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A team of graduate students at Stanford University, overseen by former Assemblyman Joe Nation, has calculated that California's three major public pension funds are collectively more than a half-trillion-dollars underfunded if their underlying assumptions are adjusted downward to a "risk-free rate."

The report, conducted under the aegis of Stanford's Institute for Economic Policy Research, bolsters the case by Gov. Arnold Schwarzenegger and other pension reformers for an overhaul of the state's pension systems.

"This study reinforces the immediate need to address our staggering pension debt," Schwarzenegger said in a statement. "According to the study, California taxpayers are on the hook for over a half trillion dollars. That's nearly six times the size of our entire state budget. The consequences are clear: increasingly large portions of state funding for programs Californians hold dear such as schools, parks and health care will be diverted to pay for this debt. That is bad enough, but without reform, pension debt will only grow."

Schwarzenegger has proposed broad pension reforms, including shifting new employees to a new, lower-cost system and raising state employees' pension contributions, but with opposition from public worker unions, his plan has gone nowhere.

The Stanford researchers examined the California Public Employees Retirement System, which covers most state workers and many in local government, the State Teachers Retirement System and the University of California's retirement system.

The systems now use projected "discount rate" on their pension liabilities of 7.5 to 8 percent, the same rates as their projections of annual earnings on investments, but critics say those are too high in today's economic climate.

The Stanford team based its underfunding estimate on a "risk-free" discount rate of 4.14 percent, which results in higher projected liabilities than the systems now portray.

"Adjusting the discount rate used on liabilities to a risk-free rate, we estimate the combined funding shortfall of CalPERS, CalSTRS, and UCRS prior to the 2008/2009 recession at $425.2 billion," the research team reported. "At the time of this writing, the funds have not released more recent financial reports, but due to the previously mentioned $109.7 billion loss the three funds collectively sustained, we estimate the current shortfall at more than half a trillion dollars."

The team, overseen by Nation, a former Marin County assemblyman, consisted of Howard Bornstein, Stan Markuze, Cameron Percy, Lisha Wang and Moritz Zander. Their report brief may be found here. The full report is due out later this week.



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