Internal Report: CalSTRS Needs Rate Hike

The second-biggest public pension in the US needs a $4.5 billion yearly boost in annual payments, an internal report found.

(February 4, 2013) — The California State Teachers’ Retirement System (CalSTRS) faces a $64 billion deficit, and would need a $4.5 billion annual infusion of revenue over the next three decades to become fully solvent, according to a new internal study.

The California scheme produced the study in response to a legislative resolution.

The draft report to the fund’s governing board also concluded that the scheme–which took in $6 billion in the last fiscal year–would need teachers, school districts, and the state to increase their contributions by 15% combined annually to remove its funding gap. “The weak financial markets of the past decade, together with the fact that contribution rates were not adjusted in response to the low returns, have undermined the long-term funding” of the plan, the report said. That “can only be effectively addressed by increasing the contributions paid by a combination of members, employers and the state.”

The report found that teachers pay 8% of their wages to finance pensions, which hasn’t changed since 1972. School districts pay 8.25% of payroll, a rate that hasn’t changed in more than 20 years, while state taxpayers contribute about 5.3%.

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CalSTRS last year paid $10.7 billion in benefits. Teachers contribute 8% of pay, school districts and other employers 8.25% of pay, and the state 5.2% of pay.

The new funding estimates assume investments will earn an average of 7.5% in the future.

Public pensions around the country have been battling funding estimates in recent years. In October, Ash Williams and Florida’s State Board of Administration (SBA), which he heads, returned 22.1% on their largest mandate last year—knowing it was not nearly enough. “Investment gains alone are not sufficient to maintain the fund’s financial health. Contributions into the system, from employers and, beginning in fiscal year 2011-12 from employees, form the base of SBA’s investment program. Annually determined actuarially sound rates of contribution into the fund are necessary to insure that the investment base is large enough to meet future Pension Plan benefit obligations.”

Graphic: The Periodic Table of Hedge Fund Returns

Hedge fund strategies sorted by performance—from 2000’s blockbuster Convertible Arbitrage to 2012’s top performer, Distressed Securities—courtesy of Boomerang Capital.

(February 4, 2013) -- If hedge fund strategies were chemical elements, most would have more in common with radioactive francium than ultra stable noble gases. 

That is one takeaway from the latest “Periodic Table of Hedge Fund Returns” produced by Boomerang Capital, a Connecticut-based hedge fund advisory. Boomerang has been rendering the success of hedge fund strategies visually since the pre-crash era, when short bias funds struggled and nearly every other approach won big. 

The winning strategy of 2012, distressed securities, has been a safe bet three out of the four years since 2008. Unsurprisingly perhaps, the single year in that stretch that distressed debt posted negative returns (2011), short bias made its only appearance above the break-even line. Hedge fund darling Daniel Loeb has been winning big on distressed debt for a number of institutions invested in his value-oriented fund, Third Point LLC. New Jersey’s public pension fund made a $100 million allocation to the fund in 2011—one of the few hedge fund investments it agreed to pay a 2-and-20 management/performance fee structure for. 

Boomerang Capital creates the graphic using data from Dow Jones Credit Suisse hedge fund indices, and ranks the strategies based on total returns. 

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See Boomerang Capital's archived tables here.      

 

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