By Kevin Yamamura
Published: Monday, Mar. 7, 2011 – 12:00 am | Page 12A
Last Modified: Monday, Mar. 7, 2011 – 12:21 am

How much is California’s public employee pension system underfunded? Determining that is about as easy as predicting the stock market.

Those who believe pensions are manageable often assume higher rates of investment return, while critics assume slower growth rates.

The California Public Employees’ Retirement System manages pension funds for 1.6 million people and 2,400 cities and districts.

It said in an annual report that it had enough assets to pay for nearly 89 percent of its promised payouts to vested employees as of June 30, 2008. That meant it was $30.2 billion short.

Stanford researchers came to a different conclusion in a study commissioned by former Gov. Arnold Schwarzenegger, a pension critic. Based on a review of the same data, the Stanford group determined that CalPERS had funded only 49.9 percent of its pension liability, with a gap of $239.7 billion.

The main difference was that CalPERS assumed a more aggressive rate of annual return – 7.75 percent.

“If you have to pay someone in 10 or 20 years, and you really don’t have a lot of leeway, then the best thing to do is use a risk-free rate, probably about 4.5 to 5 percent,” said Joe Nation, a former Democratic lawmaker who oversaw public policy graduate students who did the work.

“If you’re managing a fund, you have to ask yourself, ‘Do I feel lucky, do I think I can beat the market and get a better rate of return?’ ” Nation added. “But the ultimate risk here is on the taxpayer.”

CalPERS spokesman Brad Pacheco said the Stanford study “ignores our diversified portfolio, which is invested across many different asset classes.”

A traditional benchmark is that pension systems should have at least 80 percent of liabilities funded, according to a recent Pew Center on the States report.

Since 2008, CalPERS has reported that its funding status has dipped below that due to the massive stock market decline. The ratio is currently between 65 percent and 70 percent funded, Pacheco said.

“We’ve earned back nearly 70 billion in our investment portfolio, reduced investment risk, and our funded status is on the rise,” said CalPERS CEO Anne Stausboll, in a statement.

Assuming a lower rate of return, often reflected in a metric called a “discount rate,” would require governments to contribute more up front, an unpalatable thought given state and local budget crises.

Reducing the rate of return by just one-quarter of a percent could force 3 percent to 5 percent higher contributions for public safety employees, a recent Little Hoover Commission report said.

The bipartisan commission noted that pension boards have let governments delay higher payments needed to offset the market downturn.

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