Blog entry Jack Ehnes

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.

Comments

Some Initial Thoughts

As a teacher in the Claremont Unified School District and the former President of the Claremont Faculty Association, a chapter of CTA, I have a few preliminary thoughts regarding the underfunded liability of CalSTRS. The public employee pension reforms spearhead by Governor Brown and passed last June by the legislature will help the long term solvency of CalSTRS, but the current unfunded liability still needs to be addressed. I know that CalSTRS is working on solutions to this issue. I have thought about the issue a bit and have come up with a package proposal as a partial solution. It probably has lots of problems with it, but I just wanted to toss it out there. 1. The California Legislature can reduce or eliminate the amount of the annual benefit adjustment of 2% to STRS pension payments if economic conditions dictate. This automatic adjustment should be permanently eliminated for those with annual pensions over $100,000 and trimmed back to 1% for those with annual pensions between $80,000 and $100,000. 2. For the next two years, there should be a temporary suspension of the annual benefit adjustment for all retirees. 3. The purchasing power protection level is currently set at 85 percent of a retiree’s initial benefit. This protection should not apply to any pension over $80,000. 4. Currently, employers contribute 8.25 percent of each member’s earnings, an amount that has not increased since 1990. With the passage of Proposition 30, school districts are not in the extreme fiscal situation that they would have been had Proposition 30 not passed. The legislature should act now to increase this contribution. The rate would go up to 8.5 percent on January 1, 2014, 8.75 percent on January 1, 2015, and 9.00 percent on January 1, 2016. I believe that this balanced proposal does not “kick the can down the road,” but is achievable and deals with the issue now, before the unfunded liability grows larger and becomes more difficult to address. Neither my degree in finance nor my HP12C is of much use to me in determining what this package of proposals would mean towards meeting CalSTRS’s unfunded liability, however, I think it would be substantial and would put the CalSTRS on a path towards sustainability. Also, I believe this proposal shares the burden equitably among all stakeholders and would have a great chance of becoming the starting point of significant and substantial discussion in Sacramento.

Thank you for your comment.

Thank you for your comment. At CalSTRS we appreciate the input our members provide to address the unfunded liability.

unfunded obligation

I think this is a fair and honest proposal and would hope that the CalSTRS Board would give it serious consideration for presentation to the state legislature.

CALSTRS underfunding

If the rate of contribution has truly not changed since 1972 (42 years ago) and if the system really expects a 7.5 % long term return (optimistic) I can understand why there are concerns about meeting future liabilities. Increase the rate of contribution in higher paying districts, throttle back your expectation of return to 5-6%, and don't whack retirees from poorer low-paying districts.

Unfunded liablility

As a long retired member of STRS I have appreciated the 2% annual increase in my pension. I don't depend on it, but it's nice. I believe those of us who have already retired should give that up as noted in Joseph Tonan's comment. We should be doing our share to support the institution that has supported us for so long.

Unfunded liability

As a long-retired STRS member I believe those of us who have been so well supported by our retirement system for so long should share the load with those still working. We should do without our 2% annual increases until the liability is funded, and not put the whole burden on others.

Unfunded Liability

How interesting that Jack Ehnes has a 5 step program in which the current retirees take a hit in four of his recommendations and the Districts increase their contributions on the fifth recommendation. He does not include current teachers to increase their contributions, and then shows his hypocrisy by suggesting that his proposal shares the burden equitably among all stakeholders. But of course I am not surprised. He is a former President of a Faculty Association affiliated with CTA, which has a history of ignoring the retirees of school districts throughout California.

Changing Retirement Contracts for Those Retired

Our retirement conditions and agreements should be honored. We made our retirement financial plans based on the cost of living increases we would receive, and the guaranteed purchasing power of our initial retirement income.

under funded liability

I am a teacher and have contributed to CAL-STRS for many years. The california legislature needs to address this under funding liability immediately in order to preserve our retirement now and for future teachers. This can be done by increasing the contirbution for the employee and the employer. The state also needs to make their contributions to the system current and stop raiding the fund when they run short of money to balance their budget. CAL-STRS is not a checking account for the state of California. Our pension is already serioulsy under funded and I suspect the real figures are worse than what is being printed. The time to do something is now!

Dear Taxpayers, ALL of these

Dear Taxpayers, ALL of these promised pensions (the result of a you-scratch-my-back-and-I'll-scratch-yours collusion between the Public Sector Unions/workers and our elected officials) are GROSSLY EXCESSIVE, the taxpayer paid-for share of which is 2-4 times (4-6 times for safety workers) greater in value at retirement than what Private Sector workers get from their employers when making the SAME pay, retiring at the SAME age, and having the SAME years of service. Taxpayers ... use any and all means to RENEGE on that 50+% of these promises in excess of what YOU get in retirement pensions.

Pensions

I'm not sure who all these retired teachers are that are so well-off that they are more than happy to take a cut in their pension and/or decline the annual 2% yearly adjustment to their benefit, but I am not one of them. After working for 34 years in education, contributing to my own retirement, and not being eligible for Social Security benefits, I feel that not getting what was promised to us is disgraceful. I don't think the comments on this site are representative of most retired teachers that I know. I understand the difficulty that the state is having with funding pensions but to solve it on the backs of those who now retired and who have no opportunity to start a new career is mean-spirited and uncaring.

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