When one of the tiniest pension funds imaginable — for Citrus Pest Control District No. 2, serving just six people in California — decided last year to convert itself to a 401(k) plan, it seemed like a no-brainer. After all, the little fund held far more money than it needed, according to its official numbers from California’s renowned public pension system, Calpers.
Except it really didn’t. In fact, it was significantly underfunded. Suddenly Calpers began demanding a payment of more than half a million dollars. It turns out that Calpers, which managed the little pension plan, keeps two sets of books: the officially stated numbers, and another set that reflects the “market value” of the pensions that people have earned. The second number is not publicly disclosed. And it typically paints a much more troubling picture, according to people who follow the money. it raises serious concerns that governments nationwide do not know the true condition of the pension funds they are responsible for. That exposes millions of people, including retired public workers, local taxpayers and municipal bond buyers — who are often retirees themselves — to risks they have no way of knowing about. The two competing ways of valuing a pension fund are often called the actuarial approach (which is geared toward helping employers plan stable annual budgets, as opposed to measuring assets and liabilities), and the market approach, which reflects more hard-nosed math.
The market value of a pension reflects the full cost today of providing a steady, guaranteed income for life — and it’s large. Alarmingly large, in fact. This is one reason most states and cities don’t let the market numbers see the light of day.
Turns out the entire pension system is underfunded. It's a bit arcane, and I think they're assuming one rate of return of a Treasury bill, and the other assumes a market gain of 7% a year. That's double the rate of return, which means pension budgets look really nice, when in reality are underfunded, and under-contributed. A tiny pension just found that out, and which reveals danger signs for pensions(and municipal bonds that backed the pensions) across the country. Not just retirees are in danger, investors in the bonds are in danger too. If anybody could clarify, that would be great.