CalSTRS Releases 2016 Actuarial Valuation
Impacts of investment and longevity assumptions felt; fund still moving toward funding goal
WEST SACRAMENTO, Calif. – The Teachers’ Retirement Board today adopted the actuarial valuation for the CalSTRS Defined Benefit Program as of June 30, 2016, reflecting impacts from assumption changes while also illustrating continued progress toward the system’s long-term funding goals.
The actuarial valuation provides a snapshot-in-time of the system’s financial health, in addition to monitoring the system’s funding status and its ability to meet long-term commitments.
CalSTRS’ actuarial consultant, Milliman, reports that the unfunded actuarial obligation, known as the funding gap, will adjust from $76.2 billion at the June 30, 2015, valuation to $96.7 billion as of the June 30, 2016, report. This increase was anticipated and occurred primarily due to the adoption of the lower investment return assumption and the increase in member life expectancies. These changes also contributed to reduce the system’s funding ratio— the ratio of the smoothed actuarial value of assets to pension obligations—from 68.5 percent to 63.7 percent.
“To say there would be no bumps in our 32-year funding journey would be unrealistic.”
CalSTRS Chief Executive Officer
At its February 1, 2017, meeting, the Teachers’ Retirement Board adopted the new assumptions as part of the multiyear CalSTRS Experience Analysis, commonly referred to as the experience study, spanning July 1, 2010, through June 30, 2015. One assumption—the investment assumed rate of return—is being carried out in two parts, down from 7.50 percent in 2015 to today’s 7.25 percent, with a second reduction next year to 7.00 percent. This assumption measures the average return CalSTRS expects the fund to make on its investment portfolio over the next 30 years.
“Given the detailed analysis of market and demographic trends presented in February, the board took responsible action to adopt assumption changes reflecting the recent actuarial experience. We expected the impacts that were indicated in today’s report; however, we can clearly see that the fund is making progress toward full funding as provided by the July 2014 funding plan enacted by the Legislature and Governor,” said CalSTRS Chief Executive Officer Jack Ehnes.
“We are on a responsible and gradual trajectory toward the long-term financial health of the fund.”
CalSTRS Chief Executive Officer
“CalSTRS is a long-term horizon investor, and to say there would be no bumps in our 32-year funding journey would be unrealistic. But this report validates that we are on a responsible and gradual trajectory toward the long-term financial health of the fund,” Mr. Ehnes added. “This valuation reflects the conservative approach of the Teachers’ Retirement Board, based on input from third-party actuarial and investment experts.”
CalSTRS actuarial experts and consultants expect that the funding status will decline again next year, when the return assumption is lowered to 7.00 percent. Had the investment return assumption been immediately lowered to 7.00 percent in the 2016 valuation, the fund would have had a $105.1 billion funding gap as of the June 30, 2016, valuation and would have been 61.8 percent funded. Even with the anticipated decline in funding levels next year, an upswing is projected as contributions increase, with a steady ascent toward full funding, under the .
Contribution Rate Changes From the June 30, 2016, Actuarial Valuation:
- State of California contributions:
The actuarial valuation findings mean the state’s contribution rate will increase from the current rate of 6.328 percent of payroll to 6.828 percent of payroll effective July 1, 2017. The state pays an additional 2.5 percent of payroll to the Supplemental Benefit Maintenance Account, an inflation-protection program for retirees.
Under the 2014 funding plan, the Teachers’ Retirement Board now has the authority to adjust the state’s contribution rate upward by 0.5 percent from the previous year, based on the funding status of the plan. Governor Brown’s 2017-18 fiscal year budget summary (page 127) presented in January 2017, already designated $2.8 billion in General Fund contributions to CalSTRS. Included in that amount, $153 million is allocated in anticipation of the 0.5 percent rate increase, noting that it is “consistent with the funding strategy signed into law in 2014, and positions CalSTRS on a sustainable path forward, eliminating the unfunded liability in about 30 years.”
- Employer contributions:
There will be no additional impact on employer contribution rates in 2017-18 from this valuation. The employer rates are currently adjusting upward, consistent with the statutory limits set in the 2014 funding plan, and will reach 19.1 percent of payroll in July 2020.
- Member contributions:
- CalSTRS “2% at 62″ members:
(Those first hired on or after January 1, 2013)
The actuarial valuation findings indicates there will not be an impact this year on CalSTRS “2% at 62″ members who were first hired on or after January 1, 2013, under the Public Employees’ Pension Reform Act (PEPRA). These members are required by law to pay at least one-half of the normal cost of their defined benefit pension. Normal cost is the annual cost that is necessary, applied to each year of service, to adequately fund the benefit over time. Normal cost does not include any costs associated with amortizing or paying down unfunded liabilities. However, based on initial projections, these members will likely see a rate increase of 1.0 percent of payroll, adjusting from 9.205 percent to 10.205 percent on July 1, 2018.
Actuarial staff project that, by July 2017, close to 20 percent of CalSTRS active members (roughly 80,000 out of more than 435,000 educators) will be in the “2% at 62″ pension formula. This number has increased by approximately 20,000 members each year.
- CalSTRS “2% at 60″ members:
(First hired before January 1, 2013)
CalSTRS “2% at 60″ members will see no additional changes to their contribution rates, regardless of the assumption changes in the actuarial valuation.
- CalSTRS “2% at 62″ members:
The California State Teachers’ Retirement System, with a portfolio valued at $202 billion as of February 28, 2017, is the largest educator-only pension fund in the world. CalSTRS administers a hybrid retirement system, consisting of traditional defined benefit, cash balance and voluntary defined contribution plans. CalSTRS also provides disability and survivor benefits. CalSTRS serves California’s more than 914,000 public school educators and their families from the state’s 1,700 school districts, county offices of education and community college districts.
See how CalSTRS demonstrates its strong commitment to long-term corporate sustainability principles in its annual Global Reporting Initiative sustainability report: Fostering a Secure Future.