The biggest pension fund for California teachers, CalSTRS, is experiencing a massive funding gap and the California Governmental Accounting Standards Board (GASB) is proposing new accounting rules for calculating the fund’s liabilities that will make those numbers even worse. CalSTRS currently has a funding gap of 56 billion dollars–the difference between money it expects to have compared with what it expects to have to pay out in benefits. If the new GASB accounting rules take effect that funding gap will be almost tripled to over 150 billion dollars.

Either way CalSTRS needs more money from taxpayers, teachers or both to avoid running out of money that pays out these benefits over the next 30 years. This issue, and many like it have created a hot button political debate pitting conservatives and conservative groups, who say the current public pension systems in California are unsustainable, against unions, that, while making some concessions, have resisted major structural changes. Unlike CalPERS, who can simply demand more money from their participants (cites, counties, and special districts) CalSTRS needs a legislative solution. In other words, CalStRS needs lawmakers to find a way to balance the books.

In many ways, CalSTRS’ current problem comes down to an accounting question: How should pension funds measure their long-term liabilities? Right now, pension funds base their calculation on a forecast that their investments will earn 7.75% a year. However, because public pensions are guaranteed by the taxpayer, many argue including GASB, that the assumed investment return should be much lower comparable to safe investments like U.S. Treasury Bills. If the investment earning assumption decreases the pension fund simply needs more cash, a lot more. It is fair to assume the pension fund investments will earn at least 7.75% per year? Maybe, maybe not. Look at your own personal investments over the years for guidance. Certainly there have been years when average investment earnings have exceeded 7.75% (dot com boom, real estate boom, etc.) Of course there have been years when investment earnings have been far less than 7.75% or even in the negative. What the question really is: How much tolerance for risk does or should the California taxpayer have.