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.