Are media reports that declare CalSTRS needs $4.5 billion more a year true? On what basis are these claims being made?

Ask Jack Jack Ehnes

Recent media articles that state CalSTRS needs $4.5 billion more annually to meet future obligations lack context, but accurately cite the cost of a particular approach. The needed increase refers to the CalSTRS projected $70 billion funding shortfall and represents a total dollar amount necessary close this gap by increasing contributions in 2014 up to the amount needed to fully fund CalSTRS over 30 years.

In our report to the Legislature pursuant to Senate Concurrent Resolution 105 which summarizes CalSTRS’ funding needs, we note that acting to increase contributions in 2014 in order to fully fund the program over the following 30 years would translate to an additional 15.6 percent of payroll or a projected $4.5 billion in the first year.

Unlike other California pension plans, the Teachers’ Retirement Board lacks the authority to raise contribution rates needed to address the funding shortfall. Instead that authority rests with the Governor and the Legislature as contributions to CalSTRS are set in statute, and the Legislature may choose to take a different approach in order to close the funding gap. Absent any changes in contribution rates or liabilities, current calculations show the program will deplete its assets in little more than 30 years. If a funding plan is not adopted and CalSTRS depletes its assets by as early as 2043 as projected, the State bears the obligation of payment for the difference between benefits paid and the contributions received.

The longer it takes to secure a long-term funding plan, the greater the risk of significant financial consequences to our members, employers and ultimately the state’s General Fund. We are confident the funding shortfall can be managed, but it requires an increase in contribution rates that can be implemented gradually and predictably over time.