CalSTRS seeks to borrow more than $30 billion to manage cash

California State Teachers' Retirement System, the country's second-largest pension fund, may borrow more than $30 billion to help it maintain liquidity without having to sell assets at fire-sale prices, according to a new policy its investment committee will consider this month.

If approved, the policy will allow staff to borrow as much as 10% of the roughly $318 billion portfolio. The proposal calls for leverage to be used "on a temporary basis to fulfill cash flow needs in circumstances when it is disadvantageous to sell assets," a CalSTRS policy document said.

CalSTRS board members will review a first draft of the policy at its Jan. 11 meeting. A representative for the pension declined to comment.

As Pensions & Investments reported in November, the $317.8 billion pension fund's investment team wants to be able to use leverage across its entire portfolio in times of market distress by borrowing when there is low or negative cash flow, repaying the debt when flows normalize as well as employing derivatives to rebalance the portfolio. In both scenarios, CalSTRS would reduce leverage when the markets and cash flows normalize.

The California Public Employees' Retirement System board approved adding 5% leverage in 2021, adopting an investment strategy that could enhance returns but potentially increases the risk of losses during market downturns.

Meketa Investment Group, a CalSTRS consultant, said increased leverage poses minimal risk to the fund. CalSTRS already leverages 4% of its portfolio, and the new policy would not create a new asset allocation policy. Instead leverage would be used to smooth cash flow and as an "intermittent tool" to manage the portfolio, Meketa said in a board document.

The pension fund has an annualized return of 7.2% over the past five years, exceeding its 7% return target. In the 2022-2023 fiscal year CalSTRS posted a 6.3% net return.