(August 19, 2011) — An auditor has labeled the California State Teachers’ Retirement System (CalSTRS) a ‘high-risk’ problem for the state, with the scheme expected to run out of money in the next 30 years.

The assessment by State Auditor Elaine Howle into high-risk issues faced by California found that unless the legislature takes immediate action, the state could be forced to be responsible for providing the necessary funding using taxpayer money. Reaffirming CalSTRS’ long-term funding problem, the report concluded: “CalSTRS reports that the programme’s assets will be depleted in 30 years. Considering that pension obligations can extend beyond 50 years, unless the State takes steps, such as raising the contribution rates for members and their employers, it may be responsible for providing the necessary funding to ensure that CalSTRS’ defined benefit programme meets its obligations.”

Despite CalSTRS’ strong performance during the latest fiscal year with a $29 billion investment gain, the fund is still far below its October 2007 peak. Currently, it only has about 71% of the assets needed to pay is long-term obligations, short of the 80% level most experts recommend. The report added: “The laws governing the contribution rates for CalSTRS members and their employers have not changed in decades. As a result, the defined benefit programme is currently funded at 71%, well below the 80% considered necessary to fund a sound pension program.”

In response to the report, CalSTRS spokesperson Ricardo Duran told aiCIO: “What the State Auditor’s list does is underscore what’s been called for in the data that we’ve been providing the Legislature and the Administration. They have the authority and the responsibility to develop a long-term funding plan because the state is the plan sponsor and ultimate guarantor of the system, which has served the state’s educators well for nearly a century. Neither the Legislature nor the Administration have asked CalSTRS to provide specific recommendations, but we’ve said that a gradual, predictable approach to reaching funding health will provide the greatest degree of fairness to CalSTRS members, the school districts and the taxpayers of California.”
 
Duran added: “The issues are long-range ones because CalSTRS has the assets to continue paying benefits for three more decades, but the longer it takes to develop a plan, the more costly will be the solution.”

The report by the California auditor highlights the grim reality of the world’s pension funding situation. A recent report by the  Organisation for Economic Co-Operation and Development (OECD) revealed that while pension assets are slowly returning to pre-crisis levels, full recovery remains uncertain. Andre Laboul, head of the OECD’s financial affairs division, stated: “Having weathered the financial crisis, pension fund asset levels in most countries continue to show strong growth and are on the way to returning to pre-crisis levels. During 2010, both economic and financial indicators showed signs of further recovery. However, the outlook for future economic growth in developed economies remains uncertain and sluggish.”

Click here to see a video with CalSTRS CIO Christopher Ailman speaking with aiCIO about the government-run model of public pensions, hedge fund-of-funds vs direct investing, and the future of outsourcing CIO talent.