CalSTRS' shortfall grows to $56B

Via Pension Pulse.

AP reports, California teacher pension shortfall grows to $56B:

The
pension system for California's teachers has $56 billion less than it
needs to cover the benefits promised to its 852,000 members and their
families, the fund reported Thursday, as big investment losses in 2008
continue to reverberate.

The drop in value
was enough to trigger an automatic increase in the amount the state
must pay into the California State Teachers' Retirement System, which
is the nation's second largest public pension fund. That will boost the
payment from California's already strained general fund by 20 percent —
from $573 million to $688 million — in the fiscal year starting July
1.

The pension shortfall as of June 30, 2010, was $15.5 billion
greater than it had been a year earlier, CalSTRS officials said. The
fund had expected the shortfall to be even greater, but educators
received smaller raises than projected, reducing the ultimate amount of
their retirement benefits, and the fund's investments performed better
than expected in the 2009-10 fiscal year.

The
pension fund's assets at the end of June were enough to cover 71
percent of its accrued liabilities over the next 30 years, down from 78
percent a year earlier.

The number itself isn't cause for alarm
but is headed in the wrong direction, said Ed Derman, CalSTRS' deputy
CEO, who discussed the latest projections from the fund's accountants
in a conference call with reporters.

At
this rate, he said, the system will run out of money to pay benefits
in 2042 unless workers, school districts and the state work out a
long-term plan to fix the funding problems. The report will be presented
next week to the CalSTRS board, but any fix would require action by
the state Legislature.

The funding shortfall results from
numerous factors, especially from steep investment losses during the
Great Recession, and hits just as a wave of baby boomers begins
entering retirement. Longer life expectancies than planners projected
when they set up the system also are increasing costs.

"CalSTRS needs a significant increase in revenue to make progress toward its funding target," the actuarial report said.

That
could come through higher contributions from workers, school districts
or the state, as well as higher returns on investments than currently
projected.

"This once again shows how much pension reform is
needed because the taxpayer is on the hook," said Assemblyman Allan
Mansoor, R-Costa Mesa, who is vice chairman of a committee that would
review any bill asking for increased contributions.

Unlike the
California Public Employees' Retirement System, the teachers' fund
cannot set the amounts that workers, employers and the state must pay
toward retirement benefits.

Contributions for the teachers fund
are set by statute, while the trigger for the increased state payment
was written into law more than a decade ago. The $688 million payment
from the state's general fund required under the trigger already has
been factored into the governor's budget calculations for 2011-12, even
as California faces a multibillion dollar deficit.

As recently as
2000, CalSTRS had more than enough assets to cover the retirement
promises it had made to teachers and school administrators. The fallout
from the dot-com bust that started at the end of the 1990s began
eroding investment returns, which plunged during the most recent
recession.

News of the shortfall comes amid a national debate
over pensions for public employees and as conservatives in California
seek changes to the lifetime defined benefit plans offered state
workers, perhaps through a future ballot initiative.

Critics
contend the plans — which guarantee certain benefits based on workers'
salaries and how long they worked — provide richer benefits than those
offered to private sector workers and underestimate costs, leaving
taxpayers on the hook for the unfunded liabilities. Several proposals
have been floated in California to reduce pension benefits for current
or future workers, but they face significant legal or political
hurdles.

Most of the jump in the teachers fund shortfall came
because of the way the number is calculated, the fund's accountants
said. The fund took an enormous hit to its stock portfolio when the
market plunged during the heart of the recession, losing nearly $43
billion — roughly 25 percent of its value — from June 2008 to June
2009.

The teachers fund spreads that loss over three years when
it calculates its long-term obligations. Even though the stock
portfolio has been posting annual gains close to 13 percent over the
past 18 months, the gains are being buried in the calculation by the
much larger 2008 losses.

The teachers fund portfolio was worth
$146.4 billion as of Dec. 31, 2010. CalPERS, the nation's largest
public pension fund, covers 1.6 million retirees and government workers
and their families, and had a portfolio worth $225.7 billion on Dec.
31.

CalSTRS members who retired during the 2009-10 fiscal year
received a median individual benefit of about $49,000 a year, meaning
half received less and half received more. Its members are not covered
by Social Security.

About 2.2 percent of the 220,000 members
receiving benefits are paid more than $100,000 a year, including
spousal and survivor benefits.

And Adam Weintraub of Bloomberg reports, Calif. teacher pension fund will need more cash:

The
pension fund for California's teachers is facing a $56 billion
shortfall, even as its investments are doing better than expected.

The
drop reported Thursday is enough to trigger an automatic increase in
the amount the state must pay into the nation's second largest public
pension fund. Payments from California's general fund will increase by
20 percent in the coming fiscal year, to $688 million.

The
shortfall grew by more than $15 billion in one year. The fund now has
enough assets to cover just 71 percent of what it will owe retirees
over the next 30 years.

That's mainly because it suffered
huge losses during 2008 and 2009. Even though investments have been
rising faster than expected for the past 18 months, it's not enough to
offset the losses.

Finally, professor Osman Gulseven wrote an interesting analysis on Seeking Alpha, Dissecting CalSTRS' Holdings: Lessons From the California Teachers' Pension Fund:

Established in 1913, The California State Teachers' Retirement System (CalSTRS) is one of the oldest state supported pension funds. CalSTRS
is the largest teachers' retirement fund portfolio in the country, and
also the seventh largest public pension fund in the world. The pension
fund provides retirement, disability and survivor benefits to almost 900,000 state educators working in the state of California.

After
seeing huge losses during the financial crises, CalSTRS is still
trying to recover its asset base, particularly real estate investments.
The pension fund's portfolio managers run several diversified
investments. As of February, CalSTSR's asset allocation is as follows (click to enlarge):

Asset Allocation for the Period Ended February 28, 2011
Assets	Market Value ($ million)	Actual	Target	Difference	Range
Global Equity	83,591	55.7%	54.0%	1.7%	48 - 60
Fixed Income	26,819	17.9%	21.0%	(3.1%)	18 - 24
Real Estate	16,473	11.0%	11.0%	(0.0%)	8 - 14
Private Equity	20,055	13.4%	12.0%	1.4%	9 - 15
Cash	1,255	0.8%	1.0%	(0.2%)	-2 - 4
Absolute Return + Alpha	1,895	1.3%	1.0%	0.3%	0 - 4
Total Investment Assets	150,088	100.0%	100.0%

CalSTRS'
largest asset allocation is in global equities. The retirement
portfolio has $83.5 billion invested in global equities. Approximately
30% of these holdings are 'actively managed' by 'professional' portfolio
managers employed by CalSTRS. According to the latest filings
submitted to I-Metrix Edgar-Online, CalSTRS' largest actively managed equity holdings are as follows:

Company Name	Ticker	Sector	Market Value	Ytd Return	Profit/Loss
GENERAL ELECTRIC	GE	Conglomerates	357.13	10.74%	34.64
PROCTER & GAMBLE	PG	Consumer	295.69	-2.96%	-9.02
COCA-COLA	KO	Consumer	236.79	1.13%	2.65
PEPSICO	PEP	Consumer	176.09	0.34%	0.60
EXXON	XOM	Energy	729.51	16.15%	101.43
CHEVRON	CVX	Energy	368.76	19.26%	59.55
SCHLUMBERGER	SLB	Energy	221.31	12.47%	24.54
CONOCOPHILLIPS	COP	Energy	198.46	19.54%	32.44
OCCIDENTAL	OXY	Energy	141.85	6.25%	8.34
JPMORGAN	JPM	Financial	306.22	9.63%	26.90
WELLS FARGO	WFC	Financial	257.10	3.14%	7.83
BERKSHIRE	BRK.B	Financial	245.02	6.68%	15.34
BANK OF AMERICA	BAC	Financial	224.01	0.90%	2.00
CITIGROUP	C	Financial	168.24	-5.92%	-10.59
PFIZER	PFE	Healthcare	274.93	17.35%	40.65
JOHNSON & J.	JNJ	Healthcare	274.42	-3.13%	-8.87
MERCK	MRK	Healthcare	170.95	-6.51%	-11.90
WAL-MART	WMT	Services	172.49	-2.22%	-3.92
DISNEY	DIS	Services	140.65	15.57%	18.95
APPLE	AAPL	Technology	550.42	8.08%	41.15
IBM	IBM	Technology	359.99	11.92%	38.34
MICROSOFT	MSFT	Technology	333.20	-7.71%	-27.84
AT&T	T	Technology	296.97	6.04%	16.92
GOOGLE	GOOG	Technology	244.31	-2.04%	-5.09
ORACLE	ORCL	Technology	217.72	5.76%	11.86
INTEL	INTC	Technology	192.66	-1.87%	-3.67
VERIZON	VZ	Technology	181.02	8.89%	14.78
CISCO	CSCO	Technology	172.18	-14.1%	-28.12
HEWLETT PACK.	HPQ	Technology	166.16	-1.71%	-2.89
QUALCOMM	QCOM	Technology	152.41	10.50%	14.48
Total / Average			7,826.65	4.74%	401.47
Weighted Average				5.13%

CalSTRS has a unique equity portfolio where 11 out of 30 top holdings are technology stocks.
The pension fund's portfolio managers favor high-tech stocks with
research and development centers in Silicon Valley. The largest
technology investment is Apple, followed by IBM, and Microsoft. The portfolio also has significant investments in energy equities.
Exxon and Chevron are two companies favored by its portfolio managers.
The sector breakdown of CalSTRS' portfolio looks like this:

The year-to-date performance of this actively managed portfolio is mediocre. The value-weighted return of top equities is 5.13%, below the S&P 500's (SPY)
return of 5.58%. While the ytd performance of energy stocks was
outstanding, CalSTRS' technology picks returned only 2.44%. Microsoft
and Cisco were the most disappointing picks, returning -7.71%, and
-141.%, respectively. The total damage to California's teachers just by
those two companies was $27.84 million and $28.12 billion,
respectively. The following graph offers sector-wide performance
analysis:

The only conglomerate, General Electric, was a brilliant choice since the stock's ytd return is 10.74%. Exxon
and Chevron provided fantastic capital gains that amounted to $101.43
million and $59.55 million, as well. Pfizer, a dividend aristocrat,
gained 17.35%, boosting the actively managed portfolio by $40.65
million. Apple, and IBM were other great stock picks returning 11.92%, and 8.08%.

A quick comparison of the actively managed portfolio with the 3^rd
quarter of 2010 holdings shows no significant adjustments. Almost all
of the holdings are slightly increased, generally by no more than by
0.5% to 1%. The only major change was increasing the Citigroup holdings
by 7.34%.

However, Citi shares lost 5.92%, costing the retirement portfolio $10.59 million. The year to date performance of this actively managed portfolio is below the market benchmark.

Perhaps
it is time for California's teachers to question whether active
management is a good strategy, given the underperforming return of their
actively managed retirement portfolio.

CalSTRS is
widely regarded as one of the best large US pension plans but it took a
beating in 2008 and is still trying to get out of a hole. Many other
large plans are in the same situation. The analysis above focuses only
on public stocks, not on private equity and real estate portfolio. The
fact that CalSTRS is long technology and energy might seem like they're
taking big risks, but I think it's a smart move. The same goes for
their increase in Citi shares.

But bear in mind CaSTRS also
has one of the largest and best performing private equity portfolios
which is still performing well even though it got hit after the crisis.
You can download the quarterly investment reports to get more information on CalSTRS's portfolios. You will also find a quarterly asset allocation and capital markets update by their CIO which is well worth reading.

As
for the deficit, no choice but to increase contributions but they're
set by statute so it will be hard to change. It is worth noting that an
automatic increase in the
amount the state must pay into CaSTRS kicked in. These deficits are
cyclical but every large plan is going to have to figure out ways to
address them and reduce them or else taxpayers will ultimately be on the
hook. Onr thing I will bring to your attention, however, is CalSTRS's
response to the Little Hoover Report:

On Wednesday, March 8, CalSTRS sent a letter
to the Little Hoover Commission in response to its report on public
pensions. The letter outlines why the recommendations would likely
weaken rather than strengthen retirement security for California’s
public educators. In some cases, the Commission’s recommendations could
actually increase the total cost of providing retirement benefits.

The
report includes broad assumptions and generalizations that do not
account for differences between CalSTRS and other public pensions.
The report also does not consider the legal ramifications of its
recommendations, such as the recommendation to reduce the accrual of
future benefits for current active members.

The
CalSTRS benefit structure, on a comparative basis with other plans, is
not, as the report says, “overly generous,” but rather provides a
moderate benefit that replaces approximately 60 percent of
pre-retirement income for members – who receive no Social Security benefits for their decades of service.

You can download the letter by clicking here and download the fact sheet on CalSTRS's funding needs by click here.
The response letter is well written and states that CalSTRS "will work
with stakeholders and legislators to address the funding situation in a
manner that respects the budget situation facing the state and schools,
while maintaining the financial security of educators in retirement."

Comments

[apberusdisvet]

2042?  Give me a break.  California won't exist in 10 years the way they are going, much less 30.  There's no money left to steal or tax.  They should secede and and try the marxist utopia for a few years; they are almost there.  I'm sure the lefties in Hollywood will gladly support the new regime.

[ebworthen]

They're reneging on Social Security so why would CalsTrs fulfill their promises either?

Pension funds are Ponzi schemes, plain and simple; Wall Street and Washington made certain of that, just like SS.

If enough people die no one remembers the initial promises or payouts.

You must roil the young to have a revolt against tyranny, and the youth are so distracted by propoganda and perception and programmed to consume that it won't happen.

[10kby2k]

Another reason to prop the stock market up.

Reality: 5 year TIPS yields -0.50%....these plan managers that plug in 8 1/2% return are retarded.  Their fixed income will yield 3%. Stocks compete with fixed income, so their expected net yield can't be much more.

If these plan managers beat the inflation rate , they are doing well.

Use 4% rate of return and deficit doubles.

This love of stocks (because they predominate retirement plans) is being exploited by the wealthy to ponzi the masses.  LOL.  Easy pickings.

[geno-econ]

Solution simple . Privatize social security and have hedge  funds manage Calstrs.  Results will be the same, but then you can only  blame yourself, hedge funds or Leo

[10kby2k]

Stocks are a ponzi.....i'd bet my life on it.  Retirement is some thing off in the future....its like the carrot in front of the horse.  The government allows take deductions to plow money into your retirement.  You actually think this money will be there in full when you retire if you are under 55?  Then you probably also believe that social security will not cut benefits or raise contributions and/or raise retirement age.

LOL. If you believe in stocks you are the Ponzi.  If you don't know where you stand on the Ponzi pryamid, you are at the bottom. LOL.   Its like a poker game...if you don't know who the dupes are.....you are the dupe.   (Poker tip: If you can't idenify the power at the table within a short period of time then run).

[malek]

You're falling short: Everything which continuously grows faster than GDP is a Ponzi.

[holmes]

"As for the deficit, no choice but to increase contributions but they're set by statute so it will be hard to change."

If they could get the statute passed, then it can be repealed. I keep seeing this in every State-it's the law, the taxpayer has to make up the shortfall. BS, lets change the law

Defined contributions not open-ended benefits.

[Steaming_Wookie_Doo]

"As for the deficit, no choice but to increase contributions but they're set by statute so it will be hard to change."

This will prove to be as effective as the French town that passed a law that made it illegal for alien UFOs to invade and take over. Broke is broke.

[GubbermintWorker]

Hey! I stand just as good of a chance of getting my retirement money as you do getting your social security retirement benefits!!

[Gromit]

Proportional insolvency bitchez

[Stuck on Zero]

"The system will run out of money to pay benefits in 2042".  I love this statement.  They are so accurate because they use the global warming models that can predict the future so uncannily.  Are these people smoking something?  Three years ago they said they were solvent.  If they can predict this well then why did they suffer losses at all?

[Rainman]

Just a casual review of pension fund equity holdings tells a backstory. The Bernank must keep the POMO pump going full blast on equities. Otherwise, these sick puppies called public pension funds will drop like flies hit with a swatter.   

[PulauHantu29]

Although most emphasize "this" as an economic problem, I see our situation more as a cultural problem...values, character, etc.

Until the gred stops...until people save more and spend less....it will get worse.

[Hedgetard55]

They need to hire some Canadian money managers to get out of this mess.

[MisterMousePotato]

Who invest in Chinese solars.

[treemagnet]

How many of these clowns think that the taxpayers will be able to pony up to cover their bloated pensions?  Towns,cities,municipalities, states - it'll be blood from a turnip.  But, if it helps 'em sleep well tonight, go for it.