CalPERS is Ahead of the Fed in Calculating Liabilities
February 13, 2019
A commentary authored by Dan Walters ("Could California pension system be underwater?," February 3, CalMatters) has raised some questions among employers that participate in CalPERS about how the pension system calculates unfunded liabilities.
At issue is a new methodology adopted by the Federal Reserve last year that increased unfunded liabilities for state and local government plans to more than $4 trillion. Walters loosely throws around government actuarial speak so let us break it down.
The Fed adopted what's called a PBO or projected benefit obligation. This essentially means that when you calculate unfunded liabilities you project future pay increases that a member might receive. News flash to Walters: CalPERS already does this. Your statement that our unfunded liabilities of $179 billion should actually be much higher is wrong. And, in fact, you're wrong about the unfunded liability amount as well. The correct figure for fiscal year 2017-18 is actually about $146 billion.
The other issue at hand is how the Fed came up with the trillion-dollar figure for all state and local pension plans. The methodology is never addressed in the commentary, but we can surmise that it's likely based on a risk-free discount rate (assumed rate of return) of about 3 percent.
CalPERS discount rate is 7 percent because we think we can do better with our investments, and we have. Our average annual return for the last 30 years is 8.4 percent.
A couple of other key points about Walters' piece and his loose use of facts. He reported that the CalPERS fund had "lost" 3.9 percent during 2018. The correct figure, accurately reported in public to the CalPERS board in January, was 3.5 percent. But much more important is that calendar year returns are nothing more than a simple snapshot in time. Employer valuations and pension contribution calculations are based on investment returns for the fiscal year, July 1 to June 30, not the calendar year. In fact, Walters failed to note that strong financial markets in the new year drove the CalPERS fund up about 4.3 percent in January, essentially wiping out the negative 2018 returns.
For our employers who may have read the Walters column there are two clear takeaways.
CalPERS was ahead of the Fed when it comes to accurately projecting unfunded liabilities. And we're focused on earning a strong return for the fund.