Blog entry Jack Ehnes

Understanding the CalSTRS Valuation

Every April the Teachers’ Retirement Board adopts the latest actuarial valuation. The actuarial valuation is a snapshot of the CalSTRS fund’s assets and liabilities as of June 30, 2012.

The new valuation shows an increase in the unfunded actuarial obligation or unfunded liability from $64 billion to $70 billion. This increase holds consistent with projections reported in all actuarial valuations since 2003.

Valuations operate akin to a measuring stick. They guide appropriate changes and decisions necessary to sustain the long-term viability of the fund. More specifically, the primary purpose is to analyze the sufficiency of future contributions from members, employers and the State to meet current and future obligations of the Defined Benefit (DB) Program.

Findings from the past 10 years indicate future revenue from contributions for the DB Program remain insufficient to finance the fund’s obligations. This continued underfunding equates to a growing unfunded liability. Unlike many other pension plans, CalSTRS lacks the authority to adjust contribution rates – only the Legislature can do that.

This does not mean, however, the fund is insolvent. What it does indicate, is that without a plan of action to address the unfunded liability, current projections show the fund will deplete its assets by as early as 2043. At that time the fund will become a pay-as-you-go system which is exponentially more costly to maintain. As the plan sponsor, the State will be obligated to ensure payment of the difference between the benefits paid and the contributions received. It also means that, the longer it takes to adopt a responsible funding strategy, the more the costs and risks to the state General Fund increase.

Members are not in jeopardy of losing benefits as the U.S. and California constitutions guarantee CalSTRS core benefits (retirement, disability and survivor benefits.) What is in question is how benefits 30 or more years from now will be funded. Since 2004, CalSTRS has been educating our members, stakeholder groups and the Legislature of the need to address the funding shortfall. We are confident the funding shortfall can be managed, but it will require increased contributions that can be gradual, predictable and fair to all parties involved. 

Most recently, CalSTRS submitted its report, “Sustaining Retirement Security: Funding the California State Teacher’s Retirement System” to the Legislature, per Senate Concurrent Resolution 105, which offers policymakers a range of sustainable funding strategies necessary to secure the long-term funding needs of the DB Program. Another recent report from the Legislative Analyst’s Office recommends adoption of a funding plan for CalSTRS by 2014.

We have dedicated a section of our website that explains the long-term needs of the fund which can be found under the ‘Plan Funding’ tab. We are hopeful legislation is enacted in the 2013-14 session, as intended in the resolution, to stem the growing cost of a solution.

Comments

Pensions

Why do STRS decisions remain in the hands of the Legislature while PERS is completely independent? And has any effort ever been made to bring STRS into the same independence that at PERS enjoys. If not, why not? Does STRS existence in the hands of the Legislature provide any special benefits? I think not. I'd like to hear an explanation.

Re: Pensions

The Legislature created CalSTRS in 1913 in order to provide a reliable retirement benefit for California’s teachers. One benefit of statutorily defined contributions is the reliability of contributions by educators, school employers and the state to the fund. This has proved most prudent, particularly in light of the negative impact pension holidays have on many systems. However, one way to address the ongoing needs of the fund is to set a time frame for reevaluation. In fact, this point is outlined in our report to the Legislature in response to SCR 105. Our recommendation is that the Legislature set a time frame to reevaluate the Defined Benefit Program which allows the opportunity to make appropriate funding changes should the need arise. Again, educators, school employers, the California Legislature, and CalSTRS created the largest teacher pension fund in the nation. This solid foundation sustains the fund both now and in the future.

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