PHOENIX - The California State Teachers’ Retirement System's unfunded liability has jumped by more than $20 billion after the adoption of the lower investment return assumptions.

The actuarial valuation, calculated as of June 30 2016, was provided by consultant Milliman. The report shows that the unfunded gap will adjust from $76.2 billion at the June 30, 2015, valuation to $96.7 billion as of the most recent numbers, growth that CalSTRS said it anticipated as a result not only of ongoing trends in the population but also of actions it took recently to try to improve the system’s long-term outlook. At its Feb. 1 meeting, the Board adopted new assumptions on its investment return performance, called the discount rate, phasing in a change from 7.50% in 2015 to today’s 7.25% with another reduction next year to 7.00%.

“Given the detailed analysis of market and demographic trends presented in February, the board took responsible action to adopt assumption changes reflecting the recent actuarial experience,” said CalSTRS Chief Executive Officer Jack Ehnes. “We expected the impacts that were indicated in today’s report; however, we can clearly see that the fund is making progress toward full funding as provided by the July 2014 funding plan enacted by the legislature and governor.”

CalSTRS, which faced criticism from advocates of an aggressive full funding strategy, pointed out that reducing the discount rate requires increased contributions from school districts who participate in the plan, potentially ratcheting up the financial pressure some of those districts face.

“CalSTRS is a long-term horizon investor, and to say there would be no bumps in our 32-year funding journey would be unrealistic,” Ehnes said. “This report validates that we are on a responsible and gradual trajectory toward the long-term financial health of the fund. This valuation reflects the conservative approach of the Teachers’ Retirement Board, based on input from third-party actuarial and investment experts.”

Pension underfunding is a national concern, which portfolio managers have said they take seriously when considering whether to invest in an issuer’s bonds. Many of the largest public pension funds, of which CalSTRS is one, have begun reducing their discount rates to more accurately reflect market performance.

CalSTRS also announced that it has elected Dana Dillon as board chair and Sharon Hendricks as vice chair for the 2017-18 term, meaning that the two will continue in those roles. Dillon is an intermediate grade school teacher who has served on the board since 2003. Hendricks is a communications studies professor with the Los Angeles Community College District and was elected to the Teachers’ Retirement Board in 2011.

“It’s an exciting time to be in a board leadership position; CalSTRS is in the forefront of myriad investment and retirement security matters that affect the fund’s more than 914,000 members and beneficiaries,” Dillon said.
“As an educator, I’m honored to not only be a voice for my colleagues, but also to serve as a role model for the next leadership generation on the effectiveness of strong, positive board governance.”

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