California: Pension and Budget Analysis

Back in August, I quoted a newspaper article that had a discussion with Joe Nation. Well, he recently wrote an article on CalMatters. He provides a little history lesson. Back in 2008, he and some graduate students did an analysis of California's pension system and determined that the "unfunded liability was over $500 billion -- seven times the number officially reported." In 2018, that figure went up to $1.109 trillion or $81,300 per household.

If I'm reading the write-up correctly, that is based on a market basis. If one goes by an actuarial basis, the debt per household drops to $22,800 (this is still an increase from $8,000 back in 2010). He doesn't mention it immediately, but further in his article, the $22,800 amount comes out to $311 billion.

I haven't read too much about the difference between market basis and actuarial basis. What seems to be the big difference is what discount rate is used. The market basis uses the terminal rate, which is a much lower rate than the actuarial basis. I'll need to dig into this a little more, but it does explain the reasons for the big difference between $311 billion and $1.109 trillion.



No matter which you use the trend line for both are negative. Just to summarize: market basis has gone from $500 billion to $1.109 trillion while the actuarial basis has gone from $8,000 per household (unknown total amount) to $22,800 per household ($311 billion).

The part that is always interesting and is always stated in various articles:

The S&P 500 index, about 800 in early 2010, is now over 3,000. And yet over the last decade, public pension funded ratios, measured by assets divided by liabilities, have moved up only slightly. The funded ratio for California Public Employees’ Retirement System’s Public Employees’ Retirement Fund was 60.8% in 2009. Now, it’s an estimated 72.6%.

Patch has an article up that states that California gets an F when it comes to state finances. That seems strange when we are told we have budget surpluses in California.

The analysis by Truth in Accounting, a non-profit government finance watchdog group, found California needs $275 billion to get out of the red, or $21,800 from each of its taxpayers.

The article doesn't get into it, but the Truth in Accounting report does to a degree:

California’s financial problems stem mostly from unfunded retirement obligations that have accumulated over the years. Of the $502.8 billion in retirement benefits promised, the state has not funded $109.5 billion in pension and $111.8 billion in retiree health care benefits. 

This is interesting as Joe Nation has a low end of $311 billion. Meanwhile Truth in Accounting uses a figure of $221.3 (I'm combining the pension and health care benefits). I'm kind of interested in the reconciliation between the two figures.

Anyways, other states with a F include: New Jersey, Illinois, Connecticut, Massachusetts, Hawaii, Delaware, Kentucky and New York. New Jersey being the worst and New York being the best of the bad.