CalSTRS Expected to Hit Full Funding Five Years Ahead of Schedule

The California State Teachers’ Retirement System (CalSTRS) is now expected to hit full funding in 2041, five years ahead of last year’s prediction of reaching that level in 2046, according to a presentation from CalSTRS Deputy System Actuary David Lamoureux at the fund’s most recent board meeting on Friday. Additionally, board members anticipate that CalSTRS will hit 80% funding in 2024, 10 years ahead of schedule.

The timeline shift is due to the unexpectedly high 27% return CalSTRS earned in the most recent year. The CalSTRS board plans to release the excess funds from this year’s record return over the course of three years. This means that this year, only one-third of the excess funds will be used to alleviate the funded rate. “Because of that, our funding levels will improve, but they will improve slowly over time,” Lamoureux said at the board meeting.

CalSTRS has not yet released its 2021 actuarial valuation report on its website, making it difficult to know what the pension’s exact funded ratio is. Last year, that number was around 67%.

Nevertheless, Lamoureux also cautioned that just as one year of good returns can have such a sweeping effect on future projections, so could a potential negative return. “I don’t think we’ll ever be able to come here and tell you there’s 100% certainty we’ll be able to achieve full funding just because of the inherent investment risk that we have in our portfolio,” he said.

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Last year, employers were responsible for about 70% of CalSTRS’ unfunded liability, while the state of California was responsible for the other 30%. However, the increase in funds is also expected to drastically change this ratio. It is anticipated that the state’s share of liability will be eliminated in 2023 and turn into a surplus. On the flip side, because the employers’ share of liability is tied to the returns CalSTRS makes, employer liability is actually expected to go up over the next few years.

CalSTRS first began struggling with its funding status in 2001 when the dot-com bubble burst and made investments less valuable than expected. The situation was made even worse in 2008 with the financial crisis, and funding status has never completely recovered to 100%. Initially, the CalSTRS board was legally not allowed to increase employer contributions to the pension plan. However, in 2014, the California legislature enacted a plan to increase contributions and help CalSTRS reach full funded status.

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Tags: California Teachers’ Retirement System, CalSTRS, funded rate, Pension, Returns

The optics, as they say on Wall Street, aren’t good for the massive dysfunction that goes by the name of the supply chain bottleneck: hundreds of container ships lolling offshore, empty store shelves, appliance delivery times stretching far into the future.

Fear not, however. JPMorgan spies an end in sight to the supply snags. The disruptions should fade away in next year’s first half, the bank believes.

And, to the Wall Street giant, that means now is a great contrarian time to buy supply chain-susceptible stocks, on the order of chemical producer Celanese (its stock is flat since spring), home products maker Newell Brands (down since then), industrial tool company WW Grainger (flat), and clothier Ralph Lauren (down). In fundamental terms, if not always in share price ones, these all are bearing up despite the supply problems, JPM finds. And now is also perfect to invest in the father of them all, the S&P 500 index, the bank contends.

For instance, despite having to charge more for its products, owing to higher energy costs, Celanese has been able to maintain stable earnings and revenue. Ralph Lauren has logged strong sales and market share increases this year, after 2020’s doldrums, when its stories were shuttered. The apparel maker, known for its timeless styles, has proven that its goods have an appeal that remains strong both in the US and abroad, analysts say. Meanwhile, the S&P 500, while dipping Tuesday, has managed to set record after record in 2021, up about 25%.

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And all the better once the supply kinks get fixed, the thinking goes. JPM discerns early signs of that. “Global supply chain pressures are easing—if this persists, S&P 500 should continue to deliver strong revenue growth and record margins,” said Dubravko Lakos-Bujas, JPM’s chief US equity strategist, in remarks to CNBC. The pandemic’s retreat (at least for the moment) is a big source of encouragement, he said, adding, “Our view all along has been that supply and labor shortages would be temporary and normalize with a decline in COVID-19.”

Lakos-Bujas pointed to the boffo financial reports for the third quarter and asked how these could be possible if the supply situation was as dire as the doom-meisters say. Indeed, S&P 500 companies have logged earnings growth of 32.7% and revenue increases of 15.3%. For the year’s final period, analysts are projecting earnings up 22.4% and revenue ahead 11.9%, according to FactSet.

His boss, JPM CEO Jamie Dimon, is even more optimistic. “This will not be an issue next year at all,” he told an investment conference last month. “This is the worst part of it. I think great market systems will adjust for it like companies have.” For the record, that’s also the outlook of Federal Reserve Chair Jerome Powell.

This sunny viewpoint, of course, isn’t universally shared. Moody’s Analytics warns of “dark clouds ahead” for the global supply chain, as no clear solution is at hand to work out its snarled pieces worldwide.

Plus, the Institute for Supply Management (ISM) sees an ongoing problem with no clear end in sight. The ISM declared in a report that “companies and suppliers continue to deal with an unprecedented number of hurdles to meet increasing demand.”

By the ISM’s reckoning, the auto industry is suffering the most, largely because of the global semiconductor shortage. Transportation manufacturers told the ISM in its survey that missing chips have “stopped or limited the lower-margin vehicle production schedules,” with the semiconductors routed to more expensive autos.

Computer makers are experiencing “extreme delays” and “getting anything from China is near impossible,” the trade group said. Demand for electronic goods and appliances has “remained strong,” but production continues “to be held back by supply chain issues.”