California Teachers Fund Needs 10% Returns to Meet Retirement Needs
The California State Teachers’ Retirement System would need to realize investment returns of more than 10 percent a year for the next 30 years to meet its obligations to retirees, a number actuaries called unrealistic.
The board of the second-largest U.S. public pension today adopted a report by its actuaries showing that it slipped $15.5 billion farther behind its ability to pay its long-term obligations in fiscal 2010.
Calstrs, as the fund is known, estimates its annual return will be 7.75 percent. A 10.1 percent projected yield would be needed to avoid increasing contribution rates for teachers or school districts, according to an analysis by actuarial consultants Milliman Inc.
“We wanted to give you a sense of what would need to happen to invest our way out of it, just to give you a sense of how hard it is,” said Nick Collier, a Milliman actuary, in comments to the board today. “The further we go down the road without additional revenue, the harder it’s going to be.”
Ed Derman, the $150.1 billion fund’s deputy executive director, said Calstrs will need additional contributions from members and school districts at some point. The power to increase contribution rates resides with the state Legislature, not the pension system managers, Derman said.
Unfunded Liabilities
Calstrs’ unfunded liabilities rose 38 percent to $56 billion as of June 30, actuaries said in a report. The gap is smaller than the $57.5 billion projection made by actuaries a year earlier because of stronger-than-expected equity performance, according to the report.
Like many public pensions, Calstrs projects its expected assets and liabilities over a 30-year period.
Public pensions nationwide are grappling with about $3.6 trillion in unfunded liabilities, according to a 2010 study by Joshua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester. While Calstrs earned a 12.7 percent return last year, its ability to make long-term payments declined because gains and losses are averaged over a three-year period.
Past Losses
Calstrs actuaries said absorbing losses from 2008 to 2009 was responsible for $12.7 billion of the increase in unfunded liabilities between June 2009 and June 2010.
Under a formula that triggers automatic increases in state payments when the pension plan falls further behind its obligations, California will pay an estimated $140 million to $150 million more toward Calstrs this year. The state contributed $573 million in the fiscal year that ended June 30.
The state’s additional payments are expected to begin in October, Derman said in an interview.
Governor Jerry Brown said April 1 that he would develop a plan to tackle the widening gap between Calstrs’ assets and expected liabilities.
The issue was one of seven pension-related measures that the 73-year-old Democrat vowed to address following a breakdown in budget negotiations with Republicans. Bob Dutton, the state Senate Republican leader, had proposed requiring new public employees to enter into a mandatory hybrid between a traditional pension and a 401(k)-style plan.
Brown didn’t offer specifics on how he would deal with the Calstrs liabilities.
In comments to the Calstrs board today, a lobbyist for the California Teachers Association said the growing gap between assets and liabilities shouldn’t be a pretext for making drastic changes to employees’ pensions.
“There are some who want to use and manipulate this for their own political purposes,” Jennifer Baker, legislative advocate for the 325,000-member union, told the board. “There truly is an agenda for some that has nothing to do with solving the shortfall that you have now.”
To contact the reporter on this story: James Nash in Sacramento at jnash24@bloomberg.net
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
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