CalSTRS will consider lowering its official investment forecast in a move expected to require higher contributions from state taxpayers once again for the teachers’ pension fund. The cost to the state could be an additional $153 million starting with the next fiscal year.
The board of the $196 billion California State Teachers’ Retirement System will consider the change to its “discount rate” at a meeting next week in San Diego.
A staff recommendation released late Wednesday, citing economic conditions and other factors, calls for lowering the rate from 7.5 percent to 7.25 percent. Keeping the rate at 7.5 percent “is not recommended since the probability of achieving this return is less than 50%,” the report said.
The move comes a month after CalPERS agreed to gradually reduce its discount rate to 7 percent, a half-point reduction, over the next three years.
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If CalSTRS’ board lowers the discount rate next week to 7.25 percent, about 80,000 teachers hired after Jan. 1, 2013, would pay about $200 more a year in pension contributions. While pension contributions for most teachers are set by statute, contributions made by teachers newly hired in 2013 or after can be subject to CalSTRS discount rate decisions under the Public Employees’ Pension Reform Act, which took effect in 2013.
If the board opts instead to lower the rate to 7 percent, those teachers would see an annual contribution increase of about $400 a year. School districts’ contributions could be affected by the board’s decision, but not before 2021-22.
The recommendation to lower the discount rate is tied to a new report by Milliman Inc., CalSTRS’ consulting actuary, that calls for changes in assumptions that drive investment returns: Actuaries expect that over the next 30 years CalSTRS members’ life expectancy will increase by about three years. The actuaries also expect growth in wages, inflation, and investment returns will be more moderate than previously projected.
Public pension funds have been lowering their investment forecasts in recent years to reflect expectations of reduced returns. But the moves have come slowly and somewhat reluctantly because of political concerns: The less money they make from investments, the more the pension funds need from taxpayers and employees. That could intensify calls for pension reforms that could result in lower retirement benefits.
Three years ago, the Legislature agreed to raise contributions to CalSTRS by billions of dollars a year. Assembly Bill 1469 affected the state, local school districts and teachers themselves. For example, the annual contributions from school districts is growing from $2 billion to $6 billion, although the increases are being phased in over several years.
The 2014 law does give CalSTRS some latitude to impose higher rates on state taxpayers without going back to the Legislature for permission. According to the staff report, Gov. Jerry Brown’s budget proposal for the new fiscal year includes an additional $153 million for CalSTRS, bringing the annual contribution to $2.8 billion.
Although the CalSTRS decision could translate into higher pension contributions from school districts, Sacramento school officials welcomed the move.
“I am happy to hear that CalSTRS is making the right move to strengthen our pensions for our teachers,” said Jay Hansen, president of the Sacramento City Unified School District board. “They deserve to have the pension they’ve been promised, and they’re planning on having the pension they’re promised.
“The district will work with the teachers’ negotiating team to make sure we put in the increased funding that will be required. “We are all in this together, and we will solve it together.”