jyamada;842327829 said:

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I believe the 3 plans which comprise the 500 billion deficit are Calprs, Calstrs and UCRP per the Chron articles you had listed.

Calprs assets as of June 2013 are 288 billion and Calstrs is 188 billion as of May 2014. I don't know what the assets of UCRP are so let's assume zero. If the unfunded liability is 500 billion, then in order to fund all current and future obligations in the year 2044 (30 years?), the assets of the. 3 plans need to double in 30 years or hit 976 billion from 476 billion in today's assets.

The average rate of return needs to be 2.5%. for the total assets to double in 30 years. For 20 years about 3.6%.
If we use the 7.5% rate, the unfunded liability would be much less than the. 500 billion projected per the articles.

Maybe the example is too simplistic but if you make slight adjustments to the rate of return %, the numbers do look pretty scary.

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But (sorry) some questions:

1) Do you mean you have to add the 2.5 or 3.6 above the return to make the existing covered vested obligations? If this is it, it seems very doable subject to no front loading of payments (see no. 4).

2) Won't the obligations rise in the future due to inflation benefits and higher salaries? In that regard, the articles seem to suggest that the reform is being requested to slow down the growth of the deficit (put another way more money will be needed to pay for the amount over the 500 billion, but again maybe we say zero since who knows what that number will be?).

3) I would assume UCRP has 1/3 of the assets required to cover the obligations. That seems to be fairly standard practice in the absence of malfeasance. I could not tell you how to find out what the number is however, so maybe zero is a good number to contract number 2?).

4) Should the assumption be the payments from an actuarial standpoint are more front loaded, as the employees with the fully vested rights become deceased over time? You may want to consider using a discount percent which will likely increase the required rate of return, perhaps significantly.

With all that said I think you have a practical approach to assessing the problem.

Ohh, a calculation (not an algorithm) affecting the public world.

I'll take that charge. Answer by tomorrow, late.

Are you sure you are up for this wife?

wifeisafurd;842328080 said:

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But (sorry) some questions:

1) Do you mean you have to add the 2.5 or 3.6 above the return to make the existing covered vested obligations? If this is it, it seems very doable subject to no front loading of payments (see no. 4).

2) Won't the obligations rise in the future due to inflation benefits and higher salaries? In that regard, the articles seem to suggest that the reform is being requested to slow down the growth of the deficit (put another way more money will be needed to pay for the amount over the 500 billion, but again maybe we say zero since who knows what that number will be?).

3) I would assume UCRP has 1/3 of the assets required to cover the obligations. That seems to be fairly standard practice in the absence of malfeasance. I could not tell you how to find out what the number is however, so maybe zero is a good number to contract number 2?).

4) Should the assumption be the payments from an actuarial standpoint are more front loaded, as the employees with the fully vested rights become deceased over time? You may want to consider using a discount percent which will likely increase the required rate of return, perhaps significantly.

With all that said I think you have a practical approach to assessing the problem.

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The 2.5 and 3.6%s are the rates of return needed over 30 and 20 years for the total assets to double and pay for the 500 billion deficit. I used a simple rule of 72 to calculate the doubling of the 476 billion in assets. I believe the 500 billion deficit being thrown around is due to reducing the rate of return from 7.5% (not sure of the exact % from your articles) to either of the above rates depending on the number of years (20 or 30).

I'm not sure how the actual future obligation is calculated....I was using the 500 billion deficit as a given for this figure. I'll defer to 93bear and see what his calculation comes up with.

jyamada;842328189 said:

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The 2.5 and 3.6%s are the rates of return needed over 30 and 20 years for the total assets to double and pay for the 500 billion deficit. I used a simple rule of 72 to calculate the doubling of the 476 billion in assets. I believe the 500 billion deficit being thrown around is due to reducing the rate of return from 7.5% (not sure of the exact % from your articles) to either of the above rates depending on the number of years (20 or 30).

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The actual amount of assets held is only a small piece of the calculation here - it matters what the system takes in through payments from teachers/school districts/state government and what the system has pledged to pay out in benefits. You could run pension system with no assets, just by making the pay in each year the same as what is being paid out. Having assets is however a buffer for unpredictable years, and if the assets appreciate faster than inflation, it means the employees/employees can contrubute far less than they get out. Seems great, until someone screws up the rate of return.

And it seems Moodys and other actuarial people have decided that 7.5% return is not reasonable to expect. And as the expected rate is decreased, that means the unfunded liability will increase, unless additional payments are collected from the employees/employer/state etc to cover the difference. Because the world is unpredictable, it's always a moving target, so the benefits versus payment relationship should constantly updated. And it's better to recognize it early than obscure the issue and then deal with a big oops in the future.

Now then the question is whether the rate of return reduction is reasonable? I believe Moodys wants to use 5.5%, and they do have reports on pensions and liabilities on a state by state basis... but it's a subscription service. Based on how each state handles their pensions, the change in rates could have a larger or smaller effect. There are so many different reports out there on how big California's unfunded pension liabilities are (560b, 360b, 130b, 80b, etc, etc) - and it all depends on the interest rate.

Also, one little tidbit - I looked up the Cal Stadium financial plan and they are using 6% return in their baseline calculations for endowment appreciation.

ColoradoBear1;842328296 said:

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The actual amount of assets held is only a small piece of the calculation here - it matters what the system takes in through payments from teachers/school districts/state government and what the system has pledged to pay out in benefits. You could run pension system with no assets, just by making the pay in each year the same as what is being paid out. Having assets is however a buffer for unpredictable years, and if the assets appreciate faster than inflation, it means the employees/employees can contrubute far less than they get out. Seems great, until someone screws up the rate of return.

And it seems Moodys and other actuarial people have decided that 7.5% return is not reasonable to expect. And as the expected rate is decreased, that means the unfunded liability will increase, unless additional payments are collected from the employees/employer/state etc to cover the difference. Because the world is unpredictable, it's always a moving target, so the benefits versus payment relationship should constantly updated. And it's better to recognize it early than obscure the issue and then deal with a big oops in the future.

Now then the question is whether the rate of return reduction is reasonable? I believe Moodys wants to use 5.5%, and they do have reports on pensions and liabilities on a state by state basis... but it's a subscription service. Based on how each state handles their pensions, the change in rates could have a larger or smaller effect. There are so many different reports out there on how big California's unfunded pension liabilities are (560b, 360b, 130b, 80b, etc, etc) - and it all depends on the interest rate.

Also, one little tidbit - I looked up the Cal Stadium financial plan and they are using 6% return in their baseline calculations for endowment appreciation.

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Hey Coloradobear!

Thanks for the explanation. I believe the author of WIAF's 2 articles was basing the 500 billion deficit on a lower rate of return....had to be although 5.5% probably wouldn't be a 500 billion deficit, so I'm guessing even lower than the 5.5%. As you say, there are many different reports using different rates.....I agree with Dajo on the deficit being lower than the 500 billion. Anyway, I won't lose any sleep over it since it's a pretty subjective number.

Realizing that this thread is mired in OT so no one is likely to read it, I still thought worth posting that CalPERS has recently announced it's 2014 fiscal year investment results and posted 18.4% gain overall. Current funding level is estimated to be at 76% and they have over $300 billion in assets. Based on those rough numbers it sounds like they are underfunded by around $100 billion. This is a pretty significant change from 2 years ago when assets were around $233 billion. They had even dropped as low as $160 billion during the great recession after previously peaking at $260 billion.

http://www.calpers.ca.gov/index.jsp?bc=/about/newsroom/news/preliminary-fiscal.xml

Unit2Sucks;842333666 said:

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Realizing that this thread is mired in OT so no one is likely to read it, I still thought worth posting that CalPERS has recently announced it's 2014 fiscal year investment results and posted 18.4% gain overall. Current funding level is estimated to be at 76% and they have over $300 billion in assets. Based on those rough numbers it sounds like they are underfunded by around $100 billion. This is a pretty significant change from 2 years ago when assets were around $233 billion. They had even dropped as low as $160 billion during the great recession after previously peaking at $260 billion.

http://www.calpers.ca.gov/index.jsp?bc=/about/newsroom/news/preliminary-fiscal.xml

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One year is not a clear picture of how good or bad things are in terms of funding. What really matters is what kind of inflation adjustments are in these agreements, and what the yearly contribution is compared to the yearly payouts that are guaranteed. And most importantly the yearly rate of return on these investments. The money in reserve augments the yearly contributions when they don't cover the full amount of payout. (And that's going to be almost every year when contributions are 15% of pay, and payouts are what 60-70% + medical benefits?). They way to get from that low contribution to a much higher appreciation is to a long term appreciation.

So for non actuaries posting on a board, there is absolutely not enough info to make any reasonable back of the hand calculations saying the fund is only $100 billion short. The real issue is that the different actuaries are using different methods of predicting investment return, and they lead to widely different predictions of funding. One year of 18% does not mean the system will not have to be scrutinized yearly basically forever with adjustments being constantly made to ensure viability.

Also, CalPERS is not the pension system for teachers. That is CalSTRS. They are reporting 67% funding, but they are still using different accounting methods than Moodys used when they predicted a much larger liability.

Yes agreed that teachers are covered by CalSTRS but there was a lot of previous discussion in this thread (I think) about CalPERS so when I read the latest report I wanted to mention it. I think CalSTRS saw similar appreciation this fiscal year.

Also completely agree that each year needs to be scrutinized and that underfunding/overfunding is an actuarial calculation. If you look at the detailed CalPERS reports you can see how many different ways they discuss funding levels and they manage multiple pools of investments so it's not really one monolithic fund. Some are over 100% funded, some are under 50% funded and many are in the 70-80% range.