CalSTRS Board Kicks Off Shortfall Review

June 3, 2005 ( - With a consultant's warning ringing in their ears that their current $24.2 billion shortfall could balloon to more than $200 billion in 30 years, trustees of the California State Teachers' Retirement System (CalSTRS) have started work on a plan to tackle the problem.

The process will include a review next month of how other public pension systems are dealing with their shortages and is expected to wrap up by fall with a strategy that could call for higher teacher or employer contributions or benefit cutbacks for newly hired educators, the Sacramento Bee reported.

Efforts to cope with the shortfall at the $124-billion fund come even though CalSTRS has enough money to pay benefits for 20 years and despite an acknowledgment that retiree benefits won’t be harmed because the Golden State guarantees them by law, the news report said.

At the same time, like most public pension funds across the country, CalSTRS isn’t projected to generate enough income from investments or employee and employer contributions to meet its long-term pension obligations. As of June 30, 2004, the fund had enough assets to cover 83% of future benefits, compared with 82% the previous year.

According to the Bee report, consultant Milliman estimated that CalSTRS, which has 755,000 members, needs to boost contributions by as much as 4.56%. Currently, teachers contribute 8% of salary while school districts add 8.25% and the state about 2%. Milliman said that without any contribution hike, the CalSTRS shortfall would hit $217 billion by 2035.

“The longer we wait, the more expensive it gets,” said Jim Zerio, a representative for CalSTRS trustee and state Treasurer Phil Angelides, according to the Bee.

CalSTRS officials said Thursday that the gap won’t vanish even if Governor Arnold Schwarzenegger is successful in his plan to end traditional pensions. Schwarzenegger and other Republican leaders advocate replacing guaranteed pensions with self-directed 401(k)-style investment accounts for future public employees, including teachers. They cite a growing pension obligation burden on the state and local governments.

“We don’t need to panic,” said Nick Smith, a CalSTRS representative for state Controller Steve Westly. “But we do need to act. There’s a problem we all need to solve.”

A year ago, trustees first learned that a string of stock market losses and subpar investment returns in recent years had left the fund billions of dollars short to pay benefits for retirees over the long haul. After reviewing options to erase the shortfall, the board opted to call for another actuarial study.

The Milliman report found little has changed 12 months later. The shortfall increased $1.05 billion to $24.2 billion. But CalSTRS’ assets grew faster than liabilities because of smaller wage increases.

More information on the CalSTRS efforts and a copy of the Milliman report is here .