(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%.
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.”