Economic Downturn Impact on Funding

Economic downturn impact on funding

Overview

CalSTRS’ unfunded actuarial obligation primarily resulted from lower than expected investment returns stemming from the 2008 global financial market collapse coupled with the 2001 dot-com bust. In fiscal year 2009 alone, the fund experienced a 25% loss.

However, provisions in the CalSTRS Funding Plan (AB 1469, Bonta) have considerably increased the likelihood of CalSTRS reaching full funding while reducing the risk of a low-funded status or even running out of money.

In 2020, CalSTRS took further steps to strengthen the funding of the system by adopting new actuarial assumptions. In addition, the Teachers’ Retirement Board has voted to increase the state’s contribution rate by 0.5% of payroll for each fiscal year since the 2017-2018 fiscal year. Although the 2020-2021 state rate was frozen at the fiscal year 2019–20 level by the state budget, the State of California made a supplemental payment of $297 million to CalSTRS in fiscal year 2020-21 to bridge the gap.

The limited rate-setting ability provided to the board by the funding plan has considerably reduced the risk of a low funded status or even depleting the fund. However, there is still the possibility that the board may not be able to adjust contribution rates to levels sufficient to fully fund the benefits by the year 2046. Investment returns significantly below expectations, significant improvements in life expectancies above current assumption and declines in membership are factors that could prevent full funding.

Additional resources