CalSTRS increases state’s supplemental contribution rate

CalSTRS' board on Thursday raised the state's supplemental contribution rate for fiscal year 2021 by 0.5 percentage points to 6.311% just as pension plan and state officials are in discussions over future special payments in light of the state's expected $55 billion deficit due to the coronavirus pandemic.

"The state is anticipating significant economic impacts from the pandemic" resulting from the COVID-19 recession, a drop in state revenues and large increases in safety net program caseloads to support Californians affected by the crisis, said Gayle Miller, a CalSTRS board delegate for board member Keely Bosler, director of the California Department of Finance, at the board meeting.

There are multiple proposals to address the contribution increase for the state and school employers, she said.

Finance Department officials are having to make "incredibly difficult decisions," she said. "We look forward to continuing to work together," Ms. Bosler added.

In July 2019, the state made two special contributions of $2.25 billion on behalf of state employers to reduce their share of the unfunded actuarial obligation and $1.1 billion to reduce the state's share of the unfunded obligation. The state's supplemental payments are part of a plan to fully fund the pension plan by 2046, which helped boost the funding ratio of the $226.9 billion California State Teachers' Retirement System, West Sacramento, to 66% from 64%, said David Lamoureux, CalSTRS' deputy system actuary at the board's online socially distanced meeting.

Meanwhile, despite school closures, all employers paid their initial contributions due April 5, according to an enterprise risk management report to the board prepared by the staff.

"We do expect school budgets to be impacted due to lower than anticipated state revenues, and as a result, the board may be reluctant to increase contribution rates," the report noted. However, CalSTRS' staff has reached out to employers and is monitoring employer contributions for indications of non-payment, the report said.

Separately, CalSTRS CIO Christopher J. Ailman reported to the investment committee meeting that was also took place virtually Thursday that so far returns are flat for the fiscal year due to the impact of the coronavirus pandemic.

Market volatility and turbulence caused by the pandemic became significant in late February and spiked significantly in March, with volatility in late March exceeding the 2008 global financial crisis, Mr. Ailman said.

"The portfolio is stable," Mr. Ailman said. "The creation of RMS (risk-mitigation strategy) as an asset class, added value where equities have been so weak."

CalSTRS' risk-mitigation strategy made up 9.2% of the portfolio as of March 31.

The investment committee also adopted a fiscal 2021 work plan that continued its study of a low-carbon future and its impact on the portfolio, and includes a new study of the growth of Asia and its portfolio implications.

Part of the study of a low-carbon future will look into whether CalSTRS should dedicate part of its portfolio to a strategy addressing the risk of climate change.

The Asia study will take into account the expected growth in the region balanced by the ESG risk, including different political systems and accounting rules as well as the dynamics of the U.S.-China relationship, Mr. Ailman told the committee.

The study will look into necessary diligence steps and criteria to invest in Asia to protect the pension fund, he said. CalSTRS officials hope to start the study in the spring of 2021.