According to a NYTimes article (subscription required), the public pension crisis may be worse that we had feared highlighted recently when a small pension plan representing six people in a pest control district in California tried to convert to a 401k plan. Though Calpers had indicated that the small pension plan was fully funded, when they tried to leave they got a bill for $500,000. What gives?
According to the Stanford Institute for Economic Policy, the unfunded pension liability of all 50 states plus the District of Columbia rose 84% from 2008 to 2014 from $2.625 trillion to $4.833 trillion from 2008 to 2014 using a 2.18% market rate based on Treasury bonds. Though the actuarial rate using a higher rate of return of 7.5% shows a better picture at only $1.040 trillion of debt in 2014, the situation is still difficult which is why many states have frozen their pension plans.
That’s what happened to the small California pensions plan – Calpers had been sending them numbers based on the actuarial rate of return at 7.5% but then sent a bill based on the market rate of 2.56? Why? Along with not wanting to alarm taxpayers facing higher rates and lower service to pay the unfunded liability, the $3.7 trillion municipal bonds would take a severe hit.
The NYTimes article quoting Jeremy Gold, an actuary and economist, in a speech last year at the M.I.T. Center for Finance and Policy, noted, “Actuaries shamelessly, although often in good faith, understate pension obligations by as much as 50 percent. Their clients want them to.”
So as many states and local municipalities try to move to defined contribution plans like 401ks just as corporate America started doing 30 years ago, they are often faced with the harsh reality of the bills to be paid for their pension plans, the magnitude of which has been hidden by many like Calpers by keeping two sets of books.
