April 8, 2011

WEST SACRAMENTO, CA – The board of the California State Teachers´s Retirement System (CalSTRS) today adopted the valuation of the Defined Benefit Program as of June 30, 2010, which identified a lower-than-expected funding gap.

The actuarial valuation is a snapshot of the fund´s assets and liabilities. It projects the extent to which the current and future assets of the Defined Benefit Program are sufficient to pay the benefits promised for prior service. If the actuarial value of assets is less than the actuarial value of obligations, then an unfunded actuarial obligation, or funding gap, exists.

As of June 30, 2010, a funding gap of $56 billion exists, a $15.5 billion increase from the previous year, as CalSTRS continues to feel the effects of the 2008–09 financial crisis. However, the gap is $1.5 billion smaller than last year's valuation predicted it would be for the system at this time.

CalSTRS uses an averaging, or smoothing, process that recognizes gains and losses over a three–year period, which is why the fund is still feeling the impact of losses incurred during the market downturn. The system is expected to continue reflecting that impact in next year´s valuation.

The smaller–than–expected shortfall reflects the 12.2 percent investment return posted at the end of fiscal year 2009–10, a $34.8–billion rebound from March 2009, the market low point. Another factor was the level of projected member earnings, which fell short of expectations. This had a $4.3 billion downward impact on actuarial obligations compared to the prior year´s valuation.

Today´s valuation puts the level of funding for CalSTRS Defined Benefit Program at 71 percent, down 7 percent from the previous year. It is the second year of funding declines, recognizing the impact of the 2008–09 financial crisis that saw CalSTRS investments lose 25 percent of their value.

"The positive effects of last year's excellent investment returns were good to see as our fund rebounds from the worst market downturn since the Great Depression", said CalSTRS Chief Executive Officer, Jack Ehnes. "However, despite these gains, we continue to recognize those losses. While our recent gains are helpful in the short term, the larger situation underscores the need to recognize that the funding issues facing CalSTRS are primarily the result of the unprecedented collapse in the markets. It also speaks to the importance that the Legislature develop a gradual and predictable funding solution that is fair to the state's taxpayers, its educators, and their employers."

Using the three-year smoothing process, the latest valuation projects that the losses from the financial crisis added $12.7 billion to the unfunded obligation, or funding gap. Another factor in the growing shortfall, also driven by the downturn, is the reduction of the assumed investment rate of return from 8 percent to 7.75 percent, and a reduction in the assumed inflation rate from 3.25 percent to 3 percent. This increased the unfunded amount by $4.4 billion.

The market downturn and its subsequent rebound has reinforced CalSTRS´ view that it cannot invest its way to financial health. CalSTRS is therefore, currently working with all its stakeholders to help the Legislature develop a plan for bridging that funding gap over the long term.

The valuation reveals that the CalSTRS funding gap cannot be bridged without changes in contribution rates. CalSTRS uses a 30–year time frame to determine the adequacy of the resources on hand to pay promised benefits. Contributions would have to increase by slightly more than 14 percent of payroll per year for the next three decades to successfully erase the funding shortfall.

The California State Teachers´ Retirement System, with a portfolio valued at $150 billion, is the largest teacher pension fund in the United States. It administers retirement, disability and survivor benefits for California´s 852,000 public school educators and their families from the state´s 1,600 school districts, county offices of education and community college districts.