CalSTRS on Wednesday reported that its funding ratio had increased to 74.4% as of June 30, the $306 billion pension fund's most recent actuarial valuation, from 73% the previous year, due to a strong performance in fiscal year 2021.
California State Teachers' Retirement System's funding ratio improved even though its fiscal year 2022 return was negative based on the large 27% return in fiscal year 2021, David Lamoureux, CalSTRS' deputy system actuary, told the board of the West Sacramento-based pension fund at its Wednesday meeting.
CalSTRS return was a net -1.3% for the fiscal year ended June 30 and a 27.2% net return in the prior fiscal year ended June 30, 2021, topping its benchmark in both periods. CalSTRS uses an actuarial value of assets which smooths the volatility of investment returns for actuarial valuation purposes, which reflects only a third of a single year's positive or negative return per year. The fiscal year 2021 gains that were set aside in the last valuation were more than enough to cover the full impact of the negative return in fiscal year 2022, resulting in CalSTRS return over its 7% annual discount rate on a smoothed basis.
As a result, staff recommended, and the board voted to keep its state and employer contribution rates the same.
Stating that he was breaking with a 35-year practice of the CIO and investment branch not commenting on CalSTRS annual actuarial report, Christopher Ailman, CalSTRS' CIO said he disagreed with the recommendation to keep contribution rates the same rather than raise them.
CalSTRS has "two spigots" to fill its "retirement bucket" to 100% funded, contributions and investment return, Mr. Ailman said at the board meeting. If less money comes from contributions, more will need to come from investment returns, he explained.
The actuaries reported that CalSTRS' funding levels are about 5% ahead of expectations set in 2014 when CalSTRS adopted its plan to be fully funded by 2046, Mr. Ailman said, exclaiming, "Hot Dog!" He then pointed out that was because the portfolio returned 27% in fiscal year 2021, which is a 60-year event and should not be counted on.
Mr. Ailman said that the board would be essentially spending its winnings in a time of inflation which is "a serious problem for a retirement fund."
While he said he was not making a recommendation to the board, he urged the board to increase contribution rates "because I want less pressure on me and the investment side" to produce another 27% fiscal year return.