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New rules will reflect a more pessimistic pension risk for California

06/26/2012

The Sacramento Bee - June 26, 2012 - by Dan Walters

A few days ago, the Pew Center on the States released a report on the nationwide gap between promises made to public employees for pensions and what states are spending to close the gap.

On paper, California isn't in awful shape. Its major pension program, with $516.3 billion in liabilities, was reported to be 78 percent financed, just shy of the 80 percent level that actuaries generally advocate.

Not surprisingly, some Democratic politicians trumpeted the report because it appears to negate the demands for major public pension reform that is one of the Capitol's thorniest issues this year.

Gov. Jerry Brown, however, has pleaded with the Legislature, so far in vain, for reform, saying that failure to act would make voters reluctant to pass new taxes.

"I am committed to pension reform because I believe there is a real problem," Brown told the Legislature in January. "Three times as many people are retiring as are entering the workforce. That arithmetic doesn't add up. In addition, benefits, contributions and the age of retirement all have to balance."

On Monday, the Governmental Accounting Standards Board issued its long-awaited revision of accounting standards for public pension systems that could undercut the official numbers reflected in the Pew report.

It has to do with what's called the "discount rate," in effect a pension system's estimate of future annual earnings on trust funds.

California's pension systems, like those of other states, have adopted discount rates well in excess of 7 percent, nearly twice as much as typical corporate pension systems, which are required to use super-safe projections.

These rosy expectations have the effect of minimizing the systems' unfunded liabilities and thus reducing pressures to reform benefits or raise contributions.

The difference is huge. A Stanford University study has estimated that were California's four big state pension systems to use a 4 percent discount rate, they'd be nearly a half-trillion dollars underfunded.

The new GASB standards, years in the making, don't go that far, but they do require unfunded liabilities to be carried on state balance sheets and, under some conditions, require super-safe municipal bond rates to be displayed.

Pension funds would still be free to make whatever earnings assumptions they wish, but the risk of high discount rates would be more easily seen, and that could increase pressure on politicians to reform.

The Pew and GASB reports provide new context for the pension debate. Another bit of data will be added to the yeasty mixture this week: the California Public Employees' Retirement System will probably end the fiscal year on Saturday with a net loss in trust fund value, even weaker than the previous year's paltry 1.1 percent gain.