Milken Institute Says California’s Public Pensions Need Overhaul to Address Funding Shortfalls

(October 19, 2010) — A new study by the Milken Institute shows that the combined liability of California’s three major state pension funds — the $216.4 billion California Public Employees’ Retirement System (CalPERS), the $131.8 billion California State Teachers’ Retirement System (CalSTRS), and the $45.9 billion University of California Retirement System — may exceed more than 5.5 times its annual tax revenue within two years unless lawmakers rein in benefits.

“The state of California simply lacks the fiscal capacity to guarantee public pension payments, particularly given the wave of state employees set to retire in years to come,” the study reports. “We’re talking about a perfect storm: more state services needed for an aging population, a workforce that will spend more years in retirement than they did contributing to the funds, and a smaller ratio of working-age taxpayers and contributing state workers to pay for it all,” said co-author Perry Wong, director of regional economics at the Milken Institute, in the report. “We hope this paper reminds the public and policymakers that these are urgent issues we need to look at right now,” Wong told aiCIO.

The researchers concluded that the California’s mounting pension costs are being fueled by demographics such as an aging work force and longevity gains among retirees, as well as an increasing demand for government public services. To curtail the growth of unfunded liabilities, the report, titled ‘Addressing California’s Pension Shortfalls,’ offers two key recommendations:

• Raise the retirement age while increasing employee contributions
• Shift to a risk-sharing plan, which would guarantee a basic pension while asking employees to bear the investment risks for part of their future benefits. The report indicates that California will eventually need to switch to a hybrid plan in which a portion of the benefit is guaranteed and the rest is subject to market risk, as with a 401(k).

The study based its conclusions on data from the UCRS, California Legislative Analyst’s Office and California’s Finance Department. It examined the ratio of the three pensions’ forecast unfunded liabilities to current assets, after accounting for state contributions.