California teachers pension fund faces shortfall


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Alarm bells are ringing at the country’s second-largest public pension fund.

The California State Teachers’ Retirement System, which lost a quarter of the value of its investment portfolio in the spending year that ended June 30, currently faces a $43-billion shortfall in the money it needs to pay future pensions.

What’s worse, warns Chief Executive Jack Ehnes, the $134-billion fund could be broke in 35 years – the length of a typical teaching career – if the state Legislature doesn’t raise the employer contributions paid by school districts in the next few years.


In the meantime, income from CalSTRS investments isn’t likely to fill the funding gap, Ehnes said. The pension fund, which until recently said it needs an average annual return of 8% to keep up with retirees, instead would have to get returns of over 20% a year. Skeptics consider even the 8% figure overly optimistic.

But getting a contribution-hike bill through the Legislature and signed by the governor during the current election year is problematic, Ehnes conceded in a report to be presented to the CalSTRS board on Feb. 5.

The state faces a $20-billion budget deficit and the spending plan proposed by Gov. Arnold Schwarzenegger would reduce spending on kindergarten-through-12th-grade schools by $2.4 billion, which is on top of a cut of $13 billion last fiscal year.

At the same time, California voters could be considering as many as three initiative proposals, aiming for the November ballot, that would reduce pension benefits and delay retirement eligibility for newly hired workers at state and local governments, school districts and some public community colleges and universities.

Marcia Fritz, the chairwoman of the group behind two of the initiatives, Californians for Pension Reform, said she wasn’t sure of Ehnes’ motive for sounding the alarm. Nevertheless, she praised his openness.

“To sugarcoat the numbers and ignore that there is a problem will only cause his situation to grow worse,’ she said. “I think he’s correct in doing a ‘mayday, mayday, mayday’ and trying to shore up the fund.”


Because of CalSTRS’ uncertainties, Ehnes is recommending to his board that the drive for higher employer contributions be put off until 2011. This year should be spent organizing government-employee groups and unions and educating members about the value of their pension benefits, he said.

As of last summer, CalSTRS estimated that it expects to have only 77% of the funds needed to meet all future pension obligations. That ratio could plunge to 13% in 2039 and zero in 2045, Ehnes said. At that point, the pension would revert to an expensive “pay-as-you-go” system, requiring government agencies and ultimately taxpayers to make up the shortfall.

CalSTRS must raise its contributions, from employers, employees or a combination of the two, by 22% to be fully funded three decades from now, Ehnes said.

While it also faces similar financial pressures, the state’s other giant pension fund, the $203-billion California Public Employees’ Retirement System, is in somewhat better shape to confront its own funding shortfall, Ehnes noted.

CalPERS’ board can unilaterally raise employer contributions from its member agencies without having to get lawmakers’ approval.

CalPERS reported that it was 86% funded as of June 30, 2008. That percentage could drop to around 65% in 30 years, according to a plan recently approved by the board that “smooths” out severe investment losses from 2008.

-- Marc Lifsher