Will CalSTRS’ Robust Earnings Reduce Contribution Rates?Categories: California Developments
School Services of California Inc., by Michelle McKay Underwood, August 8, 2014
Q. With strong investment returns recently reported by CalSTRS, will their unfunded liabilities be reduced enough to lessen the contribution rates needed?
A. It is unlikely a single year of robust earnings will fundamentally change the CalSTRS unfunded liability, but it is possible that several years of strong earnings, in conjunction with increased contributions, could in the future. The statute that created the funding plan for CalSTRS (Assembly Bill 1469 [Bonta, D-Alameda]) does provide for flexibility when it comes to employer and state contribution rates.
Once the final 19.1% employer contribution rate is achieved, the CalSTRS Board will have the authority to increase or decrease the contribution rate to reflect what is needed to eliminate the unfunded liability by 2046. For employers, the rate cannot change by more than 1% in any given year, cannot exceed an increase of 12% of creditable compensation (the 19.1% rate already represents a 10.85% increase), and cannot be increased in order to supplant the state’s obligation. The state’s rate cannot change by more than 0.5% in any given year after its three-year implementation timeline.
It is clear that both CalSTRS and the California Public Employees’ Retirement System had remarkable earnings for 2013-14, posting gains of 18.66% and 18.4%, respectively. However, we will not know the effects of those earnings (and other factors) for CalSTRS until the next annual valuation is released, in spring 2015. And it may not significantly move the needle—after investment earnings of 13.8% in 2012-13, CalSTRS’s total unfunded liability increased by $2.7 billion while the unfunded ratio decreased by just 0.1% from the year before.