If anyone knew the answer to that precisely, they may well be
both clairvoyant and very wealthy. In reality, financial experts
do seek to understand how the macroeconomic forces underlying our
economy will change and how that change affects future market
returns.
Every April the Teachers’ Retirement Board adopts the latest actuarial valuation. The actuarial valuation is a snapshot of the CalSTRS fund’s assets and liabilities as of June 30, 2012.
The new valuation shows an increase in the unfunded actuarial obligation or unfunded liability from $64 billion to $70 billion. This increase holds consistent with projections reported in all actuarial valuations since 2003.
Each new year brings the promise of a fresh start. For CalSTRS,
2013 marks an especially significant year for the fund when we
celebrate 100 years of service to California’s educators and
their families. CalSTRS began in 1913 with 16,020 active and
retired members, and has grown to presently include 862,000
members with a portfolio value of more than $157 billion. One
hundred years of service is an accomplishment to be proud of, and
wonderful, time-honoring events are in store to commemorate this
special occasion.
To the families affected by the horrific and disturbing events
that took place December 14, 2012, at Sandy Hook Elementary
School, we offer our deepest sympathy. Our thoughts and prayers
are with you through this very difficult and troubling time. We
understand there is nothing we can say or offer to make up for
the tremendous losses you suffered.
Americans suffered considerable loss of assets through the
devaluation of their homes during this past recession. The
mortgage crisis has hurt the finances of the young and the old.
Relative to seniors, however, there has been emerging data that
gives some important insights.
As fiduciaries of retirement benefits for California’s 856,000
educators, CalSTRS takes its responsibility very seriously. As a
public entity, transparency is critical. A significant part of
this duty is the ability to appropriately address and improve
business processes. A recent review by the State Controller was
rightfully critical of CalSTRS history of addressing pension
spiking, or the inappropriate enhancement of a member’s income to
increase pension benefits.
A
recent article in the Los Angeles Times says anxious
investors nearing retirement are day trading with their life
savings. While one can sympathize with the anxiety and
desperation felt by those individuals, it doesn’t take an expert
to realize this type of investment strategy comes with
considerable risks.
The Governmental Accounting Standards Board is scheduled to
release new accounting standards that will significantly change
the way pensions are reported.
With the recent allegations of corporate misconduct, fraud and
bribery, corporate accountability has become a high-profile
issue. Media reports of questionable leadership underscore the
role boards of directors play in the long-term growth of publicly
held companies. Concerned investors like CalSTRS, want assurance
that governance safeguards and effective internal controls are
put in place to mitigate any future risk.
April is an active month for CalSTRS and educators alike. Every
year at this time the CalSTRS board adopts the latest actuarial
valuation which captures the long-term needs of the fund. This
year’s valuation of the Defined Benefit Program was adopted on
April 12.
This year’s National Institute on Retirement Security conference
held in early March, “Pensionomics 2012: Measuring the Economic
Impact of DB Pension Expenditures,” featured a new report that
demonstrates how defined benefit pensions support economic
activity and how this activity keeps California’s local economies
stable. There are a couple of key points made during the
conference I would like to highlight.
Disturbing allegations about some Los Angeles area teachers and
their unthinkable and illicit actions against students have
generated a lot of media coverage recently. You have probably
seen the stories.
In addition to sparking public outrage over how such things could
happen in our schools, these reports have prompted some to
question why a teacher who is alleged to have so seriously
violated the public trust and students’ innocence should continue
to receive pension benefits. We understand this frustration.
On Thursday, February 2, 2012, the Teachers’ Retirement Board
voted to lower the investment return assumption a quarter of a
percent to 7.5 percent. The move, based on the recommendation of
outside actuarial firm Milliman, Inc., marks the second time in
14 months the board has lowered the assumed rate of return. So
why is this important?
On October 27, 2011, Governor Brown unveiled his 12-Point Pension Plan.
As the debate around pension reform continues, it’s important to
emphasize that the most pressing need facing CalSTRS was not
included in the Governor’s proposal: A plan of action to address
the long-term funding needs of the system. To be clear, the
authority and responsibility for this action rests with the
Governor and the Legislature.
It’s important to share with you some information about a
little-known organization, the Governmental Accounting and
Standards Board, who sets industry standards for how government
finances are reported. On July 8, 2011 GASB released Exposure
Drafts which include new accounting rules for how public pension
fund liabilities are reported.
As I go around the state speaking to teachers groups, I’m
starting to get more questions about what CalSTRS is doing to
prevent pension spiking. CalSTRS is the steward of your pension
funds and we are working hard to ensure spiking is prevented,
detected and corrected.
However, it’s important to recognize what the law says CalSTRS
can and cannot do.
With relief mixed with caution, we celebrate the remarkable
23.1-percent investment return, our highest in 25 years. CalSTRS
ended the 2010-11 fiscal year with an investment portfolio valued
at $154.3 billion. This is up $29 billion
from last fiscal year, which posted a 12.2 percent investment
return.
Several studies have recently suggested that including Social
Security may lower the cost of the CalSTRS defined benefit.
CalSTRS commissioned a study that found just the opposite to be
true.
The CalSTRS Defined Benefit pension provides secure retirement
income that our retired members and their beneficiaries rely on,
but they’re not the only ones. Communities throughout the state
also realize an economic benefit from the state’s nearly 214,000
retired educators.
