The California State Teachers' Retirement System (CalSTRS) could see its assets disappearby 2041if laws governing the contribution rates for members and their employers do not change, says the California state auditor

In its report, released on 18 August, the auditor stated that it had marked the funding of the defined benefit (DB) program of CalSTRS as a new high-risk issue. CalSTRS is the second biggest public pension fund in California with a market value estimated to be $154bn.

"The laws governing the contribution rates for CalSTRS members and their employers have not changed in decades. As a result, the defined benefit program is currently funded at 71%, well below the 80% considered necessary to fund a sound pension program," wrote the auditor.

"Additionally," the auditor said, "CalSTRS reports that the program's assets will be depleted in 30 years. Considering that pension obligations can extend beyond 50 years, unless the state takes steps, such as raising the contribution rates for members and their employers, it may be responsible for providing the necessary funding to ensure that CalSTRS' DB program meets its obligations."

Last month the scheme reported its highest returns in 25 years with no less than a 23.1% return on investments. It was the second consecutive year of excellent performance results for the scheme. However, due to losses of 25% during the crisis, the scheme is not yet in the clear.

CalSTRS itself at the time already complained that it had limited options when it came to addressing its funding deficit since, as the auditor pointed out, it cannot unilaterally raise contribution rates.

Jack Ehnes, chief executive officer at CalSTRS, at the time said: "Without legislative approval for increased contributions, even given this past year's impressive performance, CalSTRS would need a more than 20% investment return each year for the next four years to achieve full funding in 30 years, an impractical expectation."

The scheme sets aside funds collected as a percentage of teachers' and administrators' salaries each year to pay future pension obligations. In the American system these retirement benefits provide an incentive for teachers to make teaching a career.

The California state auditor's office is authorized to annually develop a risk assessment process. Two previous assessments of high-risk issues facing the State have been issued but none of them mentioned CalSTRS as a high-risk issue before.

Read the full report here.

19.08.2011

azeevalkink@wilmington.co.uk