Healthy Short-Term Returns Are Not Enough to Cure Chronic Underfunding
In the last three years, CalSTRS has experienced significant market volatility. In fiscal year 2011, CalSTRS catapulted to a 23.1 percent investment return high. The following fiscal year investment returns plummeted to 1.8 percent and then rebounded up to this year’s 13.8 percent. The good news that we’ve significantly exceeded our 7.5 percent investment assumption for three years still does not change current projections of depleting our assets in roughly 30 years.
This is not an indication of an irresponsibly mismanaged fund now in turmoil. Great returns that weather the turbulence of the market validate a team of professionals who are dedicated to their fiduciary responsibility. We set realistic benchmarks and hold ourselves accountable if they are not met. However, investment returns whether weak or strong lack the isolated muscle to recover from a decade of meager market conditions. Our estimates show that without contribution increases, CalSTRS would need to achieve 10 percent returns annually for the next 30 years to pay down the unfunded liability. Good returns at best merely slow a negative, downward trend.
Benefits under the CalSTRS Defined Benefit Program are sustainable when funding is secured through sufficient employer and employee contributions, when investment earnings are realized and when contributions can be adjusted appropriately. The last part – when contributions can be adjusted – is the most important.
Historically, contributions to CalSTRS set in state law have not been adjusted to address funding deficiencies, which has, in part, led to the current $70 billion funding shortfall. Employee contribution rates have not been adjusted since 1972, employer rates have not changed since 1990 and the state’s rates have decreased since 1997. Because the Teachers’ Retirement Board does not have the authority to adjust contributions, CalSTRS must rely upon the Legislature and Governor for remedy.
We are confident the long-term health of the fund can be restored with the appropriate action. Without it, the costs and risks to the state General Fund exponentially multiply. We estimate that for every day that goes by without a plan to close the funding gap, the costs soar by $22 million. Since 2006, CalSTRS has been calling for a review of contribution rates. We are working with the Legislature and our stakeholders to develop a funding plan, as recently provided in response to Senate Concurrent Resolution 105, and strongly recommended by the Legislative Analyst’s Office. The solution is a gradual and predictable increase in contribution rates.