NCPA - National Center for Policy Analysis

Trouble Brewing: The Disaster of California State Pensions

October 25, 2010

California has promised its public employees lavish pensions and retiree health benefits without setting aside nearly enough money to pay for those benefits.  As a result, California already admits to a $75.5 billion shortfall in paying for these promises to public employees -- $40.5 billion for the teachers' retirement plan (California State Teachers' Retirement System, or CalSTRS) and $35 billion for the California Public Employee Retirement System (CalPERS), says Stuart Buck, a Distinguished Doctoral Fellow in the Department of Education Reform at the University of Arkansas.

Unfortunately, the situation is actually far more dire than is currently admitted.

  • The actuarial valuations mentioned above took place as of June 30, 2008 and both pension systems have had substantial losses in their investments since that date.
  • As of the most recent information available, CalPERS' assets had dropped to a reported $200 billion, and the teachers' retirement system's assets had dropped to $134 billion; these losses would add another $44 billion in unfunded liabilities.

But it gets even worse, says Buck.

  • When the California pension systems set aside money for future pension payments, they rosily assume that their investments are going to earn a steady 7.75 percent or 8 percent return year after year.
  • But that assumption is clearly too optimistic -- especially after a decade of zero stock market growth -- and does not match the bond-like nature of pension obligations.

Re-estimating California's pension obligations using a discount rate approximating what private pensions are allowed to use, Buck finds the gap between existing plan assets and the present value of benefits accrued by participants actually reaches $282.2 billion, a figure that rises to $326.6 billion when current market values are taken into account.  On top of that, the California Controller estimates that retiree health benefits are currently underfunded by $51.8 billion.  The total of these actuarial obligations thus reaches $378.8 billion.

Source: Stuart Buck, "Trouble Brewing: The Disaster of California State Pensions," Foundation for Education Choice, October 2010.

For text:


Browse more articles on Tax and Spending Issues