The Teachers' Retirement Board is committed to promoting the development of a comprehensive strategy to address the long-term funding needs of the system.
CalSTRS pointed out the need to address the projected $70 billion unfunded liability; however, absent changes in contribution rates or liabilities, current projections show the fund will deplete its assets in approximately 30 years. The funding shortfall can be managed, but it will require increased contributions, which can be achieved predictably over time.
Senate Concurrent Resolution 105 Funding Plan Directive
Senate Concurrent Resolution 105 establishes a framework for development of a funding strategy. The resolution encourages CalSTRS to work with affected stakeholders to develop at least three funding strategy options and submit them to the Legislature by February 15, 2013.
CalSTRS submitted its report of possible funding strategies, Sustaining Retirement Security for Future Generations: Funding the California State Teachers’ Retirement System, to the Legislature as requested by the resolution on February 14, 2013. The report doesn’t contain any single funding approach endorsed by the Teachers' Retirement Board. However, from the board’s perspective as fiduciaries, the definitive approach to address the funding shortfall fully funds the Defined Benefit Program within a 30-year timeframe. This approach upholds consistency with accounting and actuarial standards. The board recognizes, however, that the Legislature and Governor may elect a different approach. As a result, the report provides an analysis of the issues the Legislature and Governor needs to consider to develop a sustainable funding strategy that secures the long-term funding needs of the Defined Benefit Program as directed in the resolution.
The report, developed with input from affected stakeholders, identifies funding options and illustrates the implications of gradual, incremental contribution increases necessary to close the $70 billion funding gap and secure the long-term needs of the fund. CalSTRS stands ready to assist the Legislature and the Governor to help them enact a viable funding strategy in the 2013-14 legislative session, as intended in the resolution.
Fair Benefits Reward Decades of Service
On average, recently retired members receive about 53 percent of their final salary after nearly a quarter century of service. Most rely on their CalSTRS pension as their primary source of retirement security as educators do not earn Social Security for their CalSTRS-covered employment. Generally, CalSTRS retired members do not receive employer-paid health care benefits after age 65.
CalSTRS Contribution Rates
All CalSTRS contribution rates are set by statue. CalSTRS members, school employers and the State of California pay contribution rates to fund the Defined Benefit Program. Employer contributions have not increased for 22 years and employees’ in 40 years. Contributions by the State of California to the Defined Benefit Program have declined from 4.607 percent to 2.791 percent since 1998.
Although the Teachers’ Retirement Board does not have the authority to raise contribution rates, it does have the ability to educate the Legislature on the need to address the CalSTRS funding shortfall, and has done so since 2006.
Financial Turmoil Affects Funding Gap
CalSTRS unfunded actuarial obligation primarily resulted from lower than expected investment returns stemming from the 2008 global financial market collapse coupled with the 2001 dot com bust. In fiscal year 2009 alone, the fund experienced a 25 percent loss. Contribution rates remained unchanged despite these losses because, unlike most other pension systems, CalSTRS does not have the legal authority to increase them. Without legislative approval for increased contributions, CalSTRS estimates it would need a more than 20 percent investment return for the next five years to achieve full funding in 30 years.
The current shortfall is based on an actuarial valuation, which is a snapshot of the fund's assets and liabilities. The most current projections, as of June 30, 2012, show the plan is 67 percent funded when in the previous year it was 69 percent funded. The significant financial losses CalSTRS experienced during the global economic downturn make it unreasonable to assume that future investments will be enough to eliminate the unfunded liability. A reasonable and predictable increase in contribution rates is needed to offset the impact of investment losses.
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