Could California pension system be underwater?

Rolling up big paper profits on stocks and other capital investments during 2017 and most of 2018 was very easy, and the California Public Employees Retirement System, the nation’s largest pension trust fund, took full advantage of the opportunity.

Its strong earnings, particularly in 2017, narrowed a yawning gap between its assets and future liabilities for pension payments to state and local government workers.

But it was short-lived and CalPERS has not only regressed but could actually be underwater because of a new way of calculating its liabilities.

A little history to begin:

CalPERS was, by its own calculations, 100 percent funded during the 1990s and into the first decade of the 21^st century – so healthy, in fact, that state and local officials felt free to sharply increase pension benefits retroactively.

However, pension funds took immense hits during the Great Recession – CalPERS alone lost $100 billion – and most have not fully recovered.

In fact, between 2007 and 2016, before the 2017-18 stock market surge, CalPERS’ total liabilities increased by a startling 76 percent, from $248 billion to $436 billion, while its assets increased by just 19 percent, from $251 billion to $298 billion, sharply increasing the fund’s unfunded liabilities.

The earnings surge, plus big increases in mandatory “contributions” from state and local governments, did raise CalPERS’ official funded level slightly to 70 percent, but that was still a long way from 100 percent – and now it’s declining again.

Very quietly, CalPERS officials told its governing board last month that the trust fund actually lost 3.9 percent during 2018, apparently due to the sharp stock market decline late in the year, pushing its funded level back down to about 67 percent.

Having just two-thirds of the assets needed to cover pension promises should be a wakeup call to the state’s politicians, but under pressure from powerful public employees unions, most prefer to ignore it.

Jerry Brown sponsored a very modest pension reform early in his second governorship, with the goal of closing the funding gap a bit, but even that step drew opposition from unions whose lawsuits that are now pending before the state Supreme Court.

Furthermore, the official assumption that CalPERS is even two-thirds funded may be wildly optimistic.

With very little media notice, the Federal Reserve System late last year doubled its calculation of state and local governments’ unfunded pension liabilities to $4.1 trillion, using a new methodology that was devised by the federal Bureau of Economic Analysis.

The new method, called “projected benefit obligation,” aligns pension assets and liabilities with new governmental accounting standards and how the federal government values its own employee pension program.

Using that methodology, CalPERS’ current unfunded liabilities, officially $179 billion, could be more like $360 billion, completely overwhelming the fund’s current assets and making it, on paper at least, hopelessly insolvent.

David Crane*, a Stanford University lecturer and head of Govern for California, says that while serving on the California State Teachers Retirement System board as an appointee of former Gov. Arnold Schwarzenegger, he attempted to persuade CalSTRS to adopt the methodology now used by the BEA and the Federal Reserve to provide a more realistic picture. However, his suggestion merely fueled successful efforts by defenders of the pension status quo to scuttle his state Senate confirmation in 2006.

The Federal Reserve’s accounting change vindicates Crane, but also implies that California’s public pension crisis, as serious as it appears from official data, is likely much worse and therefore much more difficult to resolve.

*David Crane is a donor to CALmatters.