The bailout requires school districts, the state government and teachers to steadily increase their annual contributions to CalSTRS in coming years. The $5.9 billion in 2014 funding for CalSTRS’ future unfunded liabilities ramps up to nearly $11 billion in fiscal 2020-21, with school districts providing 70 percent of the extra funds, 20 percent coming from the state general fund and 10 percent from teachers.

The report is only the latest from the LAO to raise concerns about how the bailout is being implemented. But it offers a particularly serious warning: Even though the 2014 law sharply increases the amount of money that must be set aside for long-term pension costs, it may not reduce long-term state liabilities:

Over the long term, if investments consistently underperform assumptions — or if CalSTRS reduces its investment return assumption — the state’s share of the unfunded liability could increase substantially and state contributions could be several billion dollars higher by the 2040s. As implemented, districts would be largely insulated from large unfunded liabilities under these bad investment scenarios. While there are pros and cons to the implementation — both from the perspective of the state and districts — we are unsure that these are the outcomes the Legislature intended when it passed the CalSTRS funding plan into law.

The concern about low returns has been an increasing focus both of pension systems and financial rating firms. Early last year, when Standard & Poor’s raised California’s credit rating because of its improved revenue picture and relatively tight budgets, it also warned that “the state teachers’ retirement system (CalSTRS) is in need of a long-term funding strategy.”

Life expectancy increase may balloon liabilities

Another factor has CalSTRS officials worried, as Ed Mendel reported this week on calpensions.org:

Last week, the CalSTRS board was told that the life spans of retirees have been increasing faster than anticipated. Two years ago CalPERS increased employer rates to cover longer life spans expected for its retirees.

 

Rick Reed, CalSTRS chief actuary, said the same mortality table has been used for persons age 20 and age 60. A weighted average tends to estimate a life span that is too long for the 60-year-old and too short for the 20-year-old.

 

With new computer technology, Reed said, it’s possible to have a mortality table for each individual for each year. For a person age 20, there would be 70 mortality tables by age 90.

Such technology will also make it easier to track the unpward arc in unfunded liabilities because retirees are living longer.

The double whammy of low investment returns and increased life expectancy has already had a harsh impact on San Francisco. The Chronicle reported in December that these factors had badly undercut hopes that Proposition C, a 2011 pension reform approved by voters, would deliver big savings:

Numbers crunchers say the pension payout for retired government workers could grow to $380 million a year from the city’s general fund by 2019. That’s $113 million more than was projected just last year. … Of the $99 million deficit that the city will have to eliminate by the start of the fiscal year July 1, $42 million is attributable to more going out in pensions than the city is taking in from the fund’s investments. …

Retirees are living longer than expected — and investments are coming in with only a 4 percent return versus the 7.5 percent that actuaries had predicted.

“It may seem the stuff of gothic horror novels, but transfusions of young blood could reverse the ageing process and even cure Alzheimer’s Disease, scientists believe. …

“Now scientists have found that young blood actually ‘recharges’ the brain, forms new blood vessels and improves memory and learning.

“In parallel research, scientists at Harvard University also discovered that a ‘youth protein’ which circulates in the blood is responsible for keeping the brain and muscles young and strong.”

We can expect to see a Manhattan Project-sized push to be able to make synthetic enriched blood in coming years.

When a lifetime pension means 50 years on the dole

It may seem strange to see such stories and consider them through the prism of public policy disputes. The wonk in me can’t help it. What about the implications of lifetime pensions if the average CalPERS pensioner lives to 100 or more?  I wrote about this for Cal Watchdog last September:

“Having a defined-benefit government pension when you live on average until you are 81 or 85 is already an immensely lucrative and reassuring fact of life for public employees. But having such a pension when you live until 100 is a gilded gift, one that makes past complaints about government employees being a special protected class seem simply inadequate.

“Barring a change in benefits or a dramatic increase in the minimum retirement age, public employees would enjoy an advantage so pronounced that it would be somewhat akin to that owned by the privileged elite who live in a satellite colony rotating around a decaying Earth in the science-fiction film ‘Elysium.'”

If we really did have giant life-expectancy gains, or course that would have a million effects beyond government pensions. But if that means we have a society with a life expectancy of 100 in which Social Security and Medicare are supposed to provide enough sustenance to people over 67 so they don’t have to work, then …

“… it is impossible to conceive of a federal budget in anything even vaguely resembling its present form.

“The main hope of averting fiscal disaster then might be what economics writer Matt Yglesias and some futurists call the emergence of a ‘post-scarcity’ world — one in which combinations of technology have sharply reduced the cost of material goods.

“But if praying for a ‘post-scarcity’ world is the best that most private-sector workers can do in contemplating how they’ll fare in a California with life expectancy of 100, that’s a striking contrast to the outlook of government workers. They can look forward to three or four decades of retired life at 75 percent to 90 percent of their final pay. The rest of us? We can pray our reverse mortgages prop up our lifestyles for a while before we’re forced to mooch off our children or to move into a new urban phenomenon: slums for the elderly.”

This is a wildly exciting time to be alive, all belly-aching about pensions aside. If there is a “post-scarcity” world, California is likely to come up with many of the key tools as biotech, computer sciences and nanotech intersect to produce a science-fiction-feeling 21st century.

Count on Jerry Brown taking the credit.

“The mortality issue exemplifies how CalPERS has set the rates it charges too low. Retirement systems are funded by contributions from employers and usually employees, plus investment earnings. Accurately projecting how long people will live is critical to setting those contribution rates.

“Currently, CalPERS studies the mortality data for its members every four years and from that projects how long retirees will live and receive benefits. But those numbers don't account for the expectation that people will live longer in the future; it only considers how long they've lived in the past.”

While CalPERS is at least aware of this issue and apparently doing something about it, I haven't heard of a single other California pension system acknowledging the need to change life-expectancy actuarial accounting. Nor will you ever hear reflexive defenders of the pension status quo like Steve Maviglio bring up this angle.

What about pension funding when life expectancy is 90?

Maybe because a little bit of digging shows the problem could soon be far worse than even Borenstein says, as Cal Watchdog reported in September:

“There is a hugely disruptive wild card in the pension debate that is rarely recognized. It is the growing consensus among longevity experts — a large number of whom are based in California — that they are nearing breakthroughs on several fronts that promise to dramatically expand how long humans live.

“According to data released in 2009, the California Public Employees’ Retirement System expects public employees with a current age of 55 to live to be 81.4 if male and 85 if female. These actuarial assumptions are built into how much public agencies are expected to set aside for all employees, including new hires in their 20s.

“The Golden State’s best-known anti-aging experts — Dr. Aubrey de Grey and Dr. Walter M. Bortz II  — are on the short list of the world’s leading authorities on the topic.  …

“De Grey, a native of England, oversees the SENS Research Foundation, a nonprofit organization based in Mountain View. SENS stands for Strategies for Engineered Negligible Senescence. His focus has been on the idea that the aging process can be 'cured,' allowing humans to live far longer thanks to 'regenerative medicine' that stops the deterioration of the body. … He believes that the average life expectancy of Americans who are now alive is likely to be the early 90s, and that in 25 years time, it could be far longer as 'regenerative medicine' becomes practical.

“Bortz … a professor at Stanford University School of Medicine … sees vast progress ahead in gaining an understanding of human metabolism and its relation to longevity. He believes average life expectancy of Americans could reach 100 in coming decades.”

California's version of 'Elysium': Maviglium

Such developments, of course, would have implications way beyond CalPERS, as I noted in my Cal Watchdog story.

“Funding for Social Security and Medicare already looks imperiled because of the retirements of millions of baby boomers and the declining birth rate. If life expectancy increased to 100, it is impossible to conceive of a federal budget in anything even vaguely resembling its present form.”

But it is also true that a gain in life expectancy would hammer home one more time just how insanely advantageous it is for one set of people to have defined-benefit pensions mostly paid for by those who don't.

“Having a defined-benefit government pension when you live on average until you are 81 or 85 is already an immensely lucrative and reassuring fact of life for public employees. But having such a pension when you live until 100 is a gilded gift, one that makes past complaints about government employees being a special protected class seem simply inadequate.

“Barring a change in benefits or a dramatic increase in the minimum retirement age, public employees would enjoy an advantage so pronounced that it would be somewhat akin to that owned by the privileged elite who live in a satellite colony rotating around a decaying Earth in the recent science-fiction film 'Elysium.'”

We could just call California “Maviglium.”

In Sacramento, Gov. Jerry Brown won passage of a pension reform measure in September 2012. While many thought it didn’t go nearly far enough, its approval showed an acceptance of a new conventional wisdom: that benefits were unnecessarily generous. In San Diego and San Jose, city voters overwhelmingly approved much more sweeping reforms.

But there is a hugely disruptive wild card in the pension debate that is rarely recognized. It is the growing consensus among longevity experts — a large number of whom are based in California — that they are nearing breakthroughs on several fronts that promise to dramatically expand how long humans live.

According to data released in 2009, the California Public Employees’ Retirement System expects public employees with a current age of 55 to live to be 81.4 if male and 85 if female. These actuarial assumptions are built into how much public agencies are expected to set aside for all employees, including new hires in their 20s.

Experts’ life-expectancy predictions far higher than CalPERS

The Golden State’s best-known anti-aging experts — Dr. Aubrey de Grey and Dr. Walter M. Bortz II  — are on the short list of the world’s leading authorities on the topic. Their analyses of anti-aging efforts build off sharply different approaches; de Grey is controversial and Bortz conventional. But both their assumptions suggest CalPERS’ actuarial assessment of its long-term funding needs is comically optimistic.

De Grey, a native of England, oversees the SENS Research Foundation, a nonprofit organization based in Mountain View. SENS stands for Strategies for Engineered Negligible Senescence. His focus has been on the idea that the aging process can be “cured,” allowing humans to live far longer thanks to “regenerative medicine” that stops the deterioration of the body. Initially scorned by many gerontologists, de Grey’s views are taken more seriously with each passing year. He believes that the average life expectancy of Americans who are now alive is likely to be the early 90s, and that in 25 years time, it could be far longer as “regenerative medicine” becomes practical.

Bortz, a native of Philadelphia, is a professor at Stanford University School of Medicine. His research has demonstrated the importance of physical exercise to “robust aging” — living long with full mental and physical faculties. Bortz sees vast progress ahead in gaining an understanding of human metabolism and its relation to longevity. He believes average life expectancy of Americans could reach 100 in coming decades.

California a world leader on longevity research

But de Grey and Bortz are only part of a wide array of longevity researchers in California, supported by a variety of public, nonprofit and private institutions.

The California Institute for Regenerative Medicine — the state stem-cell agency financed by a 2004 bond — has backed dozens of ambitious age-related research projects, and agency officials are particularly excited about prospects for delaying the onset of Alzheimer’s disease, which often reduces life expectancy by six years or more.

Stanford and UCLA each have a Center on Longevity. UC San Francisco is home to some of the most promising longevity research in the world.

The J. Craig Venter Institute in San Diego — founded and run by the scientist who in 2001 became the first to complete sequencing and analysis of the human genome — by itself could change the world. Venter is pioneering the development of synthetic genes, which have stunning potential to remake life as we know it.

There’s also Google’s new “moon shot” — a project called Calico that has as its goal nothing less than “solving death.” It’s expected to be based in Silicon Valley.

A list of California-based longevity research with transformational possibilities could go on at some length. But the point of providing this background isn’t to offer testament to the Golden State’s enduring strengths in the sciences. It’s to lay the groundwork for thinking about what life in our state might be like in a quarter-century if life expectancy does balloon to 100.

The Golden State version of ‘Elysium’

Having a defined-benefit government pension when you live on average until you are 81 or 85 is already an immensely lucrative and reassuring fact of life for public employees. But having such a pension when you live until 100 is a gilded gift, one that makes past complaints about government employees being a special protected class seem simply inadequate.

Barring a change in benefits or a dramatic increase in the minimum retirement age, public employees would enjoy an advantage so pronounced that it would be somewhat akin to that owned by the privileged elite who live in a satellite colony rotating around a decaying Earth in the science-fiction film “Elysium.”

Of course, a huge gain in life expectancy would affect public policy in many other ways as well. Funding for Social Security and Medicare already looks imperiled because of the retirements of millions of baby boomers and the declining birth rate. If life expectancy increased to 100, it is impossible to conceive of a federal budget in anything even vaguely resembling its present form.

The main hope of averting fiscal disaster then might be what economics writer Matt Yglesias and some futurists call the emergence of a “post-scarcity” world — one in which combinations of technology have sharply reduced the cost of material goods.

But if praying for a “post-scarcity” world is the best that most private-sector workers can do in contemplating how they’ll fare in a California with life expectancy of 100, that’s a striking contrast to the outlook of government workers. They can look forward to three or four decades of retired life at 75 percent to 90 percent of their final pay. The rest of us? We can pray our reverse mortgages prop up our lifestyles for a while before we’re forced to mooch off our children or to move into a new urban phenomenon: slums for the elderly.

“Elysium” writer-director Neill Blomkamp has said that income disparities he witnessed in California and Mexico helped inspire him in coming up with the story for his dystopia, a heavy-handed homage to the Occupy movement.

The version of “Elysium” we could be headed for may have California roots of a different sort. The haves vs. have-nots scenario of our future may not be the 1 percent vs. the 99 percent.

It will be the 10 percent or so of public employees who have defined-benefit pensions that last longer than their entire careers vs. the rest of us.