This is my presentation at Nicar 2016 in Denver about the time value of money and how it applies to CalSTRS.

1. TIME VALUE OF MONEY:
AN INTRODUCTION TO
PRESENT VALUE
Cezary Podkul |@Cezary
3/11/2016 1NICAR 2016 | Denver

2. Link to Class Materials
• Everything you need is in Dropbox:
2
bit.ly/1XiGytY
3/11/2016 NICAR 2016 | Denver

3. Roadmap
• What we hope to cover today:
1. Sales Pitch: Why is it useful for you to
know present value?
2. Example: We’ll model out a simple
example together
3. Application:We’ll apply what we learned
to a real-life example – CalSTRS
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4. Why Learn PV?
Part 1
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5. Why Learn PV?
• What is it?
– A way to put a value today on a stream of
payments owed in the future, such as:
• Pension payments
• Lottery winnings
• That Social Security check you’ll be getting in 40 years
• Any flow of money
– All you need to know is the amounts, the time
when they’ll be paid, and the interest rate
– Answers the question, “What is that flow of
money worth to me today?”
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6. Why Learn PV?
• Can lead to some great reporting
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- The Washington Post, August 25, 2015
- The Wall Street Journal, October 19, 2012
- Bloomberg News, August 13, 2015
- ProPublica and The Washington Post, July 10, 2015

7. Why Learn PV?
• If you understand PV,
you can make sense of
documents like this
– Sample structured
settlement sale from Terry
McCoy’s reporting
– Sells $1.6 million in
nominal payments worth
$844,00 for $40,000, or 5
cents on the present dollar
– Clearly a ripoff
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8. Why Learn PV?
• And documents like this
– Bond disclosure from NJ
saying that their pension
liability increased to $82.8
billion from $37.3 billion
– Fine print that made local
and national headlines
– The culprit? Discount rate
used in PV analysis: 4.29% vs.
7.9% makes a big impact; see
our explainer here.
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9. Why Learn PV?
• Better understand
headlines like these
– Why is Michael Dell willing
to pay $67 billion for EMC?
– Depends on how much
EMC’s business is worth to
him today
– How do you find out?
Present value of future
earnings – plus takeover
premium
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- Forbes, October 12, 2015

10. Why Learn PV?
• Plus, the math makes for great visuals
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11. Why Learn PV?
• And these concepts are coming to a
state legislature near you!
– Anyone here from Alaska? This one’s yours:
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12. Why Learn PV?
• So it’s worth knowing the mechanics of
these calculations
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13. Simple Example
Part 2
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14. Simple Example
• Formula for calculating present value
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Present Value
Future Value
Discount Factor
=
Where:
Discount
Factor
= (1+ i)n
i = expected rate of return
n = number of time periods

15. Simple Example
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Let’s test drive it!
Open a blank Excel worksheet and
let’s pencil out an example together

16. $-
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
0 1 2 3 4 5 6 7 8 9 10
Present value Cumulative annual payments
Simple Example
• Mathematically, this is always true – why?
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Year
Amount

17. $-
$20
$40
$60
$80
$100
$120
0 1 2 3 4 5 6 7 8 9 10
Present value Cumulative annual payments Reinvested value
Simple Example
• Mathematically, this is always true – why?
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Year
Amount
Because of this

18. Simple Example
• A related formula that is worth knowing
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Net Present
Value
Future Value
Discount Factor
=
Where:
Discount
Factor
= (1+ i)n
i = expected rate of return
n = number of time periods
– C +
– C = Initial investment (negative
because spending money)

19. Application: CalSTRS
Part 3
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20. Application: CalSTRS
• Let’s apply what we just learned to a
public pension plan
– CalSTRS: The 2nd largest U.S. public pension
• Has $179.4bn in assets
• Pays $1bn+ in monthly benefits
• Covers 896,000 members and beneficiaries
– What’s the liability today?
• Depends on future payments due to retirees
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21. Application: CalSTRS
• Projected cumulative pension payments of
$1.7 trillion due over the next 100 years
Present value of those payments = liability today
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$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
2015
2019
2023
2027
2031
2035
2039
2043
2047
2051
2055
2059
2063
2067
2071
2075
2079
2083
2087
2091
2095
2099
2103
2107
2111
Billions
Cumulative Benefits Due
$1.7 trillion of
pension benefit
payments

22. Application: CalSTRS
• First a bit of pension accounting
– The accrued liability (AAL) is the present
value of future payments to retirees
– The pension asset value (AVA) is what’s
available today to pay future liabilities
– If pension liabilities exceed assets, then
there is an unfunded liability (UAAL)
– The size of the funding gap is measured
using the funded ratio (AVA/AAL)
. . . More key terms available here
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23. Simple Example
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Goal: Calculate the AAL and
use it to estimate the UAAL
Let’s walk through it together

24. Application: CalSTRS
• So how do we know if we’re right?
– Check the Comprehensive Annual Financial Report
– ‘Schedule of Funding Progress’ is your best friend
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25. Application: CalSTRS
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- The Los Angeles Times, November 18, 2015
• The assumed rate of return matters – a lot!
– CalPERS, the other big California pension, shows why:

26. Application: CalSTRS
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(See CalPERS’
response to Crane)
• Once you fall behind, catching up is hard
– Taxpayers or markets have to pick up the tab
– Even if markets do their part, it may not be enough

27. Application: CalSTRS
• Homework: CalPERS
- CalPERS also provided us data for this exercise BUT:
- Projections only for 30 years
- ‘True-up’ based on partial data
. . . So take it with a grain of salt
- Benefit projections include future normal cost
- Discount rate is same as CalSTRS, 7.5%
- PV the benefits and see how sensitive they are to the
discount rate assumption
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28. Questions?
28
cezary.podkul@propublica.org
@Cezary
3/11/2016 NICAR 2016 | Denver