The California Legislative Analyst's Office in a report Wednesday said CalSTRS' $73 billion unfunded liability might be the state's “most difficult fiscal challenge” and called for an increase in funding that would cost billions of dollars over the next 30 years.
The $161.4 billion California State Teachers' Retirement System, West Sacramento, is scheduled to run out of money to pay benefits in 2044, the result of increases in benefits for educators in the late 1990s and poor returns following the financial crisis, the report noted.
Officials at CalSTRS have sent dire warnings to state lawmakers and the governor about the pension fund's financial predicament for several years now and last month presented to the Legislature a variety of options to repair the funding gap, including ways to reach full funding over the next 30 years.
The LAO report urges that the most prudent course is to reach full funding over the next three decades but says that will cost an additional $4.5 billion a year over current payments.
Currently, the state pays $1.4 billion a year, and teachers and school districts split the remaining $4.3 billion in annual contributions.
But under state law, teachers cannot be forced to contribute more unless they are given additional compensation benefits. The report says the bulk of increased contributions would likely come from the state and/or school districts.
The report urges the Legislature to deal with the matter rapidly. “Because the additional cash can be invested to generate higher returns, raising contributions next year would create immediate payoff,” the report said.
CalSTRS' estimate that it would run out of money in 2044 is based on the pension fund's own actuarial estimate that it can earn on average a 7.5 % annualized return over the next 30 years.
Some critics have labeled that return assumption unrealistic.