NCPA - National Center for Policy Analysis


April 9, 2010

An independent analysis of California's three big pension funds has found a hidden shortfall of more than half a trillion dollars, several times the amount reported by the funds and more than six times the value of the state's outstanding bonds, says the New York Times. 

Graduate students at Stanford applied fair-value accounting principles to California's pension funds, using a method recently devised by two economists working in Illinois, Joshua D. Rauh of Northwestern University and Robert Novy-Marx of the University of Chicago: 

  • The Stanford group's finding does not suggest that California has to come up with half a trillion dollars all at once; pensions are paid slowly over time.
  • But the possibility that the state's public pension funds are much deeper in the hole than reported could help explain why the required contributions to the funds have been rising every year, contributing to California's annual budget drama.  

The finding also raises vexing legal issues, because public debts in California are supposed to be approved by the voters.  The voters have, in fact, duly authorized all of the state's general obligation bonds, but the much larger pension debt is appearing out of nowhere, says the Times. 

The researchers offered six recommendations for closing the gap between what is owed to the state's retirees and how much has been set aside, including less volatile investments and a revamped benefit structure. 

Gov. Schwarzenegger issued a statement on Monday, warning that unless state lawmakers tackled pension reform, "increasingly large portions of state funding for programs Californians hold dear, such as schools, parks and health care, will be diverted to pay for this debt." 

Source: Mary Williams Walsh, "Analysis of California Pensions Finds Half-Trillion-Dollar Gap," New York Times, April 6, 2010. 

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