Reporter Ed Mendel covers pensions at his Web site,

CalSTRS is unveiling a new Web site, just in time to rebut a Stanford study last week that says California’s three big public pension funds have a shocking shortfall of more than $500 billion.

A group of graduate students used “risk-free” bonds, rather than stocks and other potentially higher-yielding investments, to calculate what a New York Times story called a “hidden shortfall” in CalPERS, CalSTRS and the UC Retirement System.

A Washington Post editorial, noting that the funds were reporting an unfunded liability of $55.4 billion, said the Stanford study is “more evidence that state governments are not leveling with their citizens about the costs of pensions for public employees.”

The website of the Stanford Institute for Economic Policy Research headlines links to some of the media stories about the study: “Stanford students rock the state with shortfall predictions of pension plans CalPERS, CalSTRS and UCRS.”

At a board meeting of the California State Teachers Retirement System last week several members said they thought the study was obviously inaccurate, but because of the credibility of the “Stanford brand” with the public needs to be countered.

“Unfortunately, I think most people would give this a letter grade of ‘F’ for quality,” said Jack Ehnes, the CalSTRS chief executive officer. “Since it bears the brand of Stanford, it clearly ripples out there quite a bit.”

He said the study does not use standard actuarial practices and draws “political” conclusions. One recommendation is a “hybrid” retirement plan that combines monthly pension checks with 401(k)-style individual investment plans.

Ehnes said a new website,, provides a forum for CalSTRS to analyze the Stanford study and “show why there are faulty assumptions in them or why they are based on shoddy research.”

The California Public Employees Retirement system posted a detailed response on its website, CalPERS says earnings exceeded the 7.75 percent annual target during the last 20 years, despite an historic market crash.

The two websites are a reaction not only to growing criticism that public pensions are overly generous and diverting funding from other programs, but a defense of the system that some want to switch to the 401(k)-style plans common in the private sector.

The Stanford study requested by Gov. Arnold Schwarzenegger is part of a dispute over whether the pension funds can hit their earning targets. CalPERS gets 75 percent of its funds from investments, only about 25 percent from employer-employee contributions.

“This study reinforces the immediate need to address our staggering pension debt,” Schwarzenegger said in a news release. “According to the study, California taxpayers are on the hook for over a half trillion dollars.”

The governor proposed last year that pensions for new state employees (the pensions of current employees are protected by law) be returned to the lower formula used before a major benefit increase a decade ago.

Powerful public employee unions say pension benefits should only be lowered through labor negotiations, not by legislation. The benefit increase, SB 400 in 1999, was approved when the stock market was booming and CalPERS had a surplus.

Citing earnings, CalPERS told legislators state pension costs would be little changed for a decade if benefits were increased. But state costs soared from around $150 million a decade ago to about $3.5 billion next fiscal year.

Most of the increase is the result of a larger workforce and the fact that CalPERS, flush with a surplus, had sharply lowered the annual state payment that had been about $1 billion, a contribution “holiday” now criticized by many.

The Stanford study, using a Treasury bond-like 4.14 percent earnings rate instead of CalPERS’ 7.75 percent, shows how an increase in public pension benefits can dramatically increase taxpayer debt.

“The finding also raises vexing legal issues, because public debts in California are supposed to be approved by the voters,” said the New York Times story. “The voters have, in fact, duly authorized all of the state’s general obligation bonds, but the much larger pension debt is appearing out of nowhere.”

There have been questions in the past about revenue bonds issued without voter approval to build prisons. The last budget of former Gov. Gray Davis contained a complicated plan, never used, to issue a $10.7 billion deficit bond without voter approval.

But apparently, whether pension obligations are a debt that, under the state constitution, requires approval by voters has not been a widely discussed issue or the subject of a major legal challenge.

The Stanford study, discounting future pension obligations at 4.14 percent, follows the work last fall in the Journal of Economic Perspectives by Robert Novy-Marx of the University of Chicago and Joshua Rauh of Northwestern University.

The two professors found that the three state pension funds in California were underfunded by $475 billion. That was 415 percent of annual state tax revenue, ranking California 24th among states, well below top-ranked Ohio at 874 percent.

“We show that government accounting standards require states to use procedures that severely understate their liabilities,” the professors wrote.

Using a low and predictable bond-like rate to discount future pension debt reduces the risk of being wrong . But pension funds think their diversified investment strategy, despite market ups and downs, will average higher earnings in the long run.

As it does every third year, CalPERS plans to hold several public hearings this year on its assumed earnings rate of 7.75 percent, possibly resulting in an adjustment early next year.

The CalSTRS board, conducting a similar but shorter review of its 8 percent earnings assumption, may make a change as soon as next month. It’s actuarial consultant, Milliman, has been recommending a reduction of a quarter to a half percent.

Public pension funds were alarmed last year when the Governmental Accounting Standards Board, planning an update of public pension rules, asked for comment on switching to a lower bond-like discount rate that corporate pensions must use.

Groups of state treasurers and pension funds, including CalPERS and CalSTRS, responded with letters saying the change could increase state and local government pension costs and cause disruptive year-to-year changes in contributions.

Rick Reed, the CalSTRS actuary, told the board last week that at this point it’s believed that the accounting board is unlikely to “change their opinion on the discount rate,” but will require more disclosure of unfunded liabilities.

Reed said the “poor quality” of the Stanford report was surprising, given its source. He said the issue raised in the report is not new, but gets serious consideration.

“This report from Stanford has been noted,” Reed said of a meeting of public pension fund actuaries scheduled for the weekend. “We are going to be discussing this issue prominently.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at