California Teacher Pension Gap Poses Risk, Auditor Says

The California State Teachers’ Retirement System’s financing has declined below a prudent level and poses a “high risk” to the state, according to an audit.

The ratio of funding to obligations for the second-biggest U.S. pension fell to 67 percent in 2012 from 98 percent in 2001, “well below the 80 percent considered fiscally sound,” auditor Elaine Howle said in an annual report.

“At the current contribution rate and actuarially estimated rate of return on investments, the defined benefit program’s funding ratio will continue to drop and assets will eventually be depleted,” Howle said today.

Pension costs for retired public employees are mounting nationwide while resources have declined. Unlike the California Public Employees’ Retirement System, the largest U.S. pension with $270 billion of assets, the Calstrs board doesn’t have the authority to set contribution rates from teachers, school districts and the state. Changes can only be made through legislation.

California now pays about 5 percent of teacher payroll into Calstrs. School districts provide 8.25 percent of payroll, while teachers and other employees surrender 8 percent of their pay. The fund’s board last year lowered its assumed rate of return on investments to 7.5 percent from 7.75 percent.

The $170 billion 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.

In March, the nonpartisan Legislative Analyst’s Office called the funding gap one of the state’s most difficult fiscal challenges. The longer lawmakers wait to increase funding, the more it will cost to close the gap because the additional money could have been invested to boost returns, the analyst’s office said.

Despite the looming pension liability, the risk penalty that investors demand to own California bonds has narrowed to the lowest level in five years.

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