Pew Report Examines Pension Funding

Blog entry Jack Ehnes

The latest report from the Pew Center on the States looks at the funding levels of state public retirement benefits in 2009. The data sample, which was the basis of the study, was taken shortly after we reached the depths of the worst financial crisis since the Great Depression.

The document, The Widening Gap: The Great Recession’s Impact on State Pension and Retiree Health Care Costs, shows how the financial crisis impacted states and all investors. It also reveals that many states, including California, failed to pay the entire amount necessary to fully fund the plans, a situation that has greatly contributed to the unfunded liability.

In the case of CalSTRS, while the state has continued to pay its legally required amount, that amount has been less than that required to fully fund the plan for eight consecutive years. For the fiscal year ending on June 30, 2010, the legally required contributions from members, employers and the state were only 55 percent of the annual amount required to fully fund the plan over 30 years.

Recovery Minimized

The findings triggered a new round of gloomy headlines, perhaps the result of bad timing by the study’s authors in failing to include more fully, the impacts of market improvements on the financial health of the public pension plans in the study.

The paper misses the strong recovery underway at CalSTRS, reflected in its 2010 Actuarial Valuation released in April as well as more recent investment returns. The CalSTRS fund has grown by more than $34 billion since June 30, 2009, a net increase of more than 28 percent.

And just as we recognize our losses over a three-year period, using accepted actuarial standards, so we also recognize the gains that play such a key role in helping to close the funding gap.

In California, where the budget battle is front and center, pensions typically make up a small portion of the overall state budget. In the case of CalSTRS, most of its funding, comes from investment earnings, the state’s educators and their employers (school districts).

Sustaining Defined Benefit Pensions

Your hard-earned Defined Benefit Pension is secure for decades and can be sustained for decades more, but changes will be necessary. It’s clear we cannot solely invest our way to financial health, so a gradual, predictable plan for adequate long-term funding is needed.

Only the Legislature has the authority to do that.


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