by Mish

Public Pension Funding Ratios

Click on any of the circles to select a state and see all of the public pension plans for that state. Illinois is amazingly bad. Click on an ocean or a portion of the map without circles to deselect.

The interactive map is based on Table 2. Market valued funding ratios and unfunded liabilities on page 42 of An Options Pricing Method for Calculating the Market Price of Public Sector Pension Liabilities by Andrew G. Biggs at the American Enterprise Institute.

Note: The AEI total and the total on the map are off by a tiny bit. I double checked the map totals against the report and they are correct. Most likely the discrepancy is a rounding error.

Thanks to Ellie Fields and Ross Perez at Tableau Software for help with the map.

Public Pension Plans Less Than 30% Funded

Illinois SERS – 23%
Indiana Teachers – 26%
Connecticut SERS – 27%
Oklahoma Teachers – 27%
Rhode Island ERS – 29%
West Virginia Teachers – 29%
Illinois Universities – 30%
Kentucky ERS – 30%

Other Pension Estimates

The March 15 cover of Barrons talks about The $2 Trillion Hole. However, the body of the article contains estimates of at least $2 trillion and another at $3 trillion.

Hedge-fund manager Orin Kramer, who is also chairman of the badly underfunded New Jersey retirement system, insists the gap is at least $2 trillion, if assets were recorded at market value and other pension-accounting practices common in Corporate America were adopted.
Finance professors Robert Novy-Marx at the University of Chicago and Joshua Rauh of Northwestern University asserted in a recent paper that the funding gap for state pension plans alone might exceed $3 trillion, in part because state funds are using an unrealistic long-term annual investment return of 8% to compute the present value of future payments to retirees, as is permitted in government standards for pension-fund accounting.

California’s $500-Billion Pension Time Bomb

The L.A. Times is commenting on California’s $500-Billion Pension Time Bomb

The state of California’s real unfunded pension debt clocks in at more than $500 billion, nearly eight times greater than officially reported.
That’s the finding from a study released Monday by Stanford University’s public policy program, confirming a recent report with similar, stunning findings from Northwestern University and the University of Chicago.
To put that number in perspective, it’s almost seven times greater than all the outstanding voter-approved state general obligation bonds in California.

Stanford Study

Inquiring minds are digging into the Stanford Study Going For Broke: Reforming California’s Public Employee Pension Systems.

Adjusting the discount rate used on liabilities to a risk-free rate, we estimate the combined funding shortfall of CalPERS, CalSTRS, and UCRS prior to the 2008/2009 recession at $425.2 billion (see Table 2).

click on chart for sharper image
At the time of this writing, the funds have not released more recent financial reports, but due to the previously mentioned $109.7 billion loss the three funds collectively sustained, we estimate the current shortfall at more than half a trillion dollars.

The American Enterprise Institute report (Click on CA in the interactive map) and the Stanford Study independently arrived at similar values for California pension plan unfunded liabilities.

Note that the Stanford study has the unfunded liability of CalPERS $239.7 billion, the AEI report has it at $234 billion (labeled as California PERF), while CalPERS claims the unfunded liability is only$38.6 billion

Similarly, the Stanford study has the unfunded liability of CalSTRS at $156.7, the AEI report has it at $165 Billion (labeled as California Teachers), while CalSTRS claims the unfunded liability is only $16.2 billion.

Even if Stanford and AEI are off by 50%, the discrepancy is enormous. Whatever the sad state of affairs is, taxpayers are on the hook for the difference.

The time to stop public defined benefit pension plans was 20 years ago. Unfortunately, it is too late for that now. Nonetheless, it is imperative for states to stop compounding the error by switching to defined contribution plans immediately.

Mike “Mish” Shedlock

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