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California Teacher Fund Needs $4.5 Billion Yearly Boost

The California State Teachers’ Retirement System’s $73 billion unfunded liability may be the state’s “most difficult fiscal challenge” and lawmakers should increase funding for the second-largest U.S. pension, the Legislative Analyst’s Office said.

Additional money from taxpayers, through higher contributions from the state and school districts, along with increases from employees probably will be needed, the analyst’s office said today in a report. Investment returns aren’t likely to be enough to close the gap, it said.

Pension costs for retired public employees are straining governments from California to Rhode Island. Calstrs, as the $161.4 billion system is known, has 66 percent of the assets needed to cover promises to current and future retirees, and will run out of money by 2044 unless changes are made, the analyst’s office said.

“Something needs to be done,” Ed Derman, the fund’s deputy chief executive officer, told lawmakers today. He said the unfunded liability grows $17 million a day.

Unlike the California Public Employees’ Retirement System, the largest U.S. pension, Calstrs’ annual contributions from teachers, school districts and the state are fixed and can only change through legislation. Calpers, with a market value of $256 billion, can increase rates when investment returns lag behind targets.

Contribution Levels

California now pays about 5 percent of teacher payroll, or $1.5 billion, into Calstrs. School districts provide 8.25 percent of payroll, amounting to $2.2 billion, while teachers and other employees surrender 8 percent of their pay, or $2.1 billion. The contribution rate has changed for employees since 1972, and for school districts in more than two decades.

The pension system said in February that it would need teachers, school districts and the state to boost their contributions by 15 percent combined annually to erase its funding gap. The longer lawmakers wait to increase funding, the more it will cost to erase the shortfall because the additional money could have been invested to boost returns, the analyst’s office said in the report.

The 15 percent increase would generate $4.5 billion more a year for three decades to erase the gap. That would leave the state spending more on teacher pensions than it does on its two public university systems combined, the analyst’s office said.

The fund’s board last year lowered its assumed rate of return on investments to 7.5 percent from 7.75 percent. The change added $5.9 billion to the system’s funding gap. Losses suffered in 2008 and 2009 added $12.7 billion to its shortfall.

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