Capitol Alert

The Stanford University research team that shocked Sacramento this year by declaring that the state's three pension systems are more than $400 billion underfunded has struck again, saying local government pension systems are nearly $200 billion short.

The Stanford Institute for Economic Policy Research team, headed by former Democratic Assemblyman Joe Nation, applied the same standard to the local funds as it did to the state's three large systems - a risk-free "discount rate" of about 4 percent on future pension fund earnings.

All public funds now use rates that are nearly twice as large, but that understates future liability, say critics, who include outgoing Gov. Arnold Schwarzenegger. By using unrealistically high assumptions of future earnings, Schwarzenegger and other critics say, the funds are misleading employees and government policy makers about the future costs of pensions. The most recent contracts negotiated with state employee unions by the Schwarzenegger administration included lowering pension guarantees to future employees.

Defenders of the current discount rates counter that they reflect past earnings and therefore are reasonable assumptions of what will happen in the future.

"This report confirms that all levels of government have been understating the pension debts owed by taxpayers to government workers, and that the pension reforms we achieved at the state level must be extended to all pension systems throughout the state," Schwarzenegger said in a statement. "Taxpayers are already suffering the consequences of billions of dollars in undisclosed pension debt, which is crowding out vital programs and services, and they are entitled to an honest accounting of the pension promises made by their elected officials. As the parties who bear all the consequences of undisclosed and unfunded pension debt, they deserve the truth. I encourage local elected officials and leaders to demand pension reform and full disclosure."

The latest Stanford study delved into the independent systems that are typically used by the most populous cities, counties and special districts. Smaller governments typically use the California Public Employees Retirement System (CalPERS), which covers state employees, for their pension programs.

While the local systems officially contend that their liabilities are 75 percent-plus covered by current assets and assumptions of future contributions and earnings, the Stanford team, using a 4 percent discount rate, drops those numbers by roughly half - some into the 35 percent range and only a couple over 50 percent.

In dollar terms, the unfunded liabilities in the report range as high as $39.8 billion in the case of the Los Angeles County Employees' Retirement Association and $34.4 billion for the City of Los Angeles' systems. In percentage terms, the East Bay Municipal Utility District has the highest unfunded liability, nearly 65 percent of obligations.

The Stanford report also lists a mid-line range, based on a 6 percent discount rate, and that drops total unfunded liability of the local systems from $195.2 billion to $89 billion, still five times as high as their official unfunded gap of $17.5 billion.

The full Stanford pension report is available here.