Asset AllocationMay 13, 2020

CalSTRS Mandates More Money from State, Employers to Absolve Growing Deficit

The pension was about 66% funded before the COVID-19 pandemic.

Reported by Steffan Navedo-Perez

The California State Teachers’ Retirement System (CalSTRS) approved an increase in the state’s contribution rate by the maximum amount available under the law, as well as the state’s employer contribution rates to the fund, in an effort to eliminate its portion of the fund’s deficit by 2046.

The system’s recently published 2019 valuation report noted that its unfunded actuarial obligation decreased from $107.2 billion at the June 30, 2018, valuation, to $105.7 billion as of June 30, 2019. As a result, the funded ratio increased from 64% to 66%.

In a board report, the pension noted that additional increases in the state’s contribution rate are expected for at least two more years to help reach its goals.

Part of the reasoning is the sour market environment the fund, and the entire world, have found themselves in. “The state contribution rate will likely be adversely impacted by the decline in investment markets that have occurred in the first half of the 2020 calendar year,” the report said.

The retirement system hired Milliman to review its situation. Milliman said that the market activity following the June 2019 valuation “will almost certainly have an adverse impact on defined benefit program funding. It is expected that the 2020 program valuation will show a greater increase in the projected state contribution rate (and possibly the employer rate) and a possible decline in the funded ratio.”

The retirement system said that the recent adoption of a new funding plan by the California legislature puts it in a position that is better able to handle the market turmoil relative to its stance in the 2008 financial crisis.

“With the funding plan, the board can now adjust contribution rates for the state and employers … to strive for reaching full funding by 2046. Even if the severity of the decline was such that it prevented CalSTRS for reaching full funding by 2046, the funding plan would allow for funding levels to improve following a decline,” the system said.

The state contribution rate will rise from its fiscal 2019-20 rate of 10.328% of payroll to 10.828%, an increase of 0.5%, the maximum allowed under current law. The employer contribution rate will also increase from 17.10% to 18.40%.

“At this time, it is too early to tell how exactly contribution rates and funding levels will be impacted by the recent decline,” the retirement system said.

The news comes in tandem with an announcement from the retirement system that a high school teacher, Harry Keiley, was elected to serve as chair to the board. Keiley was elected to the board in 2007 and will also serve as vice chair of the retirement system’s investment and compensation committees.

Serving as the new vice chair of the board is Sharon Hendricks, a communication studies instructor.