The new valuation criteria set by Moody’s put California’s financial situation in a much bleaker light.
(June 13, 2013) - California's unfunded pension liabilities for all state and local governments combined is roughly $329 billion, according to Moody's new actuarial method—nearly double the original estimate of $128 billion.
The adjustment is based on a 13-year duration estimate for all plans. Each plan's actuarial accrued liability (AAL) is projected for 13 years at the plans reported discount rate. Moody's then discounts these liabilities at the high-grade long-term corporate bond rate of 5.5%, which it deems less risky than the standard 7.5%. The calculation results in an increase in AAL of roughly 13% for each one percentage point difference between 5.5% and the plan's discount rate.
By Moody's new calculations, using the 5.5% discount rate, Californian public pension plans, in aggregate, are only 64% funded, not 82%.
Employee retiree costs to date have been vastly underreported to taxpayers, according to Moody's. Governmental Accounting Standards Board (GASB) has established new rules to help prevent misreporting, and with the changes, new estimates put California's unfunded liabilities at nearly double the previous estimate.
Moody's has placed 30 Californian cities on the watch list for a possible credit downgrade, while the state itself has the second lowest credit rating in the nation behind Illinois.
GASB's new rules will require state and local governments to report funded status according to lower expected rates of returns on assets. However, it is largely up to state and local governments to address how these plans can be better funded.
Last year, California Governor Jerry Brown signed a bill that will save between $43 billion and $56 billion in pension pay outs over the next three decades, according to estimates by the state's public retirement system.
GASB's new rules and Moody's new criteria are a step in the right direction, but most US pension systems are seen as more funded than they are, according to Andrew Biggs, pension expert resident scholar at the American Enterprise Institute.
When asked whether the new criteria's would change contributions or the governance of a fund, he said the markets will cause the change when governments see their borrowing rates multiply because of the insolvency of their pension funds.
"The funds are like airplanes," he said. "They were flying at 20,000 feet before the most recent financial crisis, when they lost 10,000 feet. While they have regained some altitude, they are still operating as if they will gain 8% or 9% annually in the long term. If we have another fall in markets, the pension plane will surely crash."