Everyone knows about Sean Spicer’s overstatement of the size of President Trump’s inauguration crowd. Few know about the California State Teachers Retirement System’s understatement of the size of teacher pension liabilities.
CalSTRS, the state-run pension fund that manages pension assets set aside to meet pension liabilities owed by school districts, recently published its CAFR (Comprehensive Annual Financial Report) as of June 30, 2015. In small print on page 124 is a big assumption:
That tiny reference has huge consequences. That’s because that’s the rate CalSTRS chooses for discounting future pension payments to present value. It’s a way of reporting the present size of those promises, which are debts. The higher the rate CalPERS chooses, the smaller the debt looks.
CalSTRS chooses that artificially high discount rate to suppress the true size of those debts. Like Spicer they know better. Financial economists have long pointed out the absurdity of using a high discount rate to report the present value of obligations of good credits such as the State of California. But nevertheless CalSTRS’s board persists, as explained here.
Using that fake discount rate, CalSTRS reports “only” $242 billion of debt for teacher pensions (see AAL on page 124 here*). Using a truthful discount rate, the real size is ~$350 billion.
This explains why the first CalSTRS Bailout, enacted into law in 2014, will fall far short and why even the recent doubling of school district pension costs forced by that bailout is just the start of school district pension cost increases. Also, school districts continue adding new liabilities every day that CalSTRS is reporting at a fraction of their real size.
It’s never too late to start telling the truth. CalSTRS should stop linking its discount rate to its investment return assumption and employ a truthful discount rate.
*CalSTRS’s figures are from 18 months ago. Liabilities have grown since then.