Recently there have been media stories regarding the CalSTRS fund and the unfunded obligation which categorizes the fund as "poorly structured."
Below is information from CalRTA's legislative advocate David Walrath, an editorial from Dana Dillon, chairman of the Teachers' Retirement Board, and a sample of a recent article.
From David Walrath, CalRTA Legislative Advocate
The California State Teachers' Retirement System has announced that they have a $43 billion unfunded obligation but this does not mean benefits are at risk. The valuation is based on the fund's assets and liabilities on June 30, 2009. While June 2009 was better than March 2009 it was a lot worse than today. The valuation reflects the stock market plunge caused by the greatest recession in the last 50 years.
The fund has more than $130 billon in assets. Even with the stock market decline there are sufficient funds in the Supplemental Benefit Maintenance Account to fund 85% purchasing power protection for the next 75 years. Yes, the unfunded obligation is about 25% of assets (the fund is 77% of full funding), BUT when the Fund was established in 1972 it was less than 50% funded.
We have been here before with a significant unfunded obligation and have dealt with the situation without cutting benefits. We will again deal with the situation and improve the STRS funding to be greater than 77% and again reach toward 100% funding. As in the past, state and employer contribution rates will need to be increased but we hope the increases will be temporary until the Fund is in better shape.
Remember that an unfunded obligation is similar to a mortgage. It has to be paid but it does not have to be paid all at once today. The mortgage is a debt, but as long as you are making payments then you can stay in the house. Also during this time the house's value can increase or decrease but as long as you do not sell then the increase or decrease is just a paper loss not a real loss. This is the same situation for the CalSTRS assets. As long as they are not sold and as long as the stock market rebounds, then the losses are paper losses not real losses. CalSTRS benefits are protected. The assets will improve in value as we recover from the long recession. The recession was an event that we hope is a once in a lifetime event. This does not mean that we will not have to look at contribution rate increases. It does mean that the sky is not falling and no current or retired educator has to worry about receiving their CalSTRS benefits.
By Dana Dillon, Chairman of the Teachers' Retirement Board
Your editorial on the California State Teachers Retirement System fund failed to tell the whole story about its board's discussion on long-term funding of classroom teacher retirement benefits ("Pension folly," Our Views, Feb. 2).
Your assertion that CalSTRS is a "poorly structured" system is wrong. For nearly a century, school employers, teachers and lawmakers have built a world-class financial services organization serving the retirement needs of California's teachers. In that time, even during the Great Depression
, we never missed paying our obligations. Our 845,000 members and beneficiaries depend on the pension system to provide a secure retirement benefit.
The average CalSTRS pension replaces 62 percent of a typical member's salary and is the only income she receives at retirement, after a career approaching 30 years of service. Our members do not earn Social Security benefits for CalSTRS service, nor do they generally receive employer-paid health care at retirement.
In contrast to other pension plans, the enhancements to CalSTRS benefits that were enacted by the Legislature and the governor were designed to reward teachers who lengthened their careers, not to provide across-the-board increases. Many of those enhancements passed in the last 10 years will soon sunset on their own. These benefit improvements are not the cause of our existing funding gap; rather the combination of the dot-com bust earlier this decade and the worldwide economic crisis in 2008 has resulted in the need to take action.
The charge that the pension system is "loosely accountable" is untrue. The pension board, made up of public members, teachers and government officials, has been nationally recognized for operating with the highest ethical standards and transparency. Our conversation this week regarding our funding status was conducted in an open public hearing, not behind closed doors. A solution can be reached.
What is needed is to build understanding and support for a solution among all the stakeholders. We must have a plan to pay the unfunded portion of the benefits due our members -- much like homeowners need a plan to pay off their mortgages.
The Los Angeles Times
California teachers pension fund faces shortfall
January 28, 2010 | 1:11 pm
Alarm bells are ringing at the country’s second-largest public pension fund.
The California State Teachers’ Retirement System
, which lost a quarter of the value of its investment portfolio in the spending year that ended June 30, currently faces a $43-billion shortfall in the money it needs to pay future pensions.
What’s worse, warns Chief Executive Jack Ehnes
, the $134-billion fund could be broke in 35 years – the length of a typical teaching career – if the state Legislature doesn’t raise the employer contributions paid by school districts in the next few years.
In the meantime, income from CalSTRS investments isn’t likely to fill the funding gap, Ehnes said. The pension fund, which until recently said it needs an average annual return of 8% to keep up with retirees, instead would have to get returns of over 20% a year. Skeptics consider even the 8% figure overly optimistic.
But getting a contribution-hike bill through the Legislature and signed by the governor during the current election year is problematic, Ehnes conceded in a report to be presented to the CalSTRS board on Feb. 5.
The state faces a $20-billion budget deficit and the spending plan proposed by Gov. Arnold Schwarzenegger would reduce spending on kindergarten-through-12th-grade schools by $2.4 billion, which is on top of a cut of $13 billion last fiscal year.
At the same time, California voters could be considering as many as three initiative proposals, aiming for the November ballot, that would reduce pension benefits and delay retirement eligibility for newly hired workers at state and local governments, school districts and some public community colleges and universities.
Marcia Fritz, the chairwoman of the group behind two of the initiatives, Californians for Pension Reform, said she wasn’t sure of Ehnes’ motive for sounding the alarm. Nevertheless, she praised his openness.
“To sugarcoat the numbers and ignore that there is a problem will only cause his situation to grow worse," she said. “I think he’s correct in doing a ‘mayday, mayday, mayday' and trying to shore up the fund.”
Because of CalSTRS’ uncertainties, Ehnes is recommending to his board that the drive for higher employer contributions be put off until 2011. This year should be spent organizing government-employee groups and unions and educating members about the value of their pension benefits, he said.
As of last summer, CalSTRS estimated that it expects to have only 77% of the funds needed to meet all future pension obligations. That ratio could plunge to 13% in 2039 and zero in 2045, Ehnes said. At that point, the pension would revert to an expensive “pay-as-you-go” system, requiring government agencies and ultimately taxpayers to make up the shortfall.
CalSTRS must raise its contributions, from employers, employees or a combination of the two, by 22% to be fully funded three decades from now, Ehnes said.
While it also faces similar financial pressures, the state’s other giant pension fund, the $203-billion California Public Employees' Retirement System
, is in somewhat better shape to confront its own funding shortfall, Ehnes noted.
CalPERS’ board can unilaterally raise employer contributions from its member agencies without having to get lawmakers’ approval.
CalPERS reported that it was 86% funded as of June 30, 2008. That percentage could drop to around 65% in 30 years, according to a plan recently approved by the board that “smooths” out severe investment losses from 2008.
-- Marc Lifsher