California Teacher Fund Needs $4.5 Billion Yearly Boost

The California State Teachers’ Retirement System needs as much as $4.5 billion more a year for three decades to pay all the benefits the second biggest U.S. public pension must cover, an internal report found.

The fund, which took in $6 billion last fiscal year, would need teachers, school districts and the state to increase their contributions by 15 percent combined annually to erase its funding gap, according to the report to its governing board.

Pension costs for retired public employees are straining governments from California to Rhode Island. Calstrs, as the $158 billion teachers’ fund is known, has just 69 percent of the assets needed to cover projected liabilities. Without changes, it would run out of money by 2046, according to the report, which is intended to help the board and lawmakers to come up with options.

“The weak financial markets of the past decade, together with the fact that contribution rates were not adjusted in response to the low returns, have undermined the long-term funding” of the plan, the report said. That “can only be effectively addressed by increasing the contributions paid by a combination of members, employers and the state.”

Unlike the California Public Employees’ Retirement System, the largest public pension, the amount that teachers, school districts and the state must pay annually is fixed and can only change through legislation. Calpers, with a market value of $256 billion, can increase rates when investment returns lag behind targets.

Phased In

Any increase for Calstrs could be phased in gradually to lessen the impact on teachers, schools and state taxpayers, the report said.

Teachers pay 8 percent of their wages to finance pensions, a rate that hasn’t changed since 1972. School districts pay 8.25 percent of payroll, a figure unchanged in more than two decades, according to the report. State taxpayers contribute about 5.3 percent.

The fund’s board in February 2012 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.

The so-called funding ratio has been less than 100 percent since 2001. Because the ratio is “smoothed” by averaging three years of investment returns to reduce volatility, the latest gap only partially reflects the almost 24 percent net gain from investments in fiscal 2011, according to a separate report to the board in April.

While Governor Jerry Brown, a Democrat, and lawmakers last year enacted a package of bills to curb public-employee pension costs, the legislation didn’t deal with Calstrs’s unfunded liability.

Before it's here, it's on the Bloomberg Terminal.