If not for pension and benefit increases as the stock market boomed more than a decade ago, CalSTRS would be one of the nation’s best-funded large retirement systems with 88 percent of the assets needed to pay promised pensions.
Instead, an annual report said last week, the CalSTRS funding level dropped from 69 percent in the previous year to 67 percent, while the “unfunded liability” or debt increased from $64.5 billion to $71 billion.
To reach full funding in 30 years, the annual payments to CalSTRS from employers, teachers and the state, estimated at $5.7 billion this fiscal year, would have to nearly double with an additional payment of more than $4.5 billion a year.
In their new report, Milliman actuaries include a calculation, required to see if a small increase in state payments is triggered under an old law, that puts new light on the cost of a half dozen benefit increases enacted around 2000.
“If we were still operating under the 1990 benefit structure, the plan would be about 88.4 percent funded instead of 67 percent,” Mark Olleman of Milliman told the CalSTRS board last week. “So the difference between 88.4 percent and 67 percent shows that one of the impacts on the funding of the plan currently is benefits.”
The Milliman actuaries went a step further with a chart showing how much of the steep drop in CalSTRS funding since 2000 is due to the benefit increases, an issue raised at a board meeting in February by a representative of a retiree group.
CalSTRS was 120 percent funded in 2000 using the market value of assets rather than the actuarial value, which spreads gains and losses over three years. (Using market value, CalSTRS is 62 percent funded now, not 67 percent as with the actuarial value.)
Most of the decline in funding from 2000 through June 30 of last year was due to investment losses. The fund peaked at $180 billion in 2007, dropped to $112 billion in 2009 and was back up to $161.5 billion as of Feb. 28.
But benefit increases enacted around 2000, when CalSTRS briefly reached 100 percent funding after a long climb from 30 percent funding during the 1970s, were a major contributor to the funding decline.
“The blue bars, the biggest one, that is investment returns,” Nick Collier of Milliman said of a chart shown on a vide screen in the board room, but not included in the meeting agenda packet.
“That resulted in a decrease over the entire period of about 46 percent,” Collier said. “The green bars of benefit changes — that resulted in about a 25 percent decrease.”
At a board meeting in February, Lois Shive, who lobbied in 2000 for several benefit increases as vice chairman of the California Teachers Association retirement committee, said a big bill that year was not sponsored by the union.
She said a “rogue member” pushed legislation that quietly converted CalSTRS into a “hybrid” plan by adding to the pension a 401(k)-style individual investment plan with a guaranteed minimum return based on the 30-year Treasury bond. (See Calpensions 15 Feb 13)
For a 10-year period ending Jan. 1, 2011, a quarter of the teacher contribution to the pension fund (2 percent of pay from a total of 8 percent of pay) was diverted into the new “Defined Benefit Supplement” for each CalSTRS member.
The legislation, never heard by a committee, was amended into a bill that previously dealt with credit cards, AB 1509, and passed by the floors of both houses. “The STRS surplus will absorb the cost,” said an unusually brief floor analysis of the bill.
“That was our 2 percent side car that established the DBS fund,” Shive told the board, “and short-funded this wonderful pension fund by a huge amount, building on to what we have now is a snowballing effect.”
Collier told the board last week that the impact of the Defined Benefit Supplement was included in the benefit changes bars on the chart, but could be difficult to see.
“In each incremental year the impact of the Defined Benefit Supplement was very small,” he said. “But if you add it up there also was an impact of the DBS — not as big as the other changes.”
Current CalSTRS funding runs out in 30 years
After years of ignoring CalSTRS requests for more money, the Legislature held a committee hearing last month to begin looking at funding options: What would be the funding level goal and who pays, when and how much?
Unlike most California public pension systems, CalSTRS lacks the power to set annual rates that must be paid by employers, needing legislation instead. But CalSTRS presumably shares a worry with the California Public Employees Retirement System.
The nation’s two largest public pension systems both have low funding levels, and both expect to get about two-thirds of their revenue from investment earnings. Another recession could drop their funding levels below a point of no return.
In the view of experts mentioned at CalPERS, if public pension funding levels fall below a certain point, 40 percent or possibly even 50 percent, reaching full funding would require big rate increases that are politically and financially impractical.
Some might say that CalSTRS is already there, particularly those who think that the current investment earnings forecast used by both funds to offset future pension obligations, 7.5 percent a year, is overly optimistic.
CalPERS kept a lid on employer rates during the recession with a radical actuarial method that spread investment gains and losses over 15 years, rolling amortization periods that refinanced debt every year and other techniques.
The CalPERS investment fund peaked at $260 billion in 2007, dropped to $160 billion in 2009 and was back up to $260 billion last week. The funding level, based on market value assets, was 73.6 percent as of June 30, 2011.
This week the CalPERS board is scheduled to consider a proposal, given tentative “first reading” approval last month, that would switch to a simplified actuarial method that could boost current employer rates roughly 50 percent over the next six years.
While CalPERS can set an annual rate that employers must pay, CalSTRS must compete for funding in the legislative arena. The state budget is back in the black after years of deficits.
But getting the Legislature to approve a long-term funding solution for CalSTRS could be more difficult than cutting a back-room deal to spend the “surplus” on increased benefits.
The priority for politically powerful teacher unions may be restoring deep classroom cuts. A recovering economy may revive hope that investment earnings can get CalSTRS funding moving in the right direction, up not down.
And there is the usual problem with getting things done: Where’s the urgency?
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 15 Apr 13
Calpensions 
April 16, 2013 at 2:00 am
Quoting …”If not for pension and benefit increases as the stock market boomed more than a decade ago, CalSTRS would be one of the nation’s best-funded large retirement systems with 88 percent of the assets needed to pay promised pensions.”
That 88% funded ratio is the “official” CalSTIRS number, calculated by (a) assuming Plan assets will earn an annual return of 7.5% basically forever and (b) using the same 7.5% rate to discount Plan liabilities (i.e., expected future cash payments to retirees).
This methodology, while legal under GASB (Gov’t accounting rules) is so aggressive that virtually all financial economists, and now Moodys dismisses such results as irrelevant. Using the identical Plan valuation standards as the US Gov’t demands of Private Sector Plans, that 88% funded ratio would drop to 65-70% … well BELOW the level (had it been a Private Sector Plan) that Gov’t -mandated Plan restrictions would kick in. They kick in, because at that level, the Plans is close to needing life support … NOT, being well-funded.
So …. the actual 69% CalSTIRS “official” funded ratio (last reported) is (on based on Moody’s or Private Sector valuation methodology) more like 50% funded …… a level that if a Private Sector Plan, no further Plan accruals would be allowed.
CalSTIRS (and CalPERS and most other Public Sector Plans) have done a greater jobs keeping benefit levels very high consistently understating true Plan costs …. and ALSO shooting itself (and Plan participants) in the foot, as it’s VERY unlikely Taxpayers will agree to make up for this huge shortfall. Reductions in promised pensions are all but assured.
April 16, 2013 at 8:21 am
Regarding CalSTRS Defined Benefit Supplemental Program (from CalSTRS CAFR for the period ending June30, 2012).
“STRP Defined Benefit Supplement Program The Defined Benefit Supplement Program, established pursuant to Chapter 74, Statutes of 2000 (AB 1509), is a defined benefit pension program that operates within the STRP. All persons who were active members of the Defined Benefit Program on or after January 1, 2001, are also members of the Defined Benefit Supplement Program.
Interest is credited to the nominal Defined Benefit Supplement Program accounts at the minimum guaranteed annual rate established by the Board prior to each plan year, which was 4.25 percent for the fiscal year ended June 30, 2012. The Board may credit additional earnings to members’ nominal accounts if actual investment earnings exceed the minimum guaranteed annual rate and meet criteria set out in Board policy. Per the Board policy there were no additional earnings or additional annuity credits granted for the fiscal year ended June 30, 2012 (page 45 of the CAFR).“
“Minimum Interest Rate Annual rate determined for the plan year by the Teachers’ Retirement Board in accordance with federal laws and regulations. The minimum interest rate is equal to the average of the yields on 30- year Treasury Notes for the twelve months ending in February preceding the beginning of the plan year, rounded to the next highest 0.25 percent. The minimum interest rate is not less than the rate at which interest is credited under the Defined Benefit Program (page 117).
Additional Earnings Credit
Annual rate determined for the plan year by the Teachers’ Retirement Board based on the actual earnings during the plan year but only to the extent the earnings are sufficient to credit the minimum interest rate and provide any additions to the gain and loss reserve deemed warranted by the board. The board adopted an additional earnings credit of 2.49 percent for the fiscal year ending June 30, 2006, and an additional earnings credit of 4.41 percent for the fiscal year ending June 30, 2007 (page 117).”
So CalSTRS approved a program that diverted 25% of the teachers contribution into a Defined Supplemental Pension Perk that guarantees interest of 4.25%, and then they had the audacity to increase the interest/contribution at taxpayer expense (2.49 percent for the fiscal year ending June 30, 2006, and an additional earnings credit of 4.41 percent for the fiscal year ending June 30, 2007) – as an additional perk even though the funding level was dropping. Now that the bad years are here it is the taxpayers that are asked to cover the 5 billion dollar contribution diversion over 10 years + the approximately 2.5 billion dollars that wasn’t earned on those lost funds for a total of almost 7.5 billion dollars, and that is only one of many increased benefits paid from the CalSTRS funds. Even though the funding diversion ended in 2011 doesn’t mean that the program has ended. It hasn‘t.
The CalSTRS COLA’s are also not a guaranteed benefit (unlike CalPERS which has a supposedly Guaranteed COLA) and the pension system has retained the right to eliminate COLA’s if funding levels drop below acceptable levels. I think the Market Value funding levels of 62% should be considered below acceptable levels. So why has CalSTRS failed to act? What are they waiting for?
CalSTRS actually has 7.9 Billion in an account to guarantee 85% buyer protection (a hedge against inflation – which is really what the COLA does also). So why is a severely under funded pension plan paying two percent COLA’s, which aren’t a requirement, when they can use the 7.9 Billion dollars stashed in an account to do the same thing? I think the answer is obvious; the pension fund would rather NOT spend their money while they have no problem asking taxpayers for theirs.
April 16, 2013 at 12:39 pm
Financial economists support using the treasury bond rate as the growth and discount rate, 2-3%.
Private Sector Plans do *NEITHER*. They assume a typically 8% growth rate, and assume the discount rate of *corporate* bond rate, about 4-6%.
More on topic, the DBS guaranteed treasury bond returns… that portion of the CalSTRS situation was *exactly* what financial economists recommend.
The real issue was the *diversion* of those funds from the main CalSTRS pension fund. Would be interesting to see a breakdown of how much of the CalSTRS problem was due to that diversion, and how much was due to other (circa 2000) benefit increases.
Important to remember: those benefit increases were *bipartisan* and nearly unanimous. Real reform would entail far more financial oversight of any increase, either in benefits or payments. But sober careful work is not ever supported by the extremists who comment on this board.
April 16, 2013 at 4:44 pm
CalPERS COLAs are not guaranteed! The majority of CalPERS annuitants receive 2% or less, depending, on the CPI. The most recently eligible retirees, after the economic collapse of 2008, received zero or less than 2% for the years 2010 and 2011. I was one of those who received less. The CPI is used by CalPERS in its COLA calculations every year.
April 16, 2013 at 8:44 pm
Quoting Spension ….” Real reform would entail far more financial oversight of any increase, either in benefits or payments. ”
That’s what you call “real reform”, more “oversight” ?
No, REAL REFORM would be (a) reversing the diversion of funds, (b) reversing all past plan increases, (c) a permanent end to any COLAs, and (d) reducing the pensions (after implementing (a), (b), and (c), to the extent the are STILL in excess of the average pensions typically afforded Private Sector Taxpayers who pay for 80-90% of the Total cost of Public Sector pensions.
And if it takes a bankruptcy to enable such changes, the sooner the better.
April 17, 2013 at 3:02 am
As you know, I’ve long advocated sovereign default of the State of California. There is no such thing as bankruptcy for a State.
All of your (a) (b) (c) and (d) can only be accomplished by Sovereign Default.
And yes, the financial oversight stunk, and led us to this mess.
April 19, 2013 at 1:06 am
“spension Says: As you know, I’ve long advocated sovereign default of the State of California. There is no such thing as bankruptcy for a State.”
Why not advocate that we work our butts off to fix the problem? Should we just sit back and watch our state deteriorate to the point sovereign default is the only answer? Your advocation sounds silly. Let’s work hard to fix all that’s broken. If that doesn’t work the State of Illinois will have, by then, set the precedent for what you preach making it easier for the golden state to lay its’ own rotten egg.
April 19, 2013 at 1:25 am
“SeeSaw Says: CalPERS COLAs are not guaranteed! The majority of CalPERS annuitants receive 2% or less, depending, on the CPI. The most recently eligible retirees, after the economic collapse of 2008, received zero or less than 2% for the years 2010 and 2011. I was one of those who received less. The CPI is used by CalPERS in its COLA calculations every year.”
SeeSaw, I wasn’t claiming the CalPERS COLA was guaranteed at 2%. I am claiming that CalSTRS COLA isn’t even a contract item, meaning they’re under no obligation to provide any COLA at all – yet they’ve done so anyway despite the decline of their funding level. I’m sure this is the result of CalSTRS board decisions – which make little sense unless you consider their bias.
Furthermore, CalSTRS actually has 7.9 Billion in an account to guarantee 85% buyer protection (a hedge against inflation – which is really what the COLA does also). So why is a severely under funded pension plan paying two percent COLA’s, which aren’t a requirement, when they can use the 7.9 Billion dollars stashed in an account to do the same thing? Considering they’re asking taxpayers for 4.5 Billion per year, for the next thirty years, I think this is a topic in need of an answer.
September 10, 2013 at 2:07 am
What a bunch off BS. If you actually read the CAFR it shows all kinds of bogus liabilities from future years. Just like every government run entity in the US. They are not audited by any taxing agency and trump up liabilities that are totally fictitious then turn around a exagerate and promote they’re just not making enough. If any other company/corporation that isn’t Government did this the accountant would go to jail. I beg you to take a look at the portfolio they have and compare it to ten years ago. Its absolutely astonishing how much money they have. Go ahead, I dare anyone.
CalPERS does the exact thing. Government is hiding all of its wealth in exactly these kinds of funds to the tune of 60 trillion dollars nationwide. Any decent accountant ignoring the bogus summaries and looking at the details would freak.