Setting the Record Straight: Part 1

Blog entry Jack Ehnes
Setting the Record Straight: Part 1

Competing studies about the state of California’s pension systems—including CalSTRS—have received recent media attention. One report by university students made stunning headlines about the state’s pension liabilities based on questionable research. The result was to make the state’s pension liabilities look much worse than they are.

To set the record straight, CalSTRS member benefits are guaranteed by the California Constitution and protected by the California and U.S. constitutions. There is no risk that the benefits will not be paid.

  • CalSTRS retirement benefits are a shared responsibility with contributions from members, employers and the State of California together with investment earnings providing the funding.
  • Because of the 2008 global economic downturn and the role of investment returns in funding benefits, the current unfunded actuarial obligation is $40.5 billion as of June 30, 2009.
  • Based on current projections, CalSTRS has assets to pay benefits through 2044.
  • After 2044 without an increase in contributions, the state of California—as the plan sponsor—would be obligated to fund benefits on a pay-as-you-go basis.
  • CalSTRS is not in crisis now, but we do need members, school districts, the Legislature and the Governor to work together to achieve a funding solution.

Investments Perform Over Time

Defined benefit pension funds are critical to retirement security, but they are not immune from the significant investment losses that have hurt all investors. A few studies have recommended a shift toward risk-free investments and suggest that pension funds reduce the assumed rate of return by more than half. This would mean that retirement systems would be increasing their exposure to bonds and decreasing exposure to equities. This approach ignores the fact that that CalSTRS averaged 8.6 percent returns for the past 30 years, including the 25 percent loss from the 2008 global market crash.

CalSTRS prudent approach to investments generates consistent returns that grow along with the course of your career. In evaluating its asset allocation, CalSTRS determines the need for liquid funds to pay current benefits. Funds that are not immediately required can be invested in longer-term, less liquid and higher earning investments.

A risk-free investment approach would impose significant new costs on taxpayers and would be contrary to the intent of California’s voters, who in 1984 removed a 25 percent constitutional limit on public pension fund equity exposure when they approved Proposition 21.

Risk and Reward
Despite the greater risk, over the long term, equities provide a higher return than bonds. Historically, more than 60 percent of CalSTRS benefits are paid from investment earnings. It is clear that reducing our investment in equities and increasing our exposure to bonds will increase the cost of the benefits to employers and, ultimately, the taxpayer.

Recovery Underway

CalSTRS funded status represents a figure at a point in time that can change with swings in the market. Experience has shown that what goes down on Wall Street will be met by an equal, or greater, recovery.

For instance, the closing value on March 31, 2010, puts CalSTRS up $18 billion in value from June 30, 2009. That equates to a nearly 18-percent return for the fiscal year. With less than 80 days to go before we cross the fiscal year finish line, the U.S. stock market has regained 60 percent in value in the past 12 months, far outpacing the return for U.S. Treasuries.


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