"(The Center Square) – California's unfunded pension liabilities could swell to more than $285 billion in 2022, depending on investment returns, a new report from the Reason Foundation estimates.
The forecast, produced by the Reason Foundation's Pension Integrity Project, estimates that unfunded pension liabilities could grow to $232.98 billion if California's major pension plans report -6% returns in 2022 and $285.57 billion if plans report -12% returns. That would represent a dramatic shift for the state, which had $131.57 billion in unfunded pension liabilities in 2021, according to the Reason Foundation.
Pensions are primarily funded by investment returns and employer contributions, with smaller additions from employee contributions. When plans are underfunded, pension plans only have so many "levers they can pull to reach full funding" for the constitutionally protected benefits, Ryan Frost, a Reason policy analyst, told The Center Square.
"[Plans] either have to earn more in the stock market or they have to raise contribution rates on employees and employers via the taxpayer," Frost said. "If the plan is continuing or growing at a rate of adding debt to the plan, then really the only thing the plan can do is raise rates and that just increases costs."
The state's largest pension plan, the California Public Employees' Retirement System (CalPERS), is a prime example of how "one bad year of investment returns can significantly impact unfunded liabilities, public employees, and taxpayers," Reason's report notes.
Analysts estimate that CalPERS' unfunded liabilities could rise from $101 billion in 2021 to $159 billion in 2022 if investment returns come in at -6%. The report estimates that this would equal a debt of $4,057 for every Californian.
CalPERS has had millions in unfunded liabilities since the 2008 recession, with underfunded liabilities skyrocketing to a record high of $162 billion in 2020, according to Reason's projections tracker. If returns come in at -6% this year, the report estimates that CalPERS' funded ratio will drop to 73.6% in 2022.
In November, the CalPERS board lowered its market expectations, which in turn, meant certain employees would have to contribute more to their pension funds because the fund expected to earn less from its investments. The contribution changes primarily impact employees hired after January 2013, taking effect for school employees (excluding teachers) this month and most other local government employees in July 2023.
Reason forecasts that unfunded liabilities for 118 state public pension plans nationwide are expected to exceed $1 trillion in 2022.
Looking ahead, Frost said analysts anticipate that over the next 15 years, pension plans will likely earn between 5.5% and 6%, and the average assumed rate of return is 7% across the country. This means that the "spikes that we've seen are probably going to continue until those assumed rate of returns are brought down," Frost said."
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