For Whom CalPERS’s Funded Status Tolls
A recent news article incorrectly describes the funded status of the California Public Employees Retirement System (CalPERS) as follows:
“Today, CalPERS . . . has about 68 percent of the assets it would need to pay all of the benefits it owes immediately.”
That is not correct. CalPERS does not have 68 percent of the assets it would need to pay all of the benefits it owes immediately. For that purpose it has only 38 percent.
68 percent is the ratio of pension assets to the present value of pension obligations discounted at the expected rate of return on assets. It means that CalPERS currently has 68 percent of the assets needed to pay benefits assuming it earns the expected rate of return over the period during which the benefits are scheduled to be paid, not immediately.
In contrast, the “immediate” ratio is the one CalPERS uses when a government for which it manages pension obligations seeks to terminate its plan. In that case, liabilities are discounted at a rate reflecting immediate defeasance via US Treasury obligations. Using that rate CalPERS has only 38 percent of the assets it would need to immediately fund benefits.
The difference is critically important to SOME — but not all — beneficiaries of government pension promises in California. That’s because pension beneficiaries in California fall into two very different categories:
- Beneficiaries whose obligations are owed or guaranteed by the state DO NOT have to worry about funded status. Because states may not declare bankruptcy, beneficiaries owed or guaranteed their pensions by the State of California can expect to be paid regardless of CalPERS’s funded status. Examples of “protected” beneficiaries include employees of the state and California State University.
- Beneficiaries whose obligations are not owed or guaranteed by the state DO have to worry about funded status. Because local governments and special districts may declare bankruptcy, failure of such an entity combined with inadequate funding could mean a reduction or elimination of retirement payments. Examples of such “unprotected” beneficiaries include employees of local governments or special (eg, water or fire) districts.
In other words, only unprotected beneficiaries, eg, city, county, and special district workers, are at risk to funded status. In contrast to employees whose obligations are owed or guaranteed by the state, unprotected beneficiaries should be keenly interested in the funded status of their pension plans. CalPERS and other public pension funds should make sure pension beneficiaries know the difference.