In a little noticed report, two finance professors examined the true cost of state government pension underfunding.

Their findings are mind-boggling.

Robert Novy-Marx and Joshua Rauh found that collectively, the pensions of the 50 U.S. states are underfunded by $3.23 trillion. And that doesn’t even include local government pensions.

Most pensions calculate future obligations using a method that only an actuary could love: the “individual entry-age normal cost method.”

The exceedingly dull explanation of this is that a worker’s retirement benefits are funded over the course of his or her entire career.

But this measurement doesn’t show how much the pension owes right now.

Novy-Marx and Rauh ask how much would a pension plan owe if the entire workforce were laid off today.

They call this the “accumulated benefit obligation.” In San Diego, it’s known as the “present value of future benefits”  They both refer to the same thing: the amount of money needed to pay off the entire plan if the workforce were laid off today:

For a pension plan to be considered fully funded, its assets should be at a minimum be equal to the accumulated benefit obligation.

The city of San Diego’s official unfunded liability stands at $2.1 billion using the entry-age normal method. The county’s is less than a billion.
When we look at what the plan would owe if it were terminated today, those figures rise considerably.