A similar study by Robert Novy-Marx and Joshua Rauh (“Public Pension Promises: How Big Are They, and What Are They Worth?”), estimates unfunded state pension liabilities to be some $3 trillion. This study is also based on market values as of June 30, 2009, yet combined public pension asset values have grown by nearly 25 percent since.

In addition to relying on depressed asset values, this Novy-Marx/Rauh study bases its estimates on the use of a discount rate equal to each state’s borrowing rate (typically four percent to five percent), rather than the plan’s expected rate of investment return (typically 7.5 percent to 8.5 percent).

“This expected return assumption is often characterized as overly-generous, but critics ignore actual investment performance, particularly over longer periods,” said Ronnie Jung, President of NCTR and Executive Director of the Texas Teachers Retirement System. “The last 10 years have been rough ones for the capital markets and public pension funds,” Jung conceded, “but public pension investment returns have actually exceeded their assumptions over the last 20- and 25-year periods. In addition, strong returns since the end of 2010 suggest that capital markets continue to recover and to increase public pension fund asset values.”

Nevertheless, many plans are looking at current assumptions for future returns and are making changes where appropriate, noted Michael Williamson, NASRA President and Deputy Director of the District of Columbia Retirement Board.

“The point is that focusing on outdated point-in-time numbers or other short-term measures for public pension plans can produce inappropriate, flawed conclusions about these plans’ true condition as well as their real impact on state and local government finances,” said Williamson.