By Ed Mendel
Monday, April 7, 2014

On a split vote, the CalSTRS board last week gave members in two unusual retirement accounts, which have a guaranteed minimum return, a $300 million credit from a surplus.

To some board members it looked like bad timing and a policy out of step with the times. CalSTRS is seeking a multi-billion dollar rate increase for the main under-funded pension system.

A board member representing Gov. Brown’s finance department, Eraina Ortega, urged a delay until the policy adopted in 2006 during different economic conditions could be reconsidered at the next board meeting.

“I do think we have to be conscious as well of what those perceptions might be when we are seeking a funding solution to the defined benefit (pension) program,” Ortega said.

Others said they wanted to keep the promise made to members when the board adopted the policy, which gives members a credit when surpluses above the amount needed for the guaranteed return reach a certain level.

“I fully understand the angst that’s around it, and I fully support taking a look at the policy,” said board member Dana Dillon. “But I find it very problematic to tell our members now that we have butted up against it, we are going to do something else.”

The board approved the $300 million credit but, as suggested by several members, will revisit the policy during the next year. Dillon is the only current board member who served in 2006 when the policy was adopted.

Like most government employees, CalSTRS members have the option of voluntarily putting money into an employer-provided “defined contribution” retirement plan, a 401(k)-style individual investment plan that CalSTRS calls Pension2.

But CalSTRS is a “hybrid” plan with two individual investment plans that, unlike a typical 401(k), have a guaranteed minimum investment return based on 30-year treasury bonds, 3.75 percent last fiscal year.

The board was told last week that giving members an additional credit above the minimum during times of surplus should, in the long run, provide a yield close to the assumed rate of return for the CalSTRS investment portfolio, 7.5 percent a year.

The accounting is separate, but the money in the two individual investment plans is invested along with pension funds in the CalSTRS portfolio, valued at $181 billion at the end of February.

Awarding the credit, difficult with the current computer system, will cost $1 million or more, estimated Jack Ehnes, CalSTRS chief executive. He said the required staff time could slow work on the development of a new computer system.

A new actuarial report last week showed no major change in the main under-funded CalSTRS pension system. It still needs an additional $4 billion a year to project full funding over 30 years and, without a rate hike, could run out of money in 2046.

Unlike other public pension systems, the California State Teachers Retirement System cannot raise employer rates, needing legislation instead. After ignoring rate-hike pleas for nearly a decade, the Legislature is working on a funding solution.

Another CalSTRS difference is that members do not receive Social Security, in addition to their pensions, and most CalSTRS members do not receive employer-paid retiree health care.

To read entire column, click here.