Calpensions

CalSTRS is preparing to leave its simple suburban headquarters this year and move into a new showcase glass tower on the Sacramento River.

It’s not great timing.

Annual rent and operational expenses will triple, going from $6.8 million at the current modest three-building location to $22.9 million at the new 13-story office tower sitting atop a five-story garage.

The expensive upgrade comes as the California State Teachers Retirement System assures anxious retirees that their pension checks are not threatened, despite a $50 billion loss in the value of the pension fund’s investment portfolio.

A message on the home page of the CalSTRS web site tells members that their benefits are safe and secure, not changed at all by the downturn in the economy and an historic plunge in the stock market.

“Your benefit does not depend on the funds in the CalSTRS investment portfolio or the amount in your CalSTRS account,” says a message from Jack Ehnes, the CalSTRS chief executive officer. “Your CalSTRS benefits are a contractual right protected not only by the California constitution but also by the U.S. Constitution.”

And it’s not like CalSTRS is about to run out of money. At one of the low points in the stock market last month, the CalSTRS investment portfolio was still valued at about $125 billion.

CalSTRS needs investment income to make ends meet, but not a lot at this time.

Payments to retirees were expected to total about $8 billion in 2008. Payments to CalSTRS were expected to total $6.5 billion — $2.5 billion from school districts, $2.4 billion from teachers, and $1.6 billion from the state.

As the state and many local governments were making painful spending cuts., CalSTRS adopted a $163 million budget for the current fiscal year, up about 18 percent from $138 million last year.

The state found out the hard way that annual payments to CalSTRS are protected by the law. To help balance the state budget in 2003, the state withheld a $500 million payment to CalSTRS that helps some pension payments keep pace with inflation.

But the courts ruled against the state action, forcing payment of the $500 million to CalSTRS several years later plus $200 million in interest. In the end, the state’s attempt to save money by cutting a CalSTRS payment turned out to be an expensive loan.

New CalSTRS building

Old CalSTRS building

The move to the sleek high-rise, and the $16 million increase in annual rent, reflects not only the growth of CalSTRS, but also symbolizes its emerging place of financial power along side the bigger and better known CalPERS.

The California Public Employees Retirement System, covering state and many local government workers, moved into an impressive headquarters building two decades ago.

The first CalPERS building, completed in 1986 for $81 million, was followed by a $265 million expansion in 2005. The sprawling six-story complex covers four city blocks and has one million square feet of space.

It would be a cheap shot to call the CalPERS buildings a “pension palace.“ But they feature high-quality construction and architectural flourishes, a massive six-story atrium and a large steel-and-glass tower intended to mimic Sacramento’s trees.

“Upon completion this will be the most expensive building, per square foot, in the city of Sacramento,” the contractor for the expansion, Hensel Phelps, said in a 2005 news release. “Currently the most expensive building in the city, per square foot, is the existing CalPERS building adjacent to the new site.”

CalPERS atrium

CalPERS tower

Now CalSTRS can claim the “most expensive building ” title.

The new energy-efficient CalSTRS building, costing $276 million, has 409,000 square feet and room to grow. CalSTRS will move a staff of about 800 into the building, which has more than 1,250 work stations.

CalSTRS announced the construction of the new building in West Sacramento, and the purchase of nearby parcels that could be used for office and condo buildings, in April 2006 near the end of the real-estate boom.

“This opportunity allows us to invest in our own community while making a commitment to a sustainable investment in our real estate portfolio and most importantly, creating a productive work environment for our employees — all to the benefit of our members,” Ehnes, the CalSTRS executive officer, said in a news release.

It was a time of big growth for CalSTRS, which began calling itself the nation’s second-largest public pension fund early in 2006, up from its ranking as the third-largest fund the previous year.

There also were proposals for major changes in the way CalSTRS operates, making it more independent like CalPERS and  free from tight controls imposed by the Legislature and the governor.

The state currently sets teacher retirement benefits. The nonpartisan Legislative Analyst recommended in 2005 that school districts and teachers be allowed to negotiate retirement benefits, like the local government agencies in CalPERS.

CalSTRS went a step further in 2006 with a proposal to give its board, rather than the Legislature and the governor, the CalPERS-like sweeping power to set pension contribution rates for school districts, teachers and the state.

The CalSTRS board said it needed the rate-setting power to erase its “unfunded liability,” the projected shortfall in money needed to pay for future pension obligations.  CalSTRS, once woefully underfunded, has made remarkable progress.

In the 1970s, CalSTRS was estimated to have only about 30 percent of the assets needed to meet future pension costs. A long bull stock market helped push CalSTRS assets to 110 percent of future costs by 2001.

The value of CalSTRS assets had dropped to 87 percent of liabilities by last June, still within an acceptable range in the view of experts. That was before the stock market crash last fall created a  much larger shortfall, an amount yet to be determined.

The proposals made several years ago to make CalSTRS more like CalPERS, with local benefit negotiations and rate-setting power, were not enacted. But the gap between the two funds has closed in other ways.

The CalSTRS chief investment officer, Christopher Ailman, told a board committee last fall that a salary increase several years ago was helping the fund attract and retain  skilled investment portfolio managers.

Ailman said that whenever CalPERS had an opening for a portfolio manager in the past, CalSTRS people applied. With the new “compensation structure,” he said, CalSTRS has only lost two portfolio managers in the last several years.

CalSTRS also remains firmly linked to CalPERS through the power of its investment portfolio, which gives the two big pension funds a shared identity with global reach.

Last July, the two Sacramento-based funds were among 10 giant pension funds from around the world invited by Prince Charles, the heir to the British throne, to attend a meeting in London on investments and climate change.

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 5 Jan 09

This entry was posted on January 5, 2009 at 6:41 am and is filed under Building, CalSTRS. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.