Ask Jack Jack Ehnes

Why does Governor Brown say CalSTRS’ unfunded liability is $80.4 billion and CalSTRS say it is $71 billion – which is correct?

Both the $71 billion and $80.4 billion CalSTRS unfunded liability values are accurate, as reported in the June 30, 2012 valuation report. The $80.4 billion, referenced in the Governor’s 2014-15 Budget Proposal, represents the difference between the market value of assets and actuarial liabilities as of June 30, 2012. The $71 billion value of the unfunded liability cited by CalSTRS represents the difference between the actuarial value of assets and actuarial liabilities as of June 30, 2012. Both could be used to determine the cost of addressing the funding shortfall as either figure would result in the same required increase in contributions.

The actuarial value of assets reflects the smoothing of investment gains and losses relative to CalSTRS’ 7.5 percent investment assumption, a methodology that is generally used by public pension plans to lessen the impact of short term fluctuations in the value of assets. CalSTRS recognizes investment gains or losses in any given year over a three-year smoothing period. For every year’s investment results, one-third of any gains and losses are recognized and reported in our valuation report for that year and each subsequent year until they are fully recognized in the third year. Using this methodology, $9.4 billion of investment losses were not recognized in the calculation of the actuarial value of CalSTRS’ assets as of June 30, 2012, which was $152.5 billion.

The market value of assets does not reflect any smoothing; all gains and losses are recognized in the year they occurred. The market value of CalSTRS assets as of June 30, 2012 was $143.1 billion, and the $9.4 billion difference between the market value and the actuarial value explains the numbers cited by the Governor and CalSTRS.

In estimating the required increase in calculations to address the funding shortfall, eventually both values would be reflected. This is because a long-term contribution rate where investment gains and losses are fully smoothed is applied and therefore reflects the market value of assets. CalSTRS reports both figures which can be found on page 10 of the June 30, 2012, actuarial valuation.

Commands