In the throes of government

The Stanford Daily, 4/18/11.

By Suzanne Stathatos

Although he might look innocuous with his white button-down shirt, blue jeans and clean-cut hair, no one would expect that Cameron Percy ’07, who recently began master’s studies in Stanford’s Public Policy Program, has sparked a controversy in the California government.

He and his four group members—Howard Bornstein ’10 MPP, Stan Markuze ’10 MPP, Lisha Wang ’10 M.A. International Policy Studies and Moritz Zander ’10 M.A. International Policy Studies—caused a stir with their investigation into the sustainability of public pension funding in the state of California.

The project came about when Schwarzenegger’s office approached Stanford’s department of public policy, asking a group of students to do an independent academic assessment of the state of California’s public pension funds.

Percy’s group decided to focus on the three largest pension funds in the state—the California Public Employee Retirement System (CalPERS), the California State Teachers’ Retirement System (CalSTRS) and the University of California Retirement System (UCRS). They examined the accounting practices of these three organizations to determine their future liabilities and to analyze how overfunded or underfunded they were.

The team used numbers from June 2008 to predict the state of public pension funds in California 16 years into the future.

“As of June 2008, before everything crashed, we concluded that CalPERS, CalSTRS and UCRS had a combined underfunding level of $425 billion over the next 16 years,” Percy said. To put it in perspective, the state budget every year is about $87 billion.

Because of his team’s work on this study, Percy was appointed by Schwarzenegger to the CalSTRS board. There are a total of 12 members on this board: four ex-officio members, three teacher-elected members and five appointees. The board is one of the largest institutional investors in the country, collectively overseeing the administration of the $150 billion fund.

Members are appointees of the governor until they go through a Senate confirmation process, which can be held up to a year from the date of appointment. However, before the hearing, Governor Brown began his administration and subsequently pulled Percy and another Schwarzenegger appointee, Steven Kram, off of the CalSTRS board.

Joe Nation, professor of the practice of public policy and the nominal faculty advisor for this project, speculated that Brown pulled Percy because “the California Teachers Association, a big supporter of Brown’s, said, ‘We don’t want this guy.’ They didn’t want Cameron on the CalSTRS board…because Cameron had conducted a study concluding that CalSTRS was severely underfunded.”

CalSTRS and the teachers’ unions didn’t approve of Percy’s study, because they didn’t want to admit there was a problem. And Brown thought he needed the backing of the teachers’ unions in order to gain support on the June ballot for his tax policies, according to Nation.

Before Percy’s study, CalPERS and CalSTERS “were understating their liabilities, overstating investment return…and doing transactions that were just risky,” said David Crane, lecturer in public policy and former economic adviser to Governor Schwarzenegger.

Now, Percy has temporarily suspended his studies in public policy in order to work in downtown Palo Alto.

Reflecting on his work, Percy said, “We uncovered something that really is fundamental to the state’s future and is something that we have to get right…It was the order of magnitude of the problem that everyone was surprised to see confirmed.”

Because the state cannot default on pensions promises it has already made, according to Crane, its only option is to cut programming in other areas, such as education.

“Fix number one is to understand the magnitude of the problem,” Nation said. “Second, I think the thing to do is to sit down with stakeholders and say, ‘Okay, now we know there’s a problem; let’s figure out how we all collectively can solve it.’”

Percy said it is critical that the state be responsible with how it sets money aside.

“In the long run, the world will probably look very different for future employees,” Percy said. “The state just can’t back itself into obligations that it may not be able to pay at some point.”

Percy said he is grateful to have had this “surprising opportunity as a young person to become acquainted with this issue and continue to be involved at a decision-making level outside of academia.”

Link to full article: http://www.stanforddaily.com/2011/04/18/in-the-throes-of-government/