California Teachers Fund Trims Investment Forecast to 7.5% Amid Declines

The California State Teachers’ Retirement System, the second-largest U.S. public pension, cut its assumed annual rate of return to 7.5 percent from 7.75 percent, the second reduction since 2010.

The board of the $144.8 billion fund voted yesterday to adopt an actuary’s recommendation to lower its investment forecast because of what a staff report called “dramatic market declines” beginning in 2008.

The change means the plan will need larger contributions from taxpayers, teachers, school districts, or a combination of all three, to cover pension costs. The fund had 71 percent of what it needs to pay future benefits as of June 30, 2010. Lowering the rate adds $5.9 billion to its $56 billion shortfall, according to Milliman Inc., the fund’s consulting actuary.

“It’s better to err on the side of being conservative,” said Sharon Hendricks, a Los Angeles community-college instructor and board member. “I certainly do that with my personal finances.”

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. Over the 10 years that ended Dec. 31, the fund gained 5.4 percent, according to a statement.

The Calstrs board last cut its assumed rate from 8 percent in December 2010, rejecting a staff proposal to make it 7.5 percent. Calstrs ranks second in assets to the California Public Employees’ Retirement System. The $229.6 billion fund posted 2011 earnings of 1.1 percent.

Rejected by Calpers

Last March, the Calpers board voted to maintain its 7.75 percent assumed rate, rejecting its actuaries’ recommendation to lower it to 7.5 percent.

Of the 11 U.S. pension funds with assets of more than $50 billion, Calstrs and systems in Wisconsin and New York reduced their assumptions since 2007-08, according to the staff report to the Calstrs board.

New York City owes its pensions more than previously anticipated because officials have been too optimistic in assuming an 8 percent return on the $115.2 billion that the five funds hold in assets, Chief Actuary Robert North has said.

A more realistic expectation would be 7 percent, which would increase the city’s liability by about $2 billion if paid in one year, North said in a telephone interview.

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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