The State of San Diego's Pensions

In a little noticed report, two finance professors examined the true cost of state government pension underfunding.

Their findings are mind-boggling.

Robert Novy-Marx and Joshua Rauh found that collectively, the pensions of the 50 U.S. states are underfunded by $3.23 trillion.¬†And that doesn’t even include local government pensions.

Most pensions calculate future obligations using a method that only an actuary could love: the “individual entry-age normal cost method.”

The exceedingly dull explanation of this is that a worker’s retirement benefits are funded over the course of his or her entire career.

But this measurement doesn’t show how much the pension owes right now.

Novy-Marx and Rauh ask how much would a pension plan owe if the entire workforce were laid off today.

They call this the “accumulated benefit obligation.” In San Diego, it’s known as the “present value of future benefits” ¬†They both refer to the same thing: the amount of money needed to pay off the entire plan if the workforce were laid off today:

For a pension plan to be considered fully funded, its assets should be at a minimum be equal to the accumulated benefit obligation.

The city of San Diego’s official unfunded liability stands at $2.1 billion using the entry-age normal method. The county’s is less than a billion.
When we look at what the plan would owe if it were terminated today, those figures rise considerably.

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