Calif. teacher pension fund delays decision about whether to drop its expected rate of return

Calif. teacher pension fund delays rate decision

SACRAMENTO, Calif. — The board of the California State Teachers’ Retirement System has delayed a decision about whether it should decrease the rate of return it expects to receive on its investments.

If the returns shrink, local school districts and the state would be asked to pay more to ensure the fund has enough money to pay pension benefits to retired teachers.

Economists have predicted that unfunded pension obligations for government employees could cost states tens of billions of dollars in coming years.

“The investment assumption is the single most important assumption we work with,” said Mark Olleman, a consultant from actuarial and consulting company Milliman Inc. “The primary risk is that over the long term, what happens if we don’t achieve investment return assumptions?”

CalSTRS’ actuarial assumptions are generally reviewed every four years, but the recent market downturn prompted an earlier review of the fund’s rate of return.

The fund has grown an average of 8.6 percent per year over the past 30 years, including when it lost one- quarter of its value between 2008 and 2009, said CalSTRS spokesman Ricardo Duran.

CalSTRS’ expected annual rate of return has been set at 8 percent since 1995. Consultants and investment staff told the board Friday that the fund should decrease its expected rate of return to 7.5 percent annually. The board decided that it will revisit the matter in November.

Some board members said the decision should be postponed because the Governmental Accounting Standards Board may release new standards on how public pension funds should determine their projected rates of return.

Board member Peter Reinke said the board should consider those changes and CalSTRS’ unfunded liabilities when it makes a decision about the rate.

“There’s a lot of moving parts here, and it’s a jigsaw puzzle, and we have to look at it more holistically with all of those parts,” Reinke said.

CalSTRS is the nation’s second largest public pension fund with assets totaling about $138.5 billion as of April 30, 2010. It serves about 833,000 members.

CalSTRS estimated its unfunded liability at $22.5 billion in 2008. Reducing the projected rate of return would increase that unfunded liability.

Several members of the board wanted to go ahead with the recommendation, saying a lower rate would more accurately reflect market conditions.

“I wanted to make sure that we don’t do this too late in the process,” said John Chiang, state controller and CalSTRS board member. “If we have to make a tough decision, we have to make a tough decision.”