CalPERS CIO Joe Dear Calls Stanford Study 'Fundamentally Flawed'

(April 9, 2010) — Californian pension funds have dismissed the results of a study by the Stanford Institute for Economic Policy Research (SIEPR), which found that the three largest Californian pension funds face a funding shortfall of more than half a trillion dollars, nearly eight times larger than what public employee retirement funds previously estimated and more than six times the value of the state’s outstanding bonds.

The calculations from the SIEPR study, conducted by Stanford University graduates, revealed that California’s three main public employee pension funds — the California Public Employees’ Retirement System (CalPERS), California State Teachers’ Retirement System (CalSTRS), and University of California Retirement System (UCRS) — are in more serious financial difficulties than previously believed, resulting in more pressure on the state’s budget and a shortage of pension funds in the future. According to the report, titled “Going For Broke: Reforming California’s Public Employee Pension Systems,” the state of California’s real unfunded pension debt has so far been understated due to the accounting rules used. The Stanford report confirmed a recent report with similar, alarming findings from Northwestern University and the University of Chicago.

In response, CalPERS Chief Investment Officer Joe Dear wrote an article published today in The San Francisco Chronicle, opposing the validity of the findings. “The study is fundamentally flawed because it is based on a what-if scenario that does not reflect how most public pension funds invest their assets,“ he wrote.

According to Dear, the “purely hypothetical” study uses a controversial method of calculating government pension liabilities, which he said doesn’t match with governmental accounting standards. “The Stanford study used an artificially low investment return assumption that’s about half of our historical average,” he asserted.

Additionally, CalPERS released a news release on its “CalPERS Responds” Web site, saying that the study “relies on outdated data and methodologies out of sync with governmental accounting rules and actuarial standards of practice.”

CalSTRS spokesman Ricardo Duran wrote in an emailed statement to Global Pensions that long-term investment returns were the “most appropriate measure” of the fiscal health of the pension system and the soundness of contribution levels. He added that “adjusting the discount rate to reflect lower risks, and less diversification of the portfolio, is an academic, rather than a market approach. Using debt securities in lieu of historical market performance to measure the ability to fund future liabilities appears to be a short-sighted vision.”