Calstrs Should Cut Assumed Return to 7.5%, Actuary Recommends

The California State Teachers’ Retirement System, the second-largest U.S. public pension, should lower its assumed annual rate of return to 7.5 percent from the current target of 7.75 percent, its actuary said.

The board of the $144.8 billion fund is scheduled to vote Feb. 2 on the recommendation, which would add $5.9 billion to its $56 billion funding shortfall, according to a report by Milliman Inc., the fund’s consulting actuary.

Calstrs posted a 2.3 percent investment gain in 2011, reducing its ability to meet long-term obligations to 856,000 members and their families. The fund had only 71 percent of the money it needs to pay benefits as of June 30, 2010, down from 78 percent a year earlier, according to a statement.

“There is a less than 50 percent probability that the current assumption” of 7.75 percent will be met “over the long term,” Milliman actuaries wrote in their report. Over 10 years, the fund gained 5.4 percent, according to a statement Jan. 24.

The Calstrs board adopted the current 7.75 percent rate in December 2010, rejecting a staff proposal to lower it to 7.5 percent from 8 percent. Calstrs is second in size to the California Public Employees’ Retirement System, which posted 2011 earnings of 1.1 percent.

The panel will also review a mix of higher contributions from teachers, school districts and the state to address the funding gap, according to its agenda.

Governor Jerry Brown didn’t include additional state funds for Calstrs in a series of measures he outlined in October to narrow pension funding gaps.

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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