NCPA - National Center for Policy Analysis

Study: California Faces $379 Billion Retirement Liability

October 8, 2010

A new study released by the Foundation for Educational Choice and the Pacific Research Institute estimates California's unfunded liability for state (CalPERS and CalSTRS) pensions and retiree health care at $379 billion.  This includes $327 billion in unfunded pension obligations -- more than four times the $75.5 billion obligation the state publicly admits to -- and $52 billion in retiree health-care liabilities.  The total shortfall is more than five times the amount of existing state debt outstanding, says Adam Summers, a policy analyst with the Reason Foundation.

The difference in the study's estimate and those of the state have to do with the discount rate used to determine the present value of future liabilities. 

  • CalPERS and CalSTRS utilize overly optimistic discount rates 7.75 percent and 8 percent, respectively.
  • By contrast, study author Stuart Buck uses the corporate bond index rate, which is the standard for private-sector pension plans.

Buck, however, says even the corporate bond index rate may be a bit conservative.  Because pension obligations could still default under certain circumstances (such as corporate bankruptcy) and California does not legally have the option to default on existing pension liabilities, others use the U.S. Treasury bonds rate to get a more realistic picture of the financial situation.  This method leads to estimated unfunded state pension liabilities of roughly $500 billion.

Source: Adam Summers, "Study: California Faces $379 Billion Retirement Liability," Reason Foundation, October 6, 2010.

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