By Ed Mendel
Monday, October 22, 2012

A new study of the 100 largest U.S. public pension funds shows CalSTRS reports a below-average funding level and the CalPERS funding level is a wobbler — higher than average if its assets are radically “smoothed,” much lower if assets are at market value.

Though notoriously difficult to measure, debt is a key issue in the national debate over whether pensions are “unsustainable” and need cost-cutting reforms to avoid eating up state and local government budgets and, in the worst cases, seeking a federal bailout.

The study issued last week by an actuarial firm, Milliman, concluded that the largest pension funds are not, as critics have charged, using overly optimistic earnings forecasts and other methods to hide massive debt.

Milliman said the funds report a combined long-term debt or “unfunded liability” of $895 billion and a funding level of 75.1 percent, not significantly different from a Milliman review that found $1.2 trillion in debt and a funding level of 67.8 percent.

“On the whole we conclude there are only a small number of plans whose interest rate assumptions are causing a sizeable underreporting of liability relative to what would be calculated based on current forecasts of future investment returns,” said the Milliman report by Rebecca Seilman.

“In fact, there are a surprising number of plans whose interest rate assumptions and accrued liability reporting are conservative in light of current forecasts,” said the report.

The California Public Employees Retirement System and the California State Teachers Retirement System have lowered their earnings forecasts to 7.5 percent, below the 8 percent used by most funds and the 7.65 percent derived by Milliman in its study.

The study lists a surprising funding level for CalPERS, 83.4 percent of assets needed to meet 30-year pension obligations. CalPERS publicly has been saying its funding level is around 70 percent, up from about 60 percent after the market crash.

The difference between the two funding levels: CalPERS emphasizes funding based on the market value of assets. The Milliman study lists the CalPERS funding level based on actuarial “smoothing.”

Smoothing spreads investment gains and losses over several years to avoid big year-to-year changes in employer contribution rates. CalPERS uses a 15-year smoothing period, well beyond the 3 to 5 years used by most pension funds.

The Milliman study lists the funding level based on the actuarially smoothed value of assets reported in the CalPERS Comprehensive Annual Financial Report last year.

The CalPERS report (see chart at bottom of this post) shows a big gap between the actuarial value funding level, 83.4 percent, and the market value funding level, 65.4 percent.

The market value of CalPERS assets was $201.6 billion. The actuarial value was much larger, $257.1 billion, because the impact of big losses in the 2008 stock market crash was offset by big gains during the 15-year smoothing period.

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