CalSTRS 2011 Valuation Shows 23 Percent Investment Return Helps, But Not Enough

Blog entry Jack Ehnes

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.

The new June 30, 2011 valuation reflects the impact of a 23.1 percent investment return in 2010-11. The immediate impact of this impressive return is lessened by the fact that, like most public pension funds, CalSTRS “smoothes” out extraordinary investment gains and losses over several years—three years in the case of CalSTRS. Not only does this mean that the valuation just adopted only reflects one-third of the impact of last year’s investment return, it also reflects the final one-third of the 25 percent losses stemming from the 2008-2009 financial crisis. As a result, the valuation showed an increase in the gap between current assets and liabilities from $56 billion to $64.5 billion, putting the fund at a 69% funding status.

Long-Term Implications

The long-term implications of the 2010-11 returns are significant. First, the number of years that projected assets are available to pay benefits has increased from 30 years to 35 years. Similarly, the increase in contributions required to fully cover all liabilities beyond 30 years has decreased by more than one percent of total salaries.

Outstanding investment performance such as the one experienced is always welcome but should not give the impression that investment returns alone can restore fund to actuarial soundness. Our estimates show that would take about 30 years of about 10 percent annual returns. It would not be prudent to think that there is any reasonable chance that such high returns could be sustained for such a long period of time.

Funding Plan is Still Needed

What is needed now is a program of gradual, incremental increases in contributions throughout a set timeframe of anywhere between 30 to 75 years. The point here being, increased contributions do not all need to happen at once, but they do need to happen. And the sooner the better as the costs rise the longer it takes to infuse the system with much-needed funds.

As the discussion of pension reform continues in the Legislature, our concern is that a plan to address the funding shortfall is included. Keep in mind the authority and responsibility for this action rests with the Governor and the Legislature. We believe the Legislature, the Governor and our stakeholders recognize this consideration. We will continue to work with them to communicate its importance to the long-term health of the fund.


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