Pension Reform

By Ed Mendel
March 28, 2016

Following new accounting rules, the annual state financial report issued this month shows a “net pension liability” of $63.7 billion, a dramatic increase from the $3.2 billion “net pension obligation” reported last year.

It’s mainly the result of including, for the first time, the large debt or “unfunded liability” of the two big statewide pension systems: the California Public Employees Retirement System and the California State Teachers Retirement System.

New rules from the Governmental Accounting Standards Board are directing state and local governments to report more of their pension debt, a “hidden” and “unsustainable” long-term drain on basic services in the view of some critics.

“The GASB accounting rules will help to increase transparency, which will in turn focus local and state governments on ensuring they adequately plan for these important long-term obligations,” state Controller Betty Yee said in a news release.

Following the old rules, the Comprehensive Annual Financial Report last year only reported the pension debt for single-employer state plans, a $3.2 billion obligation for judges and a closed plan for legislators.

The new report this month for the fiscal year ending last June 30 includes the debt for the five plans in the main CalPERS fund, $39.4 billion, and the state share of more than a third of the CalSTRS debt, $22 billion.

“During the 2014-15 fiscal year, the State implemented GASB statements No. 68 and 71, which resulted in the elimination of the June 30, 2014 net pension obligation of $3.2 billion and the recognition of a net pension liability of $63.7 billion at June 30, 2015 — a net increase of $60.5 billion in long-term obligations,” said the report.

Next year the new accounting rules will be used to report the debt for retiree health care promised state workers, estimated to be $74.1 billion in an update issued by Yee in January.

This year a much lower state worker retiree health care debt is reported, a “net OPEB obligation” of $22.3 billion under old rules based on the contribution shortfall. (Retiree health care is labeled “other post-employment benefits” in the financial reports.)

Half of the state’s reported overall “negative unrestricted net position” of $175.1 billion, which includes long-term obligations paid over decades, is debt owed employees. Well over a third of the total is outstanding bond debt, $67.1 billion.

The debt owed employees, totaling $89.9 billion, is the $63.7 billion net pension liability, the $22.3 billion retiree health care obligation, and $3.9 billion owed for compensated absences. The chart below shows net position growth under the new rules.

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