It's hard to believe I haven't posted in our Friends with Benefits category for nine months. I just came across this fresh new estimate with the various estimated rates of return on the portfolio:
The total state and local government pensions in the United States at the end of 2013 had an estimated $3.6 trillion in assets. They were 74% funded, with liabilities totaling an estimated $4.86 trillion, and an unfunded liability of $1.26 trillion. These funds, in aggregate, project annual returns of 7.75%. If you apply a 6.2% average annual return to recalculate the liability, using formulas provided by Moody’s Investor Services, the liability increases to $5.87 trillion and the unfunded liability increases to $2.27 trillion.
Using the 4.33% discount rate recommended by Moody’s for valuing pension liabilities, the Citibank Pension Liability Index for July 2014, increases the estimated liability to $7.39 trillion and the unfunded liability to $3.79 trillion. That is, if America’s state and local pension funds were to no longer make aggressive market investments but were to return to relatively risk free investments, the payment required just to return these funds to solvency would be more than $12,000 per American.
Apparently, Jerry Brown is trying to do something about accrued sick time. We'll see if it sticks.
Dan Borenstein of the SacBee (as reprinted in the Merc) has this painful update for us:
On Monday, Chief Investment Officer Ted Eliopoulos will release CalPERS' investment earnings for the fiscal year that ended June 30. We know roughly what he will say because he foreshadowed it last month.
"We're likely to be flat, which is a nice way of saying zero, more or less," he warned the CalPERS board. Goose eggs. Zilch. No return on investment.
That's bad news for a pension system predicated on assumed long-term average annual returns of 7.5 percent. That's especially bad for taxpayers who must make up the shortfall.
The pension system last reported its shortfall in 2014 at $93 billion, more than four times what it was a decade earlier. Since then there have been two consecutive fiscal years of poor earnings. The debt is more now.
The problem is exacerbated because CalPERS' board is dominated by labor representatives and labor-backed politicians susceptible to worker pressure to keep the investment return forecast high.
The resulting lower up-front contribution leaves more money available for workers' raises. But it adds to the pension system debt.
Yet the political gamesmanship continues at CalPERS, as the board overrides recommendations of its professional staff. In 2011, the board kept its assumed return rate at 7.75 percent, ignoring its actuary's recommendation to lower it. In 2012, the board lowered the rate to 7.5 percent; the actuary had recommended 7.25 percent.
The board is scheduled to next reset the investment return rate assumption in 2018.
http://www.mercurynews.com/opinion/ci_30129792/borenstein-bad-calpers-earnings-worsen-93-billion-taxpayer
Posted by: Joe | July 18, 2016 at 01:58 PM