California Pensions for Teachers Fall Farther Behind

Published November 12, 2013

Saddled with a massive debt on what is needed to meet its pension obligations the California State Teachers Retirement System (CalSTRS) added more than $4.0 billion to that debt in 2012 because it chose to underfund its so-called “catch-up” payment.

That is the conclusion reached by a study released this week by the California Public Policy Center. Using data from publicly disclosed financial reports Рthe most recent CalSTRS annual report as well as their most recent actuarial valuation and review Рthe study evaluated how much cash was actually contributed to the plan in 2012, including how much was contributed to pay down their unfunded liability.

During the fiscal year ended 6-30-2012 CalSTRS collected $5.8 billion from employees and employers to invest in their pension fund. Of this $5.8 billion, $4.7 billion was the so-called “normal contribution,” which was a payment to cover the present value of future pensions earned during 2012 by actively employed participants. The other $1.1 billion that was collected and invested in the fund was a “catch-up” payment to reduce the unfunded liability, which at the end of 2012 was officially estimated to be $71.0 billion.

Should Have Been 7 Times Higher

Using pension evaluation formulas and unfunded liability payback terms formally recommended by Moody’s Investor Services in April 2013, this study shows that if the “catch-up” payment is calculated based on a level payment, 20-year amortization of the $5.6 billion unfunded liability – still assuming a 7.50 percent rate-of-return projection – the 2012 catch-up payment should have been $7.0 billion per year,¬†nearly seven times what was actually paid.

The study also shows that if the pension fund rate-of-return projection drops to 6.20 percent (the historical performance of U.S. equity investments, including dividends, between 1900 and 1999) the unfunded liability recalculates to $107.8 billion and the catch-up payment increases to $9.6 billion per year. At a rate-of-return projection of 4.81 percent (recommended by Moody’s), the unfunded liability recalculates to $154.9 billion and the catch-up payment increases to $12.2 billion per year.

Overly Optimistic, Aggressively Calculated

The conclusion of this study is that CalSTRS relies on optimistic long-term earnings projections and very aggressive unfunded liability repayment schedules in order to contribute the absolute minimum each year into their pension fund.

As a result, the study estimates their officially recognized unfunded liability actually increased during 2012 by more than $4 billion. If CalSTRS is required to even incrementally lower their rate-of-return projections – something that market conditions may eventually dictate – their funded ratio, which was already only 67.02 percent, will fall precipitously.

Internet Info

“Are Annual Contributions Into CalSTRS Adequate?”, California Public Policy Center: http://californiapublicpolicycenter.org/are-annual-contributions-into-calstrs-adequate/