As pension costs consume ever-greater shares of public school budgets in California, parents and school districts are in need of better disclosure from the California State Teachers’ Retirement System (STRS), the financial intermediary whose activities determine those pension costs. No enterprise has a greater financial impact on California’s six million k-12 schoolchildren and their families, yet STRS provides them with no guidance. At a minimum, STRS should do the following:
- Stop burying volatility risk. Buried on page 29 of its most recent actuarial report STRS discloses that, “as a retirement system becomes more mature, it tends to be subject to increased volatility in the contributions needed,” and admits that STRS is just such a plan. As explained here, volatility risk means that, “just as a gambler’s chances of recouping accumulated losses worsen over time,” underfunded mature pension plans such as STRS face increasing difficulty in recovering from years in which investment performance falls short of STRS’s hurdle rate. When that happens, even more money must be diverted from classrooms to pension costs. To help citizens and school districts prepare, STRS should highlight volatility risk and explain and quantify that risk in simple terms.
- Report results more frequently. As reported here, public pension plans such as STRS are en route to a second consecutive year of investment returns falling short of their hurdle rates, leading to sizable increases in unfunded liabilities and exacerbating volatility risk. But citizens are in the dark because — unlike the financial intermediaries in which STRS invests— STRS discloses its performance only once a year. As an aggressive advocate of good corporate governance, STRS knows better. In the spirit of “what’s sauce for the goose is sauce for the gander,” STRS should report financial results no less frequently than the financial intermediaries in which it invests.
- Stop misleading the public about who is at risk. In a press release accompanying its most recent actuarial report, STRS incorrectly claims that its financial health “ensures the financial future of . . . educators and their families.” But educators and their families will receive their pension benefits no matter what, because their pensions are unconditionally guaranteed by taxpayers. The financial futures most affected by STRS are those of (i) current and future schoolchildren and teachers, whose classrooms, jobs and salaries are squeezed whenever school budgets are invaded to meet pension costs, and (ii) taxpayers, who must pay higher taxes or suffer cuts in services to make up for pension deficits. STRS should stop misleading the public about who is at risk.