Standard & Poor’s Revises CalSTRS Outlook to Positive

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LOS ANGELES — Standard & Poor's Ratings Services revised its outlook on the California State Teachers' Retirement System to positive from stable and affirmed its AA-minus issuer credit rating May 5.

S&P also affirmed the pension fund's A-1-plus short-term rating.

"We base the outlook revision on recent legislation that we believe should improve CalSTRS funded ratio over the next two years, assuming the pension fund meets its actuarially projected investment returns," said Standard & Poor's credit analyst David Hitchcock.

CalSTRS provides retirement, disability and survivor benefits for 868,493 pre-kindergarten through community college educators and their families. It is the second-largest pension fund in the U.S., after the California Public Employees' Retirement System, with total assets equal to $218.5 billion at June 30, 2014.

State legislation passed in 2014 will substantially boost both employer and employee retirement contributions to achieve a projected 100% funded ratio by 2046, under current actuarial assumptions, according to the S&P report.

Offsetting factors for Standard & Poor's include the fact that CalSTRS' annual employer contribution rates remain limited to percentages of payroll under state law, rather than the size of the unfunded liability.

"Although the governor's proposal is for a revised fixed funding formula that is not explicitly tied to an actuarial ARC, in our view, the proposal goes a long way toward solving current annual underfunding," S&P said.

The system has what S&P called an "adequate" 69% funded ratio of actuarial assets to liabilities for the State Teachers' Retirement Plan, which is CalSTRS' main defined-benefit plan.

S&P also cited a high degree of diversity and good liquidity among CalSTRS' large pool of investments, totaling $191.2 billion at March 31, 2015; and its independent board structure.

"Although we expect that the recent pension reform legislation will boost funded levels, if future investment returns or actuarial experience deviate significantly from actuarial assumptions, further state legislation may be necessary to ensure sound actuarial funding, and this may not occur on a timely basis," Hitchcock wrote. "The 2014 reform legislation followed many years of annual underfunding of STRP's actuarial annual required contribution that resulted in a long-term decline in funded ratios before the recent reforms."

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