Stanford Study Finds California Pension System Underfunded By $500 Billion »

Take a stab at who will eventually be paying for the shortfall.

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An independent analysis of California’s three big pension funds has found a hidden shortfall of more than half a trillion dollars, several times the amount reported by the funds and more than six times the value of the state’s outstanding bonds.

The analysis was commissioned by Gov. Arnold Schwarzenegger, who has been pressing the State Legislature to focus on the rising cost of public pensions.

Graduate students at Stanford applied fair-value accounting principles to California’s pension funds, using a method recently devised by two economists working in Illinois, Joshua D. Rauh of Northwestern University and Robert Novy-Marx of the University of Chicago.

The Stanford group’s finding does not suggest that California has to come up with half a trillion dollars all at once; pensions are paid slowly over time. But the possibility that the state’s public pension funds are much deeper in the hole than reported could help explain why the required contributions to the funds have been rising every year, contributing to California’s annual budget drama.

The finding also raises vexing legal issues, because public debts in California are supposed to be approved by the voters. 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.

The researchers offered six recommendations for closing the gap between what is owed to the state’s retirees and how much has been set aside, including less volatile investments and a revamped benefit structure.

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