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California Pension Systems: Ranking their Funding Assumptions
(The Hangover!)

Roeder Financial       May 2023

This is the fourteenth periodic survey (click here to see survey results in a new window) which ranks the funding assumptions used by California's public pension systems from "most conservative" to "most optimistic." In the related spreadsheet, the "most conservative" system is ranked as #1 and "most optimistic" system is ranked as #36.

Some Hangovers are better than others. When "The Hangover" was released in 2009, Rotten Tomatoes applauded as a 79% approval rating by leading movie critics was conferred. Bradley Cooper rocked! California public systems were "drunk" on incredible returns for the FYE June 30, 2021 as returns of 25-30% shocked all. However, the torrent of cash provided by the federal government to help combat COVID-19 did have one unfortunate and inevitable side effect: inflation the like unseen in 40 years.

Markets were definitely "hungover" for the FYE ending on June 30, 2022 as negative returns were the norm. The trailing 5-year returns in this year's survey are skewed by the date of the most recent valuation. Invariably the entities with a June 30, 2022 valuation date had a lower 5-year return than those whose measurement date was as of December 31, 2021.

There is no absolute "right" or "wrong" in setting assumptions. There can be a number of valid reasons that an assumption package for Entity A differs from Entity B. Entity A might have a larger equity allocation than Entity B. Entity C might wish to have more conservative assumptions to be able to fund potential ad hoc benefits. The nation's largest state plan, CalPERS, may be able to have certain size-related investment efficiencies unavailable to smaller sponsors.

A seeming contradiction has existed during the fourteen year period in which these surveys have been completed. There has not been even one instance of ANY entity increasing their assumed rate of investment return 2009 - and almost assuredly longer - despite a decade-long bull market. This raises two questions: Were assumed investment returns too high a decade ago? Have lowered assumed returns fully reflected of the timing and duration of the next bear market?

Nor does traditional actuarial funding address a paradox: other factors equal, more contribution volatility exists for better funded plans than those with lower funded ratios. Actual investment returns can diverge wildly from assumed returns during a market cycle. Higher asset levels mean that the dollar magnitude of potential actuarial gains or losses is also greater.. After the "learning experience" brought about by the 2001-2009 bear market, some Systems established policies which would keep a greater reserve during the "good times" when and if funded ratios again exceed 100%. Other entities, such as CalPERS, have decided that traditional smoothing methods did not achieve desired stability and have used a blunt approach which directly smoothes contribution changes over a period of years - on top of other smoothing methods. Segments of the actuarial community believe that current professional standards, if in place during the 1990's, might have precluded today's environment. Perhaps so. Such changes will certainly help but the "political risk" of benefit decisions during the "good" times will remain.

Even though active employees benefit in their retirement years by having well funded systems, making assumptions more conservative can have a "cost" for actives. Lower assumed investment assumptions often directly or indirectly translate into higher employee contributions. In recessions, it is not unusual for plan sponsors to tell Retirement Boards that a lack of pension contribution relief will result in potential layoffs.

Defining some of the characteristics of "most conservative" versus "most optimistic" is useful.

Most Conservative Most Optimistic

Lower Assumed Investment Return Higher Assumed Investment Return
Higher Assumed Pay Increases Lower Assumed Pay Increases
Shorter Amortization periods Longer Amortization Periods

Explicit Expense Load No Explicit Expense Load
Entry Age Normal Funding Projected Unit Credit Funding
Level Dollar Amortization LevelPercent of Pay Amortization

Using comparative funded ratios, to determine how well funded a plan is,

  • Actuarial assumptions will often not be comparable.

  • A relatively high funded ratio could be largely attributable to Pension Obligation Bonds (POB). In looking at the financial viability of a plan, it is essential to look at more than just than the computed actuarial rates if there is also POB debt service.

The most significant development in the 2021 survey, for the tenth straight year, continues to be the lowering of both assumed investment returns and inflation assumptions. Number of entities lowering assumed investment return:

Survey Year Reductions
2022 9
2021 9
2020 8
2019 12
2018 19
2017 18
2016 6
2015 12
2014 16
2013 21

In the past decade the "standard" has decreased by 1+%. In our initial 2009 survey, 60% of the entities used an investment assumption of at least 8%. For the first time in this survey’s history, no entity used an assumed return higher than 7.20%.

"Mean" assumptions for the past five surveys follow:

  2022 2021 2020 2019 2018 2017
Assumed Investment Return 6.79% 6.87% 6.96% 7.02 7.10% 7.24%
Base Wage Inflation 3.05% 3.08% 3.19% 3.23% 3.27% 3.38%
"Excess" Assumed Return 3.74% 3.79% 3.77% 3.79% 3.83% 3.86%

Several points should be noted on the amortization of unfunded liabilities. "Open" or "rolling" methods will use the same number of years in a future valuation as is been used in the current valuation. "Layered" means that there is a new amortization base established each year which is funded on a "closed" or "declining" basis. If one believes that a best practice is for an individual's benefit to be fully funded at their anticipated retirement date, sound practice is to have the amortization period be closely correlated with the average future working lifetime of the active member group (typically between 11 and 15 years). 30-year amortization passes a significant part of the cost, attributed to current participants, to a future generation of taxpayers. Some entities in the survey still have amortization periods of 20+ years for all or significant elements of their unfunded liability - not a best practice. All amortization approaches noted in this survey should be assumed to be level percent of payroll unless otherwise indicated. Level-percent-of- payroll amortization will produce a lower current year contribution than level-dollar amortization over the same period.

To the extent actuarial losses occur in the future, such losses will become more problematic. This is due to the changing demographics of maturing systems. For most systems, the number of inactive members has approached or exceeded the number of active membership in recent years. Spreading losses on a relatively small payroll base means more volatility in contribution rates, other factors equal.


The passage of PEPRA did not immediately stop the increase in contribution rates. However, we expect PEPRA to eventually moderate the sky-high contribution rates of the past decade in conjunction with more modest levels of expected future investment returns. The City and County of San Francisco System is noteworthy. Fourteen years ago, their assumptions were among the most conservative. Today, the System ranks #36 out of 36.

Recent 5-Year returns have been quite volatile. Compare mean 5-year and 10-year returns:


Differences in the historical returns among entities should take into account one factor. The returns doing the first six months of calendar year 2022 were terrible. Thus, our expectation is that entities, whose most recent valuation in the survey is based on their December 31, 2021 snapshot, will have higher trailing returns than other entities, other factors equal.

The source for survey data has largely been from the most recent actuarial valuation report on system web sites. Plan administrators and selected actuaries were sent a draft report to give them the opportunity to make any corrections and updates. The final version will be on the Ramble at Thanks to the many who helped update the survey. If you have any questions, Rick Roeder can be reached at (619) 300 – 8500 or via

Guest authors are welcome to submit articles and their thoughts to the ROEDER RAMBLE for potential viewing on this site.

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