Recently CEO Jack Ehnes of the California State Teachers’ Retirement System (CalSTRS) asserted that the pension fund’s $71 billion unfunded liability “stems largely” from the 2008-9 economic downturn. But CalSTRS’s own information appears to contradict that claim and to point to another culprit.
Over the last decade – including the economic downturn — CalSTRS reported an enviable investment return of 7.5 percent per annum. CalSTRS’s investment staff deserves hearty applause for that performance, which bested the return earned by the average public pension fund by more than 15%.
In earning that return, CalSTRS performed fairly close to its objective, which during the decade ranged from 8 percent to 7.5 percent. Also, CalSTRS seeks a 7.5 percent return going forward.
Thus, including the downturn, CalSTRS’s investments had a good decade. How then does Ehnes justify his assertion that the 2008-9 economic downturn, the results of which are subsumed within the fund’s returns over that decade, “largely” caused its $71 billion unfunded liability?
He didn’t include evidence for his statement. Hopefully he will at some point. In the meantime, CalSTRS’s website provides useful data — and it points in a different direction.
According to a report on CalSTRS’s website, in 1998 CalSTRS reported assets of $77 billion and liabilities of $74 billion, creating a surplus of $3 billion. But by 2003 – just five years later — that surplus had turned into a $23 billion unfunded liability. The reason: liabilities soared $58 billion, or 78 percent.
According to California’s leading pension historian, during that period more than a half-dozen benefit improvements – which boost liabilities — were provided to CalSTRS’s members. At the same time (and perversely given the increase in liabilities), employees and the state were allowed to cut contributions into the fund, decreasing asset growth. Assets still grew at a healthy 7 percent annual rate during that period but they couldn’t keep up with liabilities that grew at a torrid 12 percent rate.
CalSTRS’s unfunded liability stood at $23 billion until 2009 when it ballooned to $40 billion and then, despite a doubling of the stock market since then, climbed to $71 billion by 2012, an increase of $48 billion in four years. The change in assets and liabilities during that period tells a different story than that told by Ehnes.
The economic downturn did indeed have an impact on CalSTRS’s unfunded liability. CalSTRS’s assets fell from $155 billion in pre-crash 2008 to $144 billion in 2012, a drop of $11 billion or 7 percent. But that decline in assets pales in comparison to a $37 billion, or 21 percent, increase in liabilities, from $178 billion in 2008 to $215 billion in 2012.
In other words, according to CalSTRS’s own data, more than three-quarters of the $48 billion increase in CalSTRS’s unfunded liability between 2008 and 2012 appears to be attributable to an increase in liabilities. Less than 25 percent of the increase in unfunded liability appears attributable to a decrease in assets. Looked at that way, the economic downturn cited by Mr. Ehnes caused CalSTRS a fraction of the pain caused by the increase in pension liabilities.
To this observer, CalSTRS’s shortfall appears to stem less from the economic downturn and more from liabilities growing 70% faster than assets over the past 14 years. We will have to await evidence from Ehnes, but certainly it’s noticeable that he didn’t mention liability growth. Even AIG, itself not the most impressive example of transparency, acknowledged its liabilities when seeking its bailout.
CalSTRS is seeking $240 billion over 30 years from Californians already hard pressed to meet existing government costs much less additional charges. At a minimum, they deserve the whole truth and nothing but the truth.