Largest US Teacher Pension Fund Underfunding Increases By $9 Billion To $64.5 Billion, Only 69% Funded

Tyler Durden's picture

While the epically underfunded status of the US, by all definitions a ponzi scheme, whose combined liabilities have a net present value of about $100 trillion, is known to everyone, most can simply shake it off for too reasons: 1) it is a number too big to comprehend, and 2) by the time the ponzi blows up it will be some other generation's problem. However, it may not be so easy for California's retiring teachers. Minutes ago, CalSTRS, or the California State Teachers' Retirement System, with a portfolio valued at $152 billion as of February 29, 2012, and is the largest teacher pension fund in the United States, reported that its underfunding increased by a massive 15%, or from $56 billion to $64.5 billion, which happened despite the market being relatively flat over the past year. In fact this is supposed to be good news: as CalSTRS states, its underfunding was supposed to be even worse by $4.3 billion. So this is really good news. We wonder how good the news will be to tens of thousands of retiring and retired teachers once they understand that their obligations are only funded 69%. And dropping. But wait, there's more: new normal, no new normal, here is what CalSTRS did: it reduced "the assumed rate of investment returns from 7.75 percent to 7.5 percent, which increased the funding shortfall by $3.5 billion." In other words, if the market grows at a true New Normal of 1-2%, or worse, is flat over the long run, we wonder if the obligation coverage ratio would even be in the single digit percentage.

From the Press release:

The Teachers' Retirement Board, the governing body of CalSTRS, today adopted the actuarial valuation of the Defined Benefit Program as of June 30, 2011. The valuation reflects a two-percent decrease in the funding status from the previous year, as the final impact of the extraordinary losses in 2008-09 is recognized.

The latest valuation shows a funding status sufficient to cover 69 percent of projected liabilities, leaving the fund with a $64.5 billion funding shortfall. The funding status means that for every dollar in pension obligations the fund has 69 cents worth of assets available. The previous valuation showed the funding shortfall at $56 billion.

The growth in the funding shortfall, however, is $4.3 billion less than was previously predicted, due primarily to the initial recognition of a 23.1 percent investment return for the 2010-11 fiscal year. The current valuation also reflects the final year in which the losses from the 2008-09 financial crisis are recognized. CalSTRS uses a three-year process to "smooth" or even out gains and losses to the system.

"Although healthy returns in 2010-11 reduced the magnitude of required future contributions, we cannot count purely on investment earnings to bring this crucially important fund back to financial health," said CalSTRS Chief Executive Officer Jack Ehnes. "What's needed now in the pension reform discussion is a long-term funding plan that only the Legislature and Governor have the authority to implement. CalSTRS is committed to working with all of our stakeholders to develop a plan that is both gradual and predictable for our members, their employers and the State of California."

The valuation continues to reflect the inability to bridge CalSTRS' funding shortfall without increases to contribution rates. Bringing CalSTRS to full funding would require an additional payroll contribution of 13 percent above current levels. This decreased from the previously required 14 percent of payroll. Absent any changes in contribution rates or liabilities, current projections show the fund will deplete its assets in about 35 years, which extends the anticipated lifespan of assets from the 30 years outlined in the prior valuation.

The actuarial valuation is a snapshot of the fund's financial health, comparing its assets to its long-term projected liabilities. The valuation projects the extent to which the current and future assets of the Defined Benefit Program are sufficient to pay the benefits promised to CalSTRS members for their service. If the actuarial value of the assets is less than the value of obligations, then an unfunded obligation, or funding shortfall, exists.

Among the factors slowing the growth of the funding shortfall are:

  • Extraordinary 23.1 percent returns as of June 30, 2011, which closed fiscal year 2010-11 and, like losses, are also recognized over three years. This year's recognized gains shrank the shortfall by about $7.5 billion.
  • The lower-than-expected projected payroll earnings for 2010-11 reduced the growth of the funding shortfall by $4.5 billion.

Several factors contributed to the growth of the funding shortfall, including:

  • Recognizing investment losses from 2008-09, which raised the funding shortfall by $12.7 billion.
  • Reducing the assumed rate of investment returns from 7.75 percent to 7.5 percent, which increased the funding shortfall by $3.5 billion.

The California State Teachers' Retirement System, with a portfolio valued at $152 billion as of February 29, 2012, is the largest teacher pension fund and second largest public pension fund in the United States. CalSTRS administers a hybrid retirement system, consisting of traditional defined benefit, cash balance and defined contribution plans, as well as disability and survivor benefits. CalSTRS serves California's 856,000 public school educators and their families from the state's 1,600 school districts, county offices of education and community college districts.

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Seasmoke's picture

Leo must be spinning in his grave !

Mr Lennon Hendrix's picture

He is ok.  He is busy buying the dips in solar.

Sancho Ponzi's picture

The last fund that consistently returned 7-8% was Madoff's ponziCon.

ElvisDog's picture

Exactly, the 7.5% assumption is a joke. They should use a 10 year moving average of returns on the S&P 500 for their forward assumptions, which would give them... Oh, wait, never mind.

Freddie's picture

7.5% is impossible with ZIRP.  If they are holding 60% bonds to 40% stock with a mix of hedge funds and private equity - there is no wau they should assume 7.5%.  6% is probably too high.  

Buck Johnson's picture

If your a govt. (local or federal) or business to big to fail, you can use ponzi economics to forecast.  But the problem with all this ponzi is just that a ponzi.  Eventually the reality of the delusion comes into being and they haven't been making that 7 to 8 percent every year and only 1 to 2 percent if not breaking even.  So the 69% that was reported to us as being funded to that amount may be a big fat lie. 

J 457's picture

They fail to mention the pension deficit is backstopped by the CA taxpayer.  That's the much bigger story.  Check CalPRS as well. 

sun tzu's picture

The California taxpayer is basically broke. 

NOTfromSanFrancisco's picture

@ sun tzu   "The California taxpayer is basically broke."


We have been broke, unemployed, illegally immigrated and thoroughly entranced with "Dancing With the Stars" for some time now...

The Navigator's picture

Broke? Ha! You ain't seen nothing yet. Wait until the boomers retire and move out of state for a lower (1) income tax rate and (2) sales tax so they can afford a daily meal at hometown buffet. Take away 5%-10% of the CA population paying the income and sales tax and that pig will really squeal. The more they tax, the more that will run - hell, anyone with gas money is going to run to AZ and rent a PO box (then register as an AZ resident) and then 90% of the cars here will have AZ plates.

Want to go long on something - buy a cheap house in AZ and rent out virtual residency on that address. 1,000 subscribers @$50/mo and you might make some money. When you do it let me know - then I can buy some pistols on the CA restricted list.

The Alarmist's picture


There, fixed it for you.

Mr Lennon Hendrix's picture

Nobody retire and everything will be fine!

Rainman's picture

Another serious unmentioned problem in Cali is that the gazillion administrators are spiking the hell out of their final year salary....often to make much more in retirement than when they were working.

The Navigator's picture

No problem - old Jerry Brown is talking about raising to top income tax rate from 10% to 13.x% - that'll fix it for another 2 years.

Chuck Walla's picture

Nobody retire and everything will be fine!


They could die early even without Obamacare. But, I now see the need for Obamacare.  Makes it easier to kill off all those pension/SSD obligations.  The man is a genius!

narnia's picture

even if no one retires, the CA public school system still costs $28,000 per year per student that actually graduates

mrdenis's picture

Hell in new Jersey we already spend more than that on our students "The governor then said that despite spending nearly $30,000 per pupil, less than half of Asbury Park students can pass 8th-grade level math.".....
10mm's picture

Asbury Park.Hmmmm,gee i wonder why.

Peter Pan's picture

Or everybody die so nothing has to be paid out. Once they start pulling back on medical care that is what will happen.

The Alarmist's picture

Reducing the expected return would not reduce the funded position, though it would increase the net periodic pension cost. Under-performing the expected return would certainly lead to a greater shortfall. In other words, they goosed prior expectations to lower the costs in earlier periods, and now they are taking it in the shorts.

Mercury's picture

We wonder how good the news will be to tens of thousands of retiring and retired teachers once they understand that their obligations are only funded 69%.

I doubt they're fretting at all actually because there isn't a chance in hell they won't get paid one way or the other.

LFMayor's picture

Yeah, because one night, they'll put on their wolf suits and make mischief.
Where the Wild, Starving, Abandonded Socialist Teachers are.

SAT 800's picture

I don't understand the assertion; I think there's practically a guaranteed result that they don't get paid; (one way or the other); like with "money" inflated to donuts for instance.

Mercury's picture

The municipality, the state or the Feds (or some combo) will make taxpayers pick up the difference.

CH1's picture

I doubt they're fretting at all actually

Because they can't do the math?

Sudden Debt's picture

As long as it's not the math teachers fund, there no real problem right?

SAT 800's picture

Correct! The "other teachers" don't even know what 69% means !

Sokhmate's picture

They probably know what it means.. without the wierd sign after the 9.

SheepDog-One's picture

We're short by $9 billion on the quarter...but wait! Thats GOOD NEWS!

I guess I could therefore tell the bartender I'm short paying my $800 bar tab by $750, but thats GOOD NEWS for him because I thought I'd be $800 short.

SAT 800's picture

There you go ! The new Normal.

bob_dabolina's picture

Why don't they just continue vilifying millionaires and have them pay for the short fall?

Fuck it, just seize all the millionaires assets. It's not fair they're rich anyway.

The Alarmist's picture

Because in CA the millionaires are mostly political donors or public servants.

bob_dabolina's picture

These teachers shouldn't be compensated at all.

The quality of students they produce is shit.

GeorgeHayduke's picture

Yeah, it's the teachers' fault. It has nothing whatsoever to do with administrators, the military industry and "the business community" wanting the schools to put out unthinking, unquestioning, order-following consumers to suits their needs.

Try looking at the whole picture, not just those parts of it that suit your limited worldview.


dogbreath's picture

yup,  criticize excessive socialist entitlement and get attacked by saying " look at the other pigs getting fat"


we're fucked

GeorgeHayduke's picture

We're fucked because this entire system has been loaded with so-called "entitlements", corruption and "something-for-nothing" thinking at so many levels for so many years. Don't act as though teachers and government workers are the the whole reason for the problem, as the so-called private financial sector did their best to get those programs started so they could reap the benefits themselves.

I forgot I should only look at the "entitlments" of those folks the dipshits call socialists. I won't look at the trillions in entitlement we've given to the financial sector the past 4 years. How does this whole pension shortfall measure up to the derivatives market? Sorry...I need to remember to do the mainstream thing and focus on the snowball someone labeled socialist and not look up the mountain to see the avalanche building above us. My fault for looking at the big picture.

Rainman's picture

Agree. Pigmen were all over these pension funds. CalPers had its own stable of, placement agents... rounding up the Pigs to feed.

Here's a recently settled CalPers bribery case involving meds.


dogbreath's picture

like I said................

yup, criticize excessive socialist entitlement and get attacked by saying " look at the other pigs getting fat"


we're fucked

CH1's picture

Yeah, it's the teachers' fault. It has nothing whatsoever to do with...

Oh, I'll stipulate to the others, but the teachers deserve a big, heaping share of blame.

I use to be their victim. I know.

SAT 800's picture

The "quality" of human beings is shit. IQ100 is average; okay? What's that? It's useless. It's amazing the little darlings can remember how to tie their shoes. What do you want the teachers to do about it? Repeal the law of genetic inheritance?

GeorgeHayduke's picture

Excellent point. As a "mature" parent with a kid in elementary school I am constantly appalled and amazed by many parents at the school with their crappy attire, tattoos, piercings, obsession with the fucking iphone andcomplete inability to converse in an adult manner. The funny part is, those parents that appall and amaze me are likely the kids of these folks bitching endlessly about the schools being failures.

If the schools are shitty, it's likely just a reflection of the culture...all of it, from the "entitlement" socialist they bitch about even in their sleep, to the corporate marketers trying to sell us shit we don't need. But putting it that way forces some ownership onto the sholders of the endlessly bitching conservative types here. They prefer bitching over action or the worst of all responsibilities...setting an example themselves.

Vlad Tepid's picture

Blaming the teachers exclusively smacks a lot to me of Stalin going out and shooting the factory workers when the tanks they were forced to make out of sub-par pig iron broke down.  In computers the phrase "Garbage in-Garbage out" is useful; to BobDabolina, I think it's instructive.

CH1's picture

IQ100 is average; okay? What's that? It's useless.

Not at all. I know you're venting, but a 100IQ brain can do a hell of a lot.

Lots of 150IQ brains run crap software and spread destruction.

I'll pick the 100IQ brain running good software every time.

The Navigator's picture

Reminds me of George Carlin when he said "we need workers just smart enough to run the machines but not smart enough to know how badly they're getting fucked" = "Obediant Workers"

re IQ - not sure its a valid measurement - I've seen mensas that are dumber than shit and high school dropouts smart as a whip.

dogbreath's picture

yeah and do you want your 110 IQ kid being educated by the 93 IQ teacher.

pods's picture

Won't work, as NEW debt is needed to keep the ponzi going.  Seizing current debt won't do jack.

(I know your comment is tongue in cheek)

CrimsonAvenger's picture

But then the teachers will be the rich ones...

We need Dennis Moore on the job. "Blimey, this redistribution of wealth is trickier than I thought."