Public Employee PEnsions:
California's Public Pension Plans Face Long-Term Shortfall of $500 Billion, Stanford Study Says

California's public employee pension plans face long-term shortfalls as high as $500 billion, according to a study released December 13 by the Stanford Institute for Economic Policy Research. The group said the shortfall in the plans that cover 2.6 million government workers is too large to be solved only by cutting future payouts, and urged the Legislature to consider cutting benefits and requiring higher contributions from existing government employees.

Economist and former Democratic state Assemblyman Joe Nation, the report's author, said it costs the state $3.4 million for each day that lawmakers fail to change the pension benefits and contribution levels for public employees. Mr. Nation released the report with a privately funded student-led group, California Common Sense.

On the day the report was released, state Treasurer Bill Lockyer resigned from the Stanford Institute's pension advisory panel, saying the authors of the study had not listened to serious concerns raised about its methodology.

Mr. Lockyer said the group relied on an overly low rate of return of 6 percent to estimate that the state's three largest pension plans face $300 billion in unfunded liabilities, and used an inappropriate low-discount rate to come up with the $500 billion shortfall estimate.

Mr. Nation said that even under the rosiest – and unlikely – revenue assumptions of 9.5 percent annual return on investments, the pension funds would be unable to meet obligations.

The report covers the California Public Employees' Retirement System, California State Teachers' Retirement System and the University of California Retirement Plan. (Source: Associated Press, December 14.)

In related news:

San Jose Faces $3.6 Billion Shortfall in City Pension Plan. One day after releasing its report on the statewide pension problem, the Stanford Institute for Economic Policy Research released research showing that even with optimistic investment returns, San Jose has only a 12 percent chance over the next 16 years of having enough cash to cover promised pension benefits to its employees and retirees.

The report estimated San Jose's unfunded pension promises at $3.6 billion. The San Jose Mercury News noted, "That translates into $11,500 for each of the city's 305,000 households."
The city's pension costs have grown from $73 million to $245 million in a decade, and a city audit a year ago estimated San Jose's unfunded pension commitments at $2 billion.

San Jose should seek a combination of new taxes, further increases in employee pension contributions and benefit reductions for current employees, the report recommended.

Mayor Chuck Reed is pushing a pension reform measure that could be put before voters in June to reduce retirement benefits for new workers. Under the proposal, current employees could choose a lower-cost plan or pay more toward current benefits, and retirees could see cost-of-living raises temporarily halted. (Source: San Jose Mercury News, December 15.)

December 16, 2011
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