Fox & Hounds: Full Explanation Required From CalSTRS’s CEO

On February 19, California State Teachers’ Retirement System (CalSTRS) CEO Jack Ehnes appeared before a committee of the California State Assembly considering CalSTRS’s request for a $240 billion bailout, starting with $4.2 billion this year.

There is no question that CalSTRS needs the money.  Ehnes pointed out that, without the injection, the fund would be insolvent in thirty years.  (NB: outside financial economists think $240 billion is too little and thirty years too optimistic, but either way everyone agrees it’s a big problem.) As I’ve noted before, no fiscal issue is of greater importance to the next generation of Californians.

But there is a question about why CalSTRS needs help.  In that regard and according to two attendees at the hearing, Ehnes referenced the Great Recession of 2008-9 and claimed that “two-thirds” of CalSTRS’s deficit is related to investment problems.  Let’s evaluate that claim.

Assume you had some money to invest on July 1, 2003 and that you measure your investment performance annually on June 30 of every year.  Assume further that, as of June 30, 2013, your annual performance for the past ten years — including the Great Recession in the middle of that period — looked liked this:

2004: +17.38%
2005: +11.09%
2006: +13.21%
2007: +21.03%
2008: –   3.69%
2009: -25.03%
2010: +12.20%
2011: +23.10%
2012: +  1.84%
2013: +13.80%

Next, ask yourself what compound annual rate of return is produced by that series of investment returns.  The answer: 7.52% per annum. The two down years of the Great Recession were more than offset by eight up years, including six double-digit gain years. 7.52% per annum for ten years is a wonderful return. In all, it was a good decade for your investments, despite the Great Recession.

By now you’ve probably inferred correctly that the foregoing schedule is how CalSTRS’s investments actually performed over that period, through and including the Great Recession.   It’s hard to see how that positive investment performance led to CalSTRS needing two-thirds of $240 billion, but hopefully Ehnes has some math to back up his claim.  Also, he’ll have to explain how his claim squares with CalSTRS’s actuary reporting earlier this year that more than 70% of CalSTRS’s deficit is attributable to other factors.

Until then, take a peek at the growth of CalSTRS’s Actuarial Obligation and the ratio of Actual Contributions to Annual Required Contributions.  And if you’re interested in the causes of pension plan under-funding generally, see the just-issued report of the Society of Actuaries Blue Ribbon Panel on Pension Plan Funding.

Needless to say, any organization – especially a public organization run by public employees — seeking billions in public assistance should be completely forthcoming. CalSTRS is a huge financial intermediary, just like AIG was before its bailout in 2008, and no different than AIG’s CEO at that time, CalSTRS’s CEO must level with the authorities from which it seeks help.

But that’s not the only reason CalSTRS should provide full and clear disclosure.  Unlike AIG – which paid back its public assistance, plus a profit — Californians will never get back the money they are being asked to provide CalSTRS. Instead, they’ll just avoid having to spend more money. That’s because if CalSTRS does not get its $240 billion, Californians will have to inject more than $600 billion at the time CalSTRS runs out of money.   Given those facts and that CalSTRS is seeking one of the largest injections of public assistance in U.S. history, one would expect its leadership to go overboard in providing the fullest possible explanation to the citizens of whom it is asking for such a large sacrifice.

One way or another, CalSTRS must get its $240 billion.  If not, public education in California will not survive and the next generation will be thrown into chaos.  But first, citizens deserve the truth.  CalSTRS’s representatives must be completely forthcoming – and the sooner the better.

Link to original article: