R E T I R E M E N T
By Michael Tamony
By Peter McKernan
MIKE MURPHY
SBCERA AND
FUNDING RATIOS:
A SOLID FOUNDATION
I own a home. My wife and I found a beautiful house that we felt would be perfect for our long-term
plans. We saved enough for a down payment, about 20 percent. For the balance of the purchase
price, we were able to secure a home loan based on our down payment plus the bank’s decision
that we would be able to pay our mortgage for the long term—30 years, to be precise.
DOES THIS SOUND FAMILIAR?
It should. Home ownership in the United States is around 60
percent, and the majority of those purchases probably looked
very similar to ours. To provide a comparison to SBCERA’s pension
plan, the money we owe to the bank for our house is my “unfunded
liability.” The 20 percent I had as a down payment compared to
the 80 percent the bank loaned me is my “funded ratio.”
Now, let’s add the value of my home into the equation. As the value of my
home increases, my funded ratio (20 percent at start) actually increases
and my unfunded liability (80 percent at the start) decreases. As the
equity in my home grows, I have more money available to pay the bank if
I sell my home. Essentially, what is happening is that my personal funded
ratio compares how much my house is worth with how much I owe. High
funded ratios indicate a solid financial situation, which, in my case, at
20 percent to start isn’t great. However, it will increase as the value of
my home rises and I make consistent mortgage payments. Now, if my
bank walked up to my door and said, “We need you to pay your entire
mortgage right now,” I would be in a bit of trouble. I would owe the bank
an amount close to the 80 percent they loaned me.
SBCERA, as of June 30, 2017, has a funded ratio of 78.69 percent. For
the sake of this analogy, SBCERA’s “home” has a rounded value of 80
percent compared to the “home loan” debt of 20 percent. Therefore,
if every active and deferred member of SBCERA walked in today and
retired, SBCERA could pay approximately 80 percent of the promised
benefits. Of course, just like with my bank coming to collect on my entire
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FIREWIRE • Spring 2018
mortgage, every active an