Stanford University public policy professor Joe Nathan is out with a new study projecting the liabilities of the state's big pension systems and the average required contributions the state will have to meet in coming years. The study looks at liabilities and ultimate costs to the taxpayer using a variety of assumptions about market returns in the coming years, ranging from a conservative return of 4.5% annually, to an aggressive return of 9.5%. Nathan's projections show that if state pension fund managers do not hit their target returns of 7.75%, taxpayers could be in big trouble.
To understand how much assumptions about future market returns matter to our pension mess, consider this. If Calpers, the giant state pension fund, were to be assured it could get robust annual investment returns of 9.5% in the foreseeable future, the fund's unfunded liabilities today would be $12.1 billion, Nathan calculates. But if Calpers were to project a more modest 4.5% return, something that is more typical from private pension funds, then the Calpers unfunded liability grows to a staggering $289 billion.
The differences are significant because employers (that is, state and local governments) must make up the difference if the pension funds fall short of their investment returns, something that virtually all pension funds have done this decade. To take one example illustrated by the chart above, if Calpers and the other state pension funds miss their 7.75% investment return rate and instead come in at an annual rate of 6.2% in the coming years, required contributions from state taxpayers into the funds would have to rise from $4.8 billion to $14.6 billion in the next five years, a rate of increase that would surely outpace tax revenue gains and force either higher taxes or a crowding out of spending in other areas.
The differences are significant because employers (that is, state and local governments) must make up the difference if the pension funds fall short of their investment returns, something that virtually all pension funds have done this decade. To take one example illustrated by the chart above, if Calpers and the other state pension funds miss their 7.75% investment return rate and instead come in at an annual rate of 6.2% in the coming years, required contributions from state taxpayers into the funds would have to rise from $4.8 billion to $14.6 billion in the next five years, a rate of increase that would surely outpace tax revenue gains and force either higher taxes or a crowding out of spending in other areas.
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