More Pension Math

It’s the lie that gets you.

Recently the California Public Employees’ Retirement System (CalPERS) reported that its investments in 2017 outperformed its “benchmark” by 0.25 percent. But whether CalPERS beats or lags its benchmark has little impact on pension costs, which are exploding because of explosive growth in pension liabilities. See for yourself:

CalPERS 2016–17 Comprehensive Annual Financial Report, page 119

Focus on the third column (“Actuarial Accrued Liability” or “AAL”), which measures the present value of pension liabilities. In 2007 CalPERS reported AAL of $248 billion. Just nine years later AAL had grown $188 billion — 76 percent — to $437 billion. No legislation boosted pension benefits during that period. In fact, a 2012 pension reform reduced benefits for new employees and limited the ability of current employees to “spike” their pensions. But still pension liabilities exploded.

That explosive growth in liabilities was not a surprise to anyone who understands CalPERS’s deceptive accounting for pensions. Explosive liability growth is the consequence of CalPERS’s board choosing an accounting policy that initially suppresses the reported size of AAL at the cost of explosive growth down the road, as explained here.

For a sense of the consequences, focus next on the second column (“Actuarial Value of Assets” or “AVA”), which measures the assets set aside to meet pension liabilities. In 2007 AVA equalled $216 billion. Pension assets would’ve had to more than double in nine years to catch up to $437 billion in pension liabilities. In that world beating or lagging benchmarks by tiny percentages does not make much difference. When liabilities explode and sufficient asset growth can’t be obtained via investment gains, the difference must be made up by requiring larger pension contributions by employers (ie, governments, schools and special districts) and to a lesser extent, current employees. Here’s a glimpse of the pace at which some employer contributions are growing:

CalPERS, Facts At A Glance, dollars in thousands.

That’s just the tip of the iceberg. Every dollar extracted from an employer is a dollar stripped from classrooms, courts, parks, public safety, social services and more. Likewise, tax increases are diverted to dead-weight costs instead of new services.

Not all defined benefit plans report untruthfully. Two plans profiled here tell the truth. But CalPERS chooses differently. As Chicago Mayor Rahm Emanuel puts it, their choice is a lie. That lie strips funding from school, local and state budgets and risks the retirement security of local government employees. It threatens civil society as citizens pay more in taxes but receive less in services while retirees rightly expect the pensions promised to them to be paid in full. Because of the lie, much more liability growth is on the way and more promises are being made every day the accounting for which is suppressed. Legislators will have their hands full addressing the consequences.