Past, Present, Future of Public Pensions in the State of California · 2019. 2. 15. · !1 Past,...
Transcript of Past, Present, Future of Public Pensions in the State of California · 2019. 2. 15. · !1 Past,...
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Past, Present, Future of Public Pensions in the State of
California
Presentation to CSMFO Annual Conference Jan. 10, 2019
Joe Nation, Ph.D. Stanford Institute for Economic Policy Research (SIEPR)
Stanford University Public Policy Program [email protected]
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As We Move Forward, Keep This in Mind……
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“It’s not even a matter of higher math…. It’s fifth-grade arithmetic.”
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As We Move Forward, Keep This in Mind……
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“It’s not even a matter of higher math…. It’s fifth-grade arithmetic.”
— California Governor Jerry Brown, Oct. 13, 2011
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Life Was Good in 1999
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• Stock market was on a high - S&P rose 225% between Sept. 1992 and 1999,
an average annual rate of 15.9% • The state’s civilian unemployment rate fell
from 9.7% to 5.0% over the same period • The state’s general fund budget climbed
nearly 40%
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Life Was Good in 1999
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• Ricky Martin’s “Livin' la Vida Loca” (‘Crazy Life’) was the #1 song
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Life Was Good Great in 1999
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• Dems controlled the Assembly, Senate, and for the first time in 16 years, the Governor’s office
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And What Happens When Times Are That Good?
!7Source: https://www.publicdomainpictures.net/en/view-image.php?image=128056&picture=party-time, retrieved Dec. 16, 2018
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SB 400 and AB 616 Enhanced Public Pension Benefits
• SB 400 (1999) - State employee focus, sponsored by CalPERS
• AB 616 (2001) - Local government employee focus
• Both enhanced benefits with more generous formulas - Examples ‣CHP 2% at 50 became 3% at 50 ‣Retirement pay based on final 12, not 36 months ‣Retired state and school members (back to 1974) received retroactive pay
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CalPERS Funded Ratio Was Nearly 140% in 1999
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1993 1994 1995 1996 1997 1998 1999Fiscal Year
CalPERS Funded Ratio, 1993-1999
Note: PERF only Source: CalPERS Note: Funded ratio calculated using Actuarial Value of Assets (AVA)
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CalPERS Funded Ratio Has Fallen Fairly Steadily Since 1999
!10Note: PERF only Sources: CalPERS, author’s estimates based on Dec. 2018 reported assets and estimated liabilities Note: Funded ratio calculated using Market Value of Assets (AVA) from 2000
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20
40
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1993199
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8199
9200
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3200
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6200
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7201
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CalPERS Funded Ratio, 1998-2018
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CalPERS Funded Ratio Has Fallen Fairly Steadily Since 1999
!11Note: PERF only Sources: CalPERS, author’s estimates based on Dec. 2018 reported assets and estimated liabilities Note: Funded ratio calculated using Market Value of Assets (AVA) from 2000
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20
40
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80
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1993199
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0200
1200
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CalPERS Funded Ratio, 1998-2018
Let’s focus on 2009-2018
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CalPERS’ Funded Ratio Has Been Essentially Flat Since 2009
!12Note: PERF only Source: CalPERS Note: Funded ratio calculated using Market Value of Assets (AVA) from 2000
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2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
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= 1
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CalPERS Funded Ratio, 2009-2018
CalPERS
SIEPR issues “Going for Broke” report
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How Can The Funded Ratio Still Be Low If the Market’s Been So Good?
!13Note: PERF only Sources: CalPERS, author’s estimates based on Dec. 2018 assets, estimated liabilities, Yahoo Finance Note: Funded ratio calculated using Market Value of Assets (AVA) from 2000
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50
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2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
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CalPERS Funded Ratio v. S&P 500, 2009-2018
CalPERS S&P 500
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Steady Rise In Liabilities Explains CalPERS’ Current Status
!14Note: PERF only Sources: CalPERS, author’s estimates based on Dec. 2018 assets, estimated liabilities, Yahoo Finance Note: Funded ratio calculated using Market Value of Assets (AVA) from 2000
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$ (b
illion
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CalPERS Liabilities, 1993-2018
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Steady Rise In Liabilities Explains CalPERS’ Current Status
!15Note: PERF only Sources: CalPERS, author’s estimates based on Dec. 2018 assets, estimated liabilities, Yahoo Finance Note: Funded ratio calculated using Market Value of Assets (AVA) from 2000
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100
200
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400
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1993
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$ (b
illion
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CalPERS Liabilities, 1993-2018
1993-2018: 7.8%/year
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Steady Rise In Liabilities Explains CalPERS’ Current Status
!16Note: PERF only Sources: CalPERS, author’s estimates based on Dec. 2018 assets, estimated liabilities, Yahoo Finance Note: Funded ratio calculated using Market Value of Assets (AVA) from 2000
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100
200
300
400
500
600
1993
1994
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2006
2007
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2009
2010
2011
2012
2013
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$ (b
illion
s)
CalPERS Liabilities, 1993-2018
1993-2018: 7.8%/year 2008-2018: 6.2%/year
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Steady Rise In Liabilities Explains CalPERS’ Current Status
!17Note: PERF only Sources: CalPERS, author’s estimates based on Dec. 2018 assets, estimated liabilities, Yahoo Finance Note: Funded ratio calculated using Market Value of Assets (AVA) from 2000
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100
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$ (b
illion
s)
CalPERS Liabilities, 1993-2018
1993-2018: 7.8%/year 2008-2018: 6.2%/year
2014-2018: 5.6%/year
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Why Public Pensions Are Unlikely to Recover
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• Unrealistic assumed rates of return • Public pension actuarial assumptions
and methods • Local government options to address
funding problem are limited
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CalPERS Discount Rate vs. Historical Rates of Return
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Current discount rate, 7.0%
Source: https://www.calpers.ca.gov/docs/forms-publications/facts-investment-pension-funding.pdf
9.0
5.6
4.3
9.0
0
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1982-2017 1999-2017 2007-2017 2012-2017
Cal
PE
RS
Inve
stm
ent R
ate
of R
etur
n (%
)
CalPERS Annual Rate of Return
Private sector analogue, 5-6%
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Are Current Investment Return Assumptions Too Optimistic?
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• McKinsey forecasts long-run equity returns 20-50% lower than last two decades*
• Blackrock suggests an equity return of 6%** • The St. Louis Federal Reserve’s outlook for
equities is 6.4%*** •Wilshire (CalPERS) says 6.1% total return
next decade • Equals long-term rate of return of about 5% for
most pension funds*McKinsey Global Institute,” Diminishing Returns: Why Investors May Need to Lower Their Expectations,” https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/why-investors-may-need-to-lower-their-sights, retrieved Nov. 19, 2017. **BlackRock Investment Institute, https://www.blackrock.com/institutions/en-us/insights/portfolio-design/capital-market-assumptions, retrieved Nov. 18, 2017. ***FRED, “The Equity Premium,” https://fredblog.stlouisfed.org/2016/07/the-equity-premium/, retrieved Nov. 19, 2017.
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Public Pension Actuarial Assumptions and Methods
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Private Sector Public SectorDiscount rate High-quality
corp.bondsExpected return
Amortization period 7 years 20-30 years*Lag before amortization starts Not permitted 2 years
Amortization schedule Level dollar Percent of payroll
Asset valuation Market value Actuarial valueBenefit freeze Funded ratio <
60%No provision
*CalPERS moved to 20 years effective June 30, 2019 valuation.
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Public Pension Amortization Policies Delay Cost Recognition
!22Source: Jay Peters presentation, Sept. 18, 2017, https://siepr.stanford.edu/events/media-workshop-understanding-public-employee-pension-debate
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Public Pension Amortization Policies Delay Cost Recognition
!23Source: Jay Peters presentation, Sept. 18, 2017, https://siepr.stanford.edu/events/media-workshop-understanding-public-employee-pension-debate
Return to original loss amount in year 23
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Local Government Options to Address Funding Problem Are Limited
!24
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Local Government Options to Address Funding Problem Are Limited
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• Contribute more - Required contribution rates - Voluntary high “rates,” e.g., Palo Alto
• Save/invest more - 115 Trust
• Pension Obligation Bonds (POBs) • Lower system liabilities
- California Rule modification - But this helps only slightly, and only in long-term
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Local Government Advocacy Options to Address Funding Problem
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• More “private-sector like” assumptions, methods
• Governance reform • Local flexibility w.r.t. benefits
Reminder: State, school employees have greater protection from insolvency than local employees