Old cause of pension debt gets new attention

CalPERS may soon report investment earnings for the fiscal year ending June 30 that are near or even above its long-term target of 7 percent, up from a return of 0.61 percent the previous year.

But the nation’s largest public pension system will still be seriously underfunded.

Like most public pension funds nationwide, CalPERS has not recovered from huge investment losses a decade ago. Going into the financial crisis in 2007, CalPERS had 101 percent of the projected assets needed to pay future pension costs.

Despite a lengthy bull market that followed a stock market crash in 2008, CalPERS recently was only 65 percent funded. Now CalPERS is worried about a downturn that might drop funding below 50 percent, a red line actuaries think makes recovery very difficult.

Two causes of the shortfall are often mentioned: overly optimistic forecasts of investment earnings, expected to pay nearly two-thirds of CalPERS future pension costs, and generous retroactive pension boosts at the turn of the century.

Last month, the Society of Actuaries issued a study reflecting a new focus on a traditional but lesser-known cause of debt — not promptly paying down debt, the “unfunded liability” from below-target investment earnings, longer life spans, or other factors.

The unfunded liability continues to grow if annual contributions to the pension fund only cover the normal cost of a pension earned during the year, but are not large enough to also pay the interest (currently 7 percent for CalPERS) on the debt from previous years.

It’s called “negative amortization.” The Society of Actuaries study, looking at 160 public pension systems nationwide from 2006 to 2014, found that most set an annual contribution target that allowed debt to continue to grow.

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