The state’s $500B bomb |

The state’s $500B bomb

Kyle Magin, Staff Writer
and the Associated Press

California’s public pension funds are underfunded by as much as $500 billion, according to a Stanford University study that was commissioned by Gov. Arnold Schwarzenegger and released this week.

The shortfall could create a major financial crisis for the state. And California is not alone: states around the country are facing massive shortfalls in their pension and retiree health care obligations that academics have estimated surpass $3 trillion.

Local government muncipalities pay millions into the pension fund. The city of Grass Valley will contribute more than $1 million (3.8 percent of its $27.4 million budget) into the fund over the next year.

If the pension obligation continues to grow, City Administrator Dan Holler said it could pose a problem.

“Ultimately you’re talking about dollars that aren’t being put back into services for the community,” Holler said.

Nevada County government officials haven’t estimated pension payments for the upcoming fiscal year yet, but Deputy Executive Officer Joe Christoffel said the county is expecting to pay about $13.5 million into the pension fund this year alone. The county’s total budget is about $185 million.

Pension payments make up about 6 percent of Nevada City’s total expenditure, said City Finance Director Catrina Andes. The city expects to pay in about $330,000 in the upcoming fiscal year.

The Town of Truckee will pay in about $2 million next year, said Administrative Services Director Kim Szczurek. Truckee’s personnel expenses in the general fund are about $10.2 million. Szczurek said as pension costs rise, Truckee will need to look at increasing its employees’ payments into the pension fund. The town currently pays all of the employer and employee expenses.

“That’s something we’ll have to negotiate with our employees, but they know it’s coming,” Szczurek said.

The estimated California shortfall applies to the retirement systems for its state and local government workers, teachers and University of California employees. Together, they serve about 2.6 million retirees.

“This study reinforces the immediate need to address our staggering pension debt,” Schwarzenegger said in a statement. “According to the study, California taxpayers are on the hook for over a half-trillion dollars. That’s nearly six times the size of our entire state budget.”

Analysts at those retirement funds estimated their unfunded liabilities to be much lower.

CalPERS put its unfunded liabilities at $38.6 billion on July 1, 2008, and CalSTRS estimated its own rate at $16.2 billion. The Stanford researchers tallied those unfunded liability figures at $239.7 billion for CalPERS and $156.7 billion for CalSTRS.

The researchers also estimated those figures would be even higher today, because those two funds and the UC retirement fund have lost a combined $109.7 billion since then.

David Crane, an economic adviser to the governor and former CalSTRS board member, explained the difference, saying the state’s pension funds have been underreporting the gap between revenue and obligations.

The Stanford researchers used a different mechanism to evaluate the estimated risk and return of the state’s investments. Crane backed the formulas used by the Stanford researchers and says recent academic studies have had similar findings about the extent of California’s pension problem.

“This more honest reckoning of our pension debt is a stark reminder that our Legislature simply must seize the opportunity to reform pensions now,” Crane said.

Brad Pacheco, chief spokesman for CalPERS, said the study relied on outdated data and didn’t take into account the gains that the CalPERS portfolio realized in the past year.

“You can’t look at these as a snapshot in time,” Pacheco said. “We need to be judged by our track record. And over the past 20 years, we’ve earned an average return of 7.9 percent.”

Schwarzenegger has called for reforms to the pension benefits offered by the state, such as raising the retirement age for some state workers and lengthening the time it takes to earn retirement health care benefits.

“The consequences are clear: 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,” Schwarzenegger said.

To contact Staff Writer Kyle Magin, e-mail or call (530) 477-4239.

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