Sacramento, Calif.-A new study published by the California Public Policy Center warns that State and Local Government pension debt could be 3 times higher than what's being reported today. The impact on this to future generations of Californians unless reform is forged will be devastating notes the studies author.
The CPPC study examines the impact of the credit rating criteria being considered by Moody's Investor Services for state and local governments. Moody's has proposed discounting pension fund liabilities at a rate of 5.5% instead of the official 7.5% rate commonly used by pension fund actuaries. Moody's has also proposed shortening the amount of time that most pension funds would allocate to "catch up" their asset balances to become 100% fully funded. What this would do is greatly increase the value of local and state government pension debt that's currently being reported to the public. In fact researchers believe it will triple the debt now reported.
This study, authored by John Dickerson, a financial professional living in Mendocino County who is involved in public sector pension analysis and reform, calculated the impact of these changes on the required annual contributions to pension funds. Dickerson focused on analyzing the independent pension funds of six California counties, Alameda, Contra Costa, Marin, Mendocino, San Mateo, and Sonoma. The results were striking.
Dickerson said, "Although my focus is County Pension Funds, I expect an evaluation of other government pension funds in California, including CalPERS and CalSTRS, would yield similar results. Pension funds need to take a very hard look at whether or not assuming a 7.5% return on investment in the next decade is prudent, They also need to confront the unfairness and additional cost of pushing this generation's unfunded pensions off to the next generation to pay. They face some very difficult adjustments."
In order to satisfy Moody's definition of prudent financial management, Dickerson calculated that each of them would have to more than double their annual pension fund contributions. The amount of money the six counties combined would have to contribute each year to their pension funds would climb to over $1.6 billion, an amount equivalent to 100% of the property tax revenues utilized by these counties.
