CalSTRS: The fighting fiduciaries

In the middle of the biggest state budget blood-letting in modern times, when entire programs are on the chopping block, a delegation from CalSTRS made the rounds at the Capitol to talk about increasing contributions to the pension fund.

“Everybody came out a little bruised,” Jerilyn Harris told her fellow California State Teachers Retirement System board members last week.

It’s the second largest public employees pension fund in the nation with post-stock market crash assets valued at $117 billion on April 30. But virtually alone among public pension systems in California, it’s unable to set its own contribution rates.

CalSTRS needs legislation. And in the face of a hurricane-force headwind, the board is continuing the long march to get a rate increase needed to close a growing unfunded liability projected in the future.

The CalSTRS board audaciously proposed three years ago that it be allowed to set contribution rates. Perhaps not surprisingly, the Legislature did not hand over the power to dip into the state general fund.

Now the board soldiers on, talking to “stakeholder” groups representing system members and contributors. The campaign is an attempt to lay the groundwork for future rate increases that would be imposed “in a very gradual and predictable manner.”

The chairwoman of the CalSTRS benefits committee, Carolyn Widener, made the case last week for continuing the drive for a rate increase in the middle of a historic state budget crisis, despite the long odds.

“We all know that everyone is suffering and has huge terrible decisions to make,” she told the committee. “Our heart goes out really to the Legislature looking at taking people off dialysis and taking people off welfare.”

Widener said working teachers see the budget pain: teachers taking pay cuts to save the jobs of their colleagues, non-teaching school staff being laid off, administrators taking furloughs. CalSTRS staff also has been hit with pay cuts and furloughs.

“In that context, it’s not difficult for people to say, ‘You are sitting over there on billions of dollars. You don’t have any trouble paying benefits right now. We have big problems here. Come back to us later about this,’” she said.

“What I want to make very clear is that as fiduciaries we don’t have that option. As fiduciaries we can’t just care about the people who are currently retired or are very close to retirement. We have to also be thinking about our members whose retirement is 30 years out.”

A “fiduciary” entrusted with the property of others not only has moral obligations, but possible legal exposure. The CalSTRS board approved an annual fiduciary insurance policy for itself last week costing more than $700,000. The board members pay $25 each for the coverage.

The previous carrier wanted a 65 percent premium increase because of the system’s unfunded liability, the board was told. A new policy from another carrier was purchased for an 8.4 percent increase.

One of the CalSTRS problems in arguing for a rate increase is that the new actuarial forecast presented last week is based on the value of the pension investment fund as of last June 30, before the disastrous stock market crash last fall.

The unfunded liability is little changed from the previous year — $22.5 billion, a gap actuaries say could be closed over 30 years with an annual rate increase of 3.71 percent of payroll, nearly $1 billion.

That means CalSTRS still has a funded ratio of 87 percent, well above the 80 percent that some regard as the prudent minimum. And the fund is too healthy to trigger an automatic 1.5 percent increase under a 1990 law.

The big rate shock could come next year when the actuarial forecast includes the stock market crash last fall. A preliminary estimate from the actuaries at Milliman is that the gap could be 10.48 to 15.77 percent of payroll, depending on losses this fiscal year.

Annual CalSTRS contributions now total about 20 percent of payroll: 8.25 percent from school districts, 8 percent from teachers, 2 percent from the state and roughly another 2 percent from the state for a supplemental fund.

In the current fiscal year that began last July, said CalSTRS spokeswoman Sherry Reser, school districts will contribute $2.7 billion, teachers $2.6 billion, and the two state payments will total more than $1 billion.

Another problem for CalSTRS is its previous investment success. A chart in the Milliman actuarial report shows the CalSTRS funded ratio was about 30 percent in 1975, climbed to more than 100 percent around 2000, and then dropped to the current 87 percent.

CalSTRS funded ratio
During a recent four-year period the CalSTRS investment fund earned double-digit returns: 17.4 percent in 2004, 11.1 percent in 2005, 13.2 percent in 2006, and a whopping 21 percent in 2007.

“I don’t mean to make a blanket statement,” Harris said of her meetings with legislators, “but I heard a lot of doubt and ideas that maybe this was something that we were going to be able to invest our way out of because we have been doing so well.”

The CalSTRS chairwoman, Dana Dillon, who made the Capitol rounds with Harris the previous week, said “one of the things brought up” was a reminder of the conversations in 2006 about the unfunded liability.

“They were saying that, at the time, even our actuaries were saying that there is a 60-40 chance that we would be able to invest our way out of it,” Dillon said.

The CalSTRS deputy chief executive, Ed Derman, said it may have been theoretically possible in the past that investment growth might erase the unfunded liability.

“Now I think it’s probably mathematically impossible to grow our way out of it,” he said.

Despite the four-year run of double-digit returns, the CalSTRS chief investment officer, Chris Ailman, told the benefits committee last week that as of May 1 returns averaged 3.7 percent for the last decade and 7.5 percent for the last 20 years.

For the current fiscal year that began last July, Ailman said, “Right now we are at about a negative 22 percent with, obviously, about four weeks left in June.”

Widener asked staff for an analysis of “what if any changes might have to occur in the benefits and when they might have to occur if we aren’t able under certain scenarios to adjust the contribution rate.”

She was reminded that a similar request three years ago resulted in letters from alarmed retirement system members who thought she was advocating a cut in benefits.

“We are not advocating changing the benefits,” Widener said. “Everybody got that?”

The board meetings last week were the last in the old suburban CalSTRS building. A new $276 million high-rise CalSTRS building on the Sacramento River is scheduled to open Thursday (June 11) on time and under budget. (See Calpensions 5 Jan 09 “CalTRS moving on up”)

Annual rent and operational expenses were $6.8 million at the old location. The costs triple to $22.9 million at the new building, 13 floors of offices sitting atop a five-story garage. Accounting rules are forcing CalSTRS to reclassify the building from “investment” to “capital asset.”

“Just a real quick moment of silence for our old building,” Dillon said before bringing down the gavel to end the meeting. “We are out of here!”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 8 Jun 09

2 Responses to “CalSTRS: The fighting fiduciaries”

  1. bull Says:

    Don’t fund it ……. the benefits are too rich. Let the employees’ get whatever the existing funds can buy & NO MORE. Taxpayers have paid ENOUGH !

  2. Jay Kelly Says:

    I rest easy at night knowing that Carolyn is on the job.

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