UC paper argues full pension funding not needed

A paper issued by Stanford graduates seven years ago helped shift public focus to what critics call a “hidden” pension debt. Now a paper issued by UC Berkeley’s Haas Institute last month argues that full pension funding is not needed and may even be harmful.

The Stanford paper came after record losses in crucial investment funds expected to pay two-thirds of future pension costs. Whether investment earnings forecasts used to offset or “discount” future pension debt are too optimistic became a key part of pension debate.

It’s not clear at this point, needless to say, that the UC paper will mark another turning point in the debate. But pension funding has not recovered from the huge investment losses nearly a decade ago, despite a lengthy bull market that has nearly tripled the Dow index.

The California Public Employees Retirement System, only 63 percent funded last month, fears investment losses in another big market downturn could be crippling. Even a prolonged stagnant or slumping market could erode the management outlook.

It seems possible (who knows how likely) that in the years ahead there may be a growing movement, out of necessity, to accept or rationalize low pension funding as normal, reducing the pressure for employer rate increases that are already at an all-time high.

Seven years ago, the Stanford graduate student paper contending that California’s three big public pension funds had a shortfall of $500 billion, not the reported $55.4 billion, drew national media attention.

A New York Times story called it a “hidden shortfall.” A Washington Post editorial said it’s “more evidence that state governments are not leveling with their citizens about the costs of pensions for public employees.”

The Stanford study, using the principles of financial economics, discounted future pension obligations using risk-free bonds, not government accounting rules that allow pension funds to use earnings forecasts for stocks and other higher-yielding investments.

Responding to economic forecasts, not accounting theory, pension funds have lowered their forecasts. CalPERS and CalSTRS recently dropped their discount rates from 7.5 percent to 7 percent, increasing the need for more employer rate increases to fill the funding gap.

Far from signaling that low funding is becoming acceptable, Gov. Brown told Bloomberg news early this month he thinks CalPERS, which covers half of all state and local government employees, will “probably” lower its earnings forecast again.

“All that imposes greater costs on local and state government,” Brown told Bloomberg. “The pressure will mount.”

CalPERS average rates (percentage of pay) before fourth increase

The UC paper issued last month, “Funding Public Pensions: Is full funding a misguided goal?” by Tom Sgouros, did not get major media attention. A quick internet search finds articles in The Week, The Fiscal Times, and the American Retirement Association news.

Sgouros argues that the Governmental Accounting Standards Board goal of full funding is needed for private-sector pensions but not for pensions offered by state and local governments, which are unlikely to go out of business.

The paper examines the problems created by the accounting rules in eight different categories, including actuarial and political. The conclusion is that the rules result in the “waste” of government funds that could be used for basic services.

A pension plan is “mutual insurance” for a group, not an attempt at “intergenerational equity” in which those who receive the services of government employees pay for their pensions, instead of pushing the cost to future generations.

Under the right conditions, the paper argues, a pension system with much less than full funding can pay benefits indefinitely: “Unless the combination of funding level and demographhics creates a liquidity crisis, there is always room to ‘kick the can’ further.”

A cautionary example of extreme full funding is a federal law in 2006 requiring the U.S. Postal Service to estimate pension and retiree health care liabilities 75 years in advance. By 2015 the USPS had put aside $335 billion and was 83 percent funded over 75 years.

But building a “breathtaking” retirement fund resulted in major operating losses, said the paper, that “shorted new capital investment and service expansions and left the service open to persistent charges that it is an an obsolete money-loser.”

The example in the paper of how pension funds that reach “full funding” tend to raise pensions and cut employer contributions is the California State Teachers Retirement System around 2000, as described in a Legislative Analyst’s Office report.

The UC paper said accounting rules “have been a convenient club to wield against public employee unions,” enabling claims that poor pension funding shows “the public has been duped into obligations it cannot afford.”

The author argues that many union leaders have weakened their own position by demanding full funding of pensions and viewing suggested cost-cutting reforms as an attack on benefits.

The paper quotes a source of support mentioned by other skeptics of the need for fully funding pensions, a report by the Congressional Government Accountability Office in 2008.

“Many experts and officials to whom we spoke consider a funded ratio of 80 percent to be sufficient for public plans for a couple of reasons,” said the GAO report.

“First, it is unlikely that public entities will go out of business or cease operations as can happen with private sector employers, and state and local governments can spread the costs of unfunded liabilities over a period of up to 30 years under current GASB standards.”

Girard Miller, debunking 12 pension myths, said in a 2012 Governing magazine column the view that 80 percent funding is healthy comes from anonymous GAO and Pew sources and a federal requirement that private pensions take action when funding falls below 80 percent.

Miller said pension funds should be 125 percent funded at the market peak. Based on equity losses in 14 recessions since 1926, a pension plan 100 percent funded at the end of a business expansion is likely to lose 20 percentof its value during an average recession.

“A plan funded at 80 percent going into a recession will likely find itself funded at 65 percent at the cyclical trough — and that’s a toxic recipe calling for huge increases in employer contributions to thereafter pay off the unfunded liabilities,” Miller said.

Now CalPERS is about 65 percent funded and phasing in the fourth in a decade-long series of rate increases ending in 2024. Getting back to 80 percent funding has been mentioned at the last two monthly CalPERS board meetings.

As a five-year strategic plan was adopted in February, board member Dana Hollinger suggested that a goal of 75 to 80 percent funding in five years would be more “attainable” and “realistic” than the goal that was aproved: 100 percent with acceptable risk, beyond five years.

Last week, Al Darby of the Retired Public Employees Association urged the board to reverse a short-term shift last September to lower-yielding investments expected to reduce the risk of funding dropping below 50 percent, another of the goals adopted in February.

“Restoring public equity allocation to pre-2016 levels would contribute a lot to reaching the 80 percent funding status that we are all hoping to restore,” Darby said.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 20 Mar 17

17 Responses to “UC paper argues full pension funding not needed”


    I read your columns regularly and am impressed with your grasp of the complex issues surrounding pensions. Thank you.
    I am a CHP retiree- not an actuary.
    That said, when CalPers changed their investment strategy from equities to “risk-free” bonds I intuitively sensed that they had done the exact opposite of what they should have done.
    The recent rise in the marked seems to have borne that out.
    Jerry Clemons

  2. larrylittlefield Says:

    There you have it. Liberals against future generations and factual information, but in favor of retroactive pension increases that “cost nothing.”

    Joining conservatives against future generations and factual information, but in favor of tax cuts that “pay for themselves with dynamic scoring.”

    What you have is Generation Greed. What we have is the future they have permanently diminished by their self dealing.

    The public employee pension crisis has caused the Democrats to be wiped out of statehouses all over the country. And now it is leading them to join what had been a long Republican policy, pre-Trump, of seeking to deceive the public.

  3. Larry Stirling Says:

    I don’t think it was pension losses that put all these funds in the red.

    UC Retirement was so overfunded that they let the professors stop paying into it giving them a huge pay raise without going the normal bargaining process.

    The other funds were on their way to solvency until the greedy bunch got their hands on the corpus and began bumping up pensions retroactively.

    It is a spending problem.

  4. Tough Love Says:

    It’s certainly not a coincidence that today’s pensiontsunami articles listing posted the following

    http://bit.ly/2nVvS9g ………

    a scholarly paper from the American Academy of Actuaries on the MYTH that an 80% funding ratio is OK …… rather than the self-interested garbage coming from the authors of this UC paper.

    Q: Who funded this study. ?

  5. Tough Love Says:

    From a Hass Institute flyer promoting a 2/9/17 presentation ….

    “What can we do to ensure that in our older ages we share in the prosperity we made possible? Come hear Tom Sgouros and Wendy Ake talk about how we can rewrite the rules governing public pensions to tackle extreme income inequality and end racial economic exclusion.”

    It’s pretty clear that Author Tom Sgouros’ goal is supporting the current structure of ludicrously excessive (and hence costly) pensions for Public Sector workers ….. NOT a beef about GAAP accounting.

  6. Tough Love Says:

    Responding to JERRY W. CLEMONS ………….

    Yes, with the benefit of hindsight we all would have been 100% in equities over the past 7 or 8 years. But us mere Private Sector mortals must be wary of downside “risk”, because when it hit’s OUR investments it’s US that must suffer the consequences …. unlike PUBLIC Sector workers (and retirees) where you guys love big “risk” with the potential for big rewards, because you have a sucker …called the Taxpayers ….. protecting your AS* should things go badly.

    I hope you get all you “deserve” ….. which starts with loosing all retroactively applied pension increases throughout your career …….. ALL of which were nothing but a THEFT of Private Sector taxpayer wealth.

    After that’s taken away, the Taxpayers should STILL ponder WHY they should fund your basic pension which (when factoring in not just the FAR FAR richer pension formula factors, but also the VERY young full/unreduced retirement age, and COLA increases …unheard of in Private Sector Plans) is 4+ times greater in value upon retirement than those of Private Sector workers who retire at the SAME age, with the SAME pay, and the SAME years of service.

  7. Slowthinker Says:

    Here is a novel idea: read the UC study,try to understand and analyize it befre making knee-jerk comments.

  8. spension Says:

    Quoting: “Larry Stirling Says:
    March 21, 2017 at 1:04 am

    …. UC Retirement was so overfunded that they let the professors stop paying into it giving them a huge pay raise without going the normal bargaining process…..”

    Got a link or some sort of documentation which describes that “huge pay raise” ? Some actual data on UC faculty salaries is here:

    Some people say UC salaries are held to be so much lower than comparable institutions precisely because of the future pension… but I’ve never heard anyone say that salaries were bumped up when UC, in 1991, stopped paying the employer’s contribution into the UCRS.

    UC Finance People usually say… if they had kept paying in, Gov. Wilson threatened to seize $ from the UCRS in 1991 unless UC quit paying in… and the UC budget was cut by, coincidentally, about the same amount needed for the employer contribution.

  9. CalPERSon Says:

    Good to know full funding isn’t needed. As a retiree, I’m looking forward to collecting my COLA increase May 1 guilt-free! I’ll use my extra funds to buy some nice wine. I’ll raise a glass in Tough Love’s honor. Cheers!

  10. Tough Love Says:

    Well………… Spension, I see that you’ve crawled out from under your self-imposed exile after calling you out as a liar.

    Readers… see link below with my post calling spension out as a liar:



    Tough Love Says:
    January 10, 2017 at 11:48 pm

    Two very specific quotes from spension … both lies:

    (1) When/where stated …..

    October 31, 2016 at 9:02 in this link …..


    What spension stated ….

    “As you’ve said many times, the executives deserve to lift every dollar of their worker’s pension funds if they want, because, well capitalism.”

    (2) When/where stated …..

    January 9, 2017 at 12:20 am in this link …..


    What was stated ……

    “Tough Love clearly said leaders of the private sector like Milken, Madoff, Boesky, Enron etc were better than police officers and prosecutors.”

    Did I make the statement that spension quoted in his/her comment in THIS blog article, posted just above and time-stamped January 10, 2017 at 12:45 pm? Yes, and to have everything in one place for easy reference, I am pasting it here (in between the asterisks):
    “Tough Love Says:
    January 6, 2014 at 5:22 pm
    Quoting Spensions…..”Milken, Madoff, Boesky, Enron, etc show the level of ethics in your chosen profession, Tough Love. Why would anyone trust a single financial assertion by anyone in the private sector?”

    Oh please ……. no matter how bad some wall street actors are, they don’t hold a candle to the art of thievery mastered by the Public Sector Union/politician cabal.”
    It appears that spension believes that he/she can take that (rather benign “opinion”) and twist it into something false and derogatory, QUOTING me as the author or HIS/HER self-created statements.


    You clearly have no ethics or moral compass.

    To be clear. I am calling you out as a liar. While I strongly advocate for Public Sector pension reform, I did not (nor would I ever) make such statements.

    If you can, prove me wrong by posting a clear link Site/Date/Time to those statements. Go right ahead, or crawl under a rock where other parasites reside.

    I will continue to post this comment until you admit that your above comments were false and that you lied by making them.

  11. spension Says:

    Tough Love, this topic is “UC paper argues full pension funding not needed”. Your posting is off topic.

    I’m glad to briefly state: I admit that my comments made about you are true and that I told the truth by making them.

    I’m not exiled from anywhere.

  12. Tough Love Says:


    You’ve been called out as a liar, (see my above comment). Until you respond to that …. affirmatively acknowledging that your statements were false and you lied by making them I will continue to bring this up…………… unless you can prove me wrong by posting a clear Site/Date/Time link to my supposed statements.

    You seem as nutty as Trump, still digging your heals in ….. knowing that your YOUR self-created statements that you attributed to me are false. If they weren’t, I’m sure you would have ALREADY given the readers the Site/Date/Time linked-proof to the contrary.

    Now crawl back under your rock.

  13. spension Says:

    Called as a liar by… someone who can’t stick to the topic of the thread.

  14. Tough Love Says:

    Spension, YES, I AM calling you out as liar.

    Per above comments ………… the readers are waiting for any Site/Date/Time linked-proof from you to the contrary.

  15. S Moderation Douglas Says:

    The readers are waiting for Tough Love to grow up. What spension said, while not verbatim, is accurate. This is the Internet. Get over it.

  16. Tough Love Says:


    You lied to us when you said your were tall and handsome….. since you’ve been posting as Stephen Douglas as well as S Moderation Douglas, with the former showing your Facebook picture. You may be tall, but you’re an old goat and anything but handsome.

  17. S Moderation Douglas Says:

    Laughing Out Loud


    “Time to stand up for what right.”

    (And you’re still off topic.)

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