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Calstrs Underfunded By $42.6 Billion

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Yes, their annual report is two months late for fiscal year July 1, 08 to June 30, 09. I wonder what happened during that time....

I am informed that the report will be released at the end of this month.

 

In some fairness to CalSTRS, most if not all of the other public pensions and endowments went down as well. One of the best, Yale endowment with superstar Chair, David Swensen, the author of "Unconventional Success", lost 25% after posting 20 years of positive gains.

Still CalSTRS is historically a very modest and conservative style of investing lost that much money. It is frightening. It is a wonder that they can speak to the board and the public with a straight face and have credibility.

I agree that they should have done a better job of protecting the fund.

Steve

 

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I heard Jack Ehnes say once that 75% of CalSTRS funding comes from investment returns. At the time (circa 2007) I was surprised, because I was thinking that they were probably more dependent on current contributions (similar to the great Ponzi scheme of Social Security) than just 25% of their needs.

 

But I wonder what it is now.

 

How did they pay for the new building?

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SOLUTION:

 

Change the calculation formula to only payout at an age factor of 1.0 rather than the exorbitant current 2.4.

The new change would only apply to those hired today and going forward.

 

These new hirees would need to save in their own high-quality, low-fee, 403b account.

 

The same solution will work for Social Security.

 

In other words, people need to save for their own retirement. They would live according to what they have saved over a 35 or so year work life. If they don't save, they don't retire, or they move in with their children and not soak the government.

Edy

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Hi Edy,

My questions are in red.

Have a good day,

Steve

 

SOLUTION:

 

Change the calculation formula to only payout at an age factor of 1.0 rather than the exorbitant current 2.4.

The new change would only apply to those hired today and going forward. Whats the rationale for 1.0%, why not .5% or less? or get rid of pension plans period.

These new hirees would need to save in their own high-quality, low-fee, 403b account. What about those teachers who work for school districts that do not have this "high quality, low-fee, 403b account"? And there are plenty of them.

 

The same solution will work for Social Security. To privatize it?

 

In other words, people need to save for their own retirement. They would live according to what they have saved over a 35 or so year work life. If they don't save, they don't retire, or they move in with their children and not soak the government.

 

What about those teachers who don't save get too old to work, become disabled or sick and have no children. Then there are the teachers who had to care for elderly parent(s) (because the parents did not save for retirement) or care for a

mentally or physically disabled a dult child?

Edy

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Hi Edy,

My questions are in red.

Have a good day,

Steve

 

SOLUTION:

 

Change the calculation formula to only payout at an age factor of 1.0 rather than the exorbitant current 2.4.

The new change would only apply to those hired today and going forward. Whats the rationale for 1.0%, why not .5% or less? or get rid of pension plans period.

These new hirees would need to save in their own high-quality, low-fee, 403b account. What about those teachers who work for school districts that do not have this "high quality, low-fee, 403b account"? And there are plenty of them.

 

The same solution will work for Social Security. To privatize it?

 

In other words, people need to save for their own retirement. They would live according to what they have saved over a 35 or so year work life. If they don't save, they don't retire, or they move in with their children and not soak the government.

 

What about those teachers who don't save get too old to work, become disabled or sick and have no children. Then there are the teachers who had to care for elderly parent(s) (because the parents did not save for retirement) or care for a

mentally or physically disabled a dult child?

Edy

 

Hello. Good questions. I will try to address with my opinion, of course.

 

The rationale for 1.0 was simply to provide a bit for those who have those circumstances you mention. That amount would provide perhaps only enough for them to buy food and not have to beg, or dumpster dive, an unpleasant alternative for sure for a college educated teacher. I would be okay to lower it to .5 or even 0 as long as the infratstructure is in place for these folks to have the "high-quality, low-fee" alternatives necessary for them to save hundreds of thousands, or more, in their 403b or 457 over 35 years. In fact, I feel the IRA should be available to teachers as well.

 

As for quality options, there needs to be some mechanism, perhaps legislated, that requires all organizations offering 403bs to have something like the CALSTRS Pension 2. If we can get rid of or reduce the CALSTRS age factor of 2.4, the districts MUST offer quality options and not just the stinko high-fee insurance ripoffs.

 

As far as those who did not save, well, face the reality. As for disabled, etc., of course, we need some mechanisms in place so as to live up to our mantra of being an advanced country with many benefits of living under this flag.

 

My entire point is that the individual needs to take some responsibility for himself and not call on the government to do everything. Additionally, schools, districts, hospitals, etc. MUSTTTTTT offer quality options in which to save.

 

As for privatizing part of SS, I like that idea. Actually, SS should only provide the equivalent, if anything, of today's dollars the amount of about $300. That would provide for food. The rest needs to come from what the individual saves in an IRA/401k/457, etc. The government should back out of that "support till the grave" mentality. This, of course, could only be applied to those born after 1980 or so--those who have enough time to save enough to live in retirement.

 

Why don't you join me in making this happen?

 

Edy

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Hi Edy,

My questions are in red.

Have a good day,

Steve

 

SOLUTION:

 

Change the calculation formula to only payout at an age factor of 1.0 rather than the exorbitant current 2.4.

The new change would only apply to those hired today and going forward. Whats the rationale for 1.0%, why not .5% or less? or get rid of pension plans period.

These new hirees would need to save in their own high-quality, low-fee, 403b account. What about those teachers who work for school districts that do not have this "high quality, low-fee, 403b account"? And there are plenty of them.

 

The same solution will work for Social Security. To privatize it?

 

In other words, people need to save for their own retirement. They would live according to what they have saved over a 35 or so year work life. If they don't save, they don't retire, or they move in with their children and not soak the government.

 

What about those teachers who don't save get too old to work, become disabled or sick and have no children. Then there are the teachers who had to care for elderly parent(s) (because the parents did not save for retirement) or care for a

mentally or physically disabled a dult child?

Edy

 

Hello. Good questions. I will try to address with my opinion, of course.

 

The rationale for 1.0 was simply to provide a bit for those who have those circumstances you mention. That amount would provide perhaps only enough for them to buy food and not have to beg, or dumpster dive, an unpleasant alternative for sure for a college educated teacher. I would be okay to lower it to .5 or even 0 as long as the infratstructure is in place for these folks to have the "high-quality, low-fee" alternatives necessary for them to save hundreds of thousands, or more, in their 403b or 457 over 35 years. In fact, I feel the IRA should be available to teachers as well.

 

We have been for years asking for "high-quality, low fee" options on this website and using the media (LA Times, NY Times, AFT newspaper "shark attack" and US News and world report). We tried to reform insurance code 770.3 with AB2506 and were crushed by the powerful insurance lobby in Sacramento. The 457b plan shows promise because it is a group plan, not an individual plan who dominates the 403b. I would like that the 403b go by the wayside and die and use the 457 instead. But that is not going to happen soon. But its worth discussing further

 

As for quality options, there needs to be some mechanism, perhaps legislated, that requires all organizations offering 403bs to have something like the CALSTRS Pension 2. If we can get rid of or reduce the CALSTRS age factor of 2.4, the districts MUST offer quality options and not just the stinko high-fee insurance ripoffs.

I have been on the LAUSD oversight committee and fighting just to get our CFO to respond to our motions to have low cost alternatives. I would like to hear more of your ideas to change districts plans, as you said and I agree, districts need to step up to the plate if CalSTRS is cutting back

 

As far as those who did not save, well, face the reality. As for disabled, etc., of course, we need some mechanisms in place so as to live up to our mantra of being an advanced country with many benefits of living under this flag.

 

My entire point is that the individual needs to take some responsibility for himself and not call on the government to do everything. Additionally, schools, districts, hospitals, etc. MUSTTTTTT offer quality options in which to save.

 

As for privatizing part of SS, I like that idea. Actually, SS should only provide the equivalent, if anything, of today's dollars the amount of about $300. That would provide for food. The rest needs to come from what the individual saves in an IRA/401k/457, etc. The government should back out of that "support till the grave" mentality. This, of course, could only be applied to those born after 1980 or so--those who have enough time to save enough to live in retirement.

 

I told you some of the stuff that I have been involved in the last 15 years and some things have changed, but there needs a lot more. As far as taking more responsibility, if I understand what you are saying is that pension plans have now become some kind of welfare system and it made teachers too dependent. In other to wean teachers away from this institution is to force them to save, by taking away this benefit. Those policies will not gain any political or policy support. I think you have to try and educate teachers first. I am all for taking responsibility and I believe this site is all about taking responsibility for retirement planning. You see how many teachers come here and how many ask the wrong questions, most posters are asking how to get my money out! What can you do about that? I don't know.

 

CalSTRS will no doubt be offering some kind of 2 tier system that you might like because of the liability gap. I don't think that gap is to be blamed on the individual teachers as much as it should be on the pension traders who decided to take unnecessary risk with the assets. I think SS should be run like a pension system. The reason why I get more money from my pension than a SS recipient is because pensions are invested in the stock market and bonds. SS is just pay as you go and has been destroyed by politicians.

Why don't you join me in making this happen? Those are giant steps you outlined. I have some problems with the ethical part of idea of throwing people out into the street because they have not saved. Most people do not save now and will have to, quoting you: "well, face the reality". But that aside, what exactly are you asking from me? For example, what little steps have you done to "make this happen"? I have outlined some of the stuff than I, other advocates, Dan's website here, my teachers' union, have already done. We do not want to reinvent the wheel.

I will be meeting with some friends this Thursday in Los Angeles to discuss the next investment workshop that UTLA, teachers union, will be sponsoring this spring. We need all the help we can get. Again these are some of the on going activities that we are actually doing right now. What have you done that has not been tried?

 

Edy

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I came across this in my inbox:

 

>From School Services of CA

>

> Appropriateness of STRS' Investment Return Assumption

>

>In a further indication of the difficult decisions that will face

>the California State Teachers' Retirement System (STRS) in the

>months ahead, STRS' Consulting Actuary provided the Teachers'

>Retirement Board with an analysis of STRS' current investment return

>assumption for its basic retirement program, known as the Defined

>Benefit (DB) Program. STRS regularly re-evaluates that assumption,

>but the analysis provided on February 5, 2010, was not part of that

>regular re-evaluation. Instead, it was sought by the Board following

>the adoption of a new asset allocation in 2009. The purpose of the

>analysis/presentation was to help the Board select an investment

>return assumption to be used in the actuarial valuation to be

>performed as of June 30, 2009. Use of an alternative investment

>assumption would impact the DB program's funded ratio, as well as

>the additional contribution rate needed to address STRS' unfunded

>liability.

>

>Seventy-five percent of the assets needed to pay STRS benefits come

>from investment returns. STRS currently assumes an 8% return on

>investments for its DB program, and has done so since 1995. Its

>consulting actuary explained that a two-step process is used to

>select an investment return, with the first step being to identify a

>range of returns that can reasonably be expected over the long term,

>and the second step being the more subjective selection of a single

>point from within that range. The actuary recommended the investment

>return assumption be set conservatively between the 50th and 75th

>percentiles-6.8% to 8.3% in this case.

>

>A second key factor in selecting a specific investment return

>assumption is the inflation adjustment. STRS uses a 3.25% assumed

>rate of inflation. Though the actuary found that to be appropriate,

>it also noted some justification for moving to a slightly lower

>assumption, such as 3.00%, particularly if the investment return

>assumption were lowered. A reduction in the assumed rate of

>inflation would impact the current 4.25% annual wage and payroll

>increase assumption.

>

>Other factors cited by the actuary that should be considered in

>selecting a specific investment return assumption include

>underperforming the assumption, which could require additional

>contributions, stability, financial impact of assumption, and what

>other statewide systems are doing. For example, 40% of public funds

>use just under 8% (specifically 7.95%), and California's Public

>Employees' Retirement System (PERS) uses 7.75% as its investment

>return assumption.

>

>The consulting actuary opined that the current 8% investment return

>assumption is reasonable, but that the Board might want to consider

>making a change-specifically, a small reduction in the assumption.

>The actuary said that a small reduction "would also be appropriate."

>The actuary explained that the 8% return can no longer be achieved

>with minimal risk, and that a lower assumption would decrease the

>risk of underperformance in the future.

>

>However, lowering the investment return assumption would show up in

>the June 30, 2009, valuation as a decrease in the funded ratio-or,

>phrased differently, as an increase in the system's unfunded

>liability-and an increase in the additional contribution rate

>needed. Based on the 25% investment loss for the year ended June 30,

>2009:

>

> * If the 8% investment return assumption were retained,

>additional contributions of 14% of pay would be required, and the

>plan would have a funded ratio of 77.1%.

> * If a 7.75% investment return assumption were used, additional

>contributions of 17% of pay would be required, and the plan would

>have a funded ratio of 74.7%.

> * If a 7.5% investment return assumption were used, additional

>contributions of 20% of pay would be required, and the plan would

>have a funded ratio of 72.3%.

>

>Put differently, for every 0.25% reduction in the investment return

>assumption, the required contribution rate would be increased by

>about three percentage points, and the expected funded ratio as of

>June 30, 2009, would be reduced by about 2.4 percentage points.

>

>Finally, the consulting actuary recommended that the Board consider

>increasing the difference between the investment return assumption

>for the Defined Benefit Supplement (DBS) and Cash Balance (CB)

>Benefit Programs. The assumed return on the DBS and CB assets is

>currently only 0.25 % less than that of the DB program, but the

>change in asset allocation for assets in the DBS and CB Benefit

>Programs has resulted in the expected return on investment being

>0.50 % lower than expected on DB assets. Thus, consideration should

>be given to lowering the investment return assumption for the DBS

>and CB programs to be 0.50% less than the DB Program.

>

>The investment return assumption was an informational rather than an

>action item, so the Board did not vote, but instead discussed the

>issue and gave direction to STRS' staff and its actuary. Three board

>members expressed their readiness to use a lower investment return

>assumption, but two favored 0.25% less while the other favored 0.50%

>less. Other board members wanted more information before they voted

>or were silent. Because the assumptions are to be utilized in

>modeling the actuarial valuation to be performed as of June 30,

>2009, the Board requested that the actuarial valuation that was to

>have been provided at the June Board meeting be delayed until

>September, if necessary, to allow discussion, decision, and

>incorporation of any changed assumptions in that valuation.

>

>STRS already plans to introduce 2011 legislation to increase

>contribution rates (see STRS to Consider Increasing Contribution

>Rates). Board action to lower the investment return assumption for

>the DB would require that contribution rates be increased further.

>We'd expect all anticipated contribution rate increases to be

>incorporated in the 2011 legislation, but the big issue will be who

>gets stuck with the bill. Stay tuned . . .

>

>-Deborah Harmon

>

>posted 02/09/2010

>

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Thanks AC,

The assumption has been discussed frequently and as you know its very political and sensitive. They will have to lower those assumptions to what John Bogle has said for years. The stock market returns since 1926 to 2008 looking at the GDP, dividends, PE ratios and corportate growth is 10.4%. These data does not include the horrific crash in the last 1.5 years, BTW http://www.crestmontresearch.com/pdfs/Stock%20Waiting%20For%20Avg.pdf ://http://www.crestmontresearch.com/pd...0For%20Avg.pdf

But Mr. Bogle says you have to factor in taxes, inflation and those d irty little words aways left out in these reports--transaction costs, fees and expenses. The real return to the individual investor is in the area of 6-7% from Bogle's books. Looking forward, the returns are expected to be less, but nobody knows for sure.

CalSTRS as well as most pension and endowments must reflect this reality.

Have a good day,

Steve

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"Change the calculation formula to only payout at an age factor of 1.0 rather than the exorbitant current 2.4."

 

1) The 2.4 factor does not kick in until age 61 1/2. At age 55, for example, the factor is 1.6.

 

2) I will probably have 40 years of service in when I retire. 40 years of service ... Do you believe that a 1% factor after 40 years of service is appropriate? I understand your proposal would apply only to new hires, but what about new hires who end up with the same amount of service?

 

3) Your 1% solution would leave teachers with substantially less income after contributing to their 403b plans. How do you suppose this will affect attracting people to the profession? Do you have any idea of the difficulties school districts have had in recruiting new people?

 

4) You want teachers to operate in a 401K-type environment. Does your proposal include a requirement that school districts match employee contributions to their 403b accounts?

 

5) Just so folks understand the math behind the 1% plan, this person is proposing a 58% decrease in the payout of an age factor for those who retire after age 61 1/2.

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Why hasnt any one been paying attention to the basic math of the funding problem?

 

According to the actuary's report 75% of the assets needed to pay benefits to STRS retirees comes from investment returns, 25% from contributions by the various parties- employees, employer and the state. According to the consulting actuary if the plan maintains its 8% interest assumption on investment returns, then additional contributions of 14% of pay will be needed. If the assumed rate of return on investments is reduced to 7.75% then the additional contributions of pay will be increased to 17%. Indeed for each .25% decline in the interest assumption below 7.75%, the required contribution rate would have to increase by 3%. At the same time the funded ratio will decline by about 2.4% for each .25% decline in investment return.

 

Does anyone know what this means? Will plan participants be required to make additional contributions to perserve the same level of benefits. Will local government employers be required to make additional contributions?

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Intruder,

 

I suspect that teachers and districts will need to make greater contributions to STRS. There may well be other measures that are needed. I agree with you that there should be far more attention paid to, as you put it, the basic math of the funding problem.

 

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Again, if a person wants, and/or deserves, a substantial retirement income, that person should save a healthy amount over several years in a high quality, lowwww fee product. School districts should offer these products and in some way, not sure how just yet, be required to offer products such as Fidelity, Vanguard, TRPrice, TIAA-Cref.

 

Does it make any sense that an individual make $499,000 on the CALPERS pension??? This is the same type issue.

 

I do not believe a person should come into this profession for the pension. Rather, he/she should come into it for the idea of developing young people. I, too, am a teacher, and am tired of seeing folks buy their daily lattes and SUVs or other new cars every 4 years or so and then turn around and say they cannot afford to save for retirement. I agree with Steve that more education of educators needs to take place.

 

We need to all write letters/emails to our representatives to change these retirement programs and at the same time see to it that all school districts/hospitals, etc. offer the quality products mentioned above.

 

All new hirees of any job need to be given some information on the 403b/IRA/401k. This is a start. The money currently taken from a person's pay that goes to STRS should go into the person's 403b, for example. As time goes on, that person should increase the amount. IRAs should be available to public school teachers. The saving limits should increase to about $25000 or so.

 

YESSS!!! I think it is appropriate that new hirees have a far lower STRS take while they have many years to save. The details still need to be ironed out, but overall, that would be a better plan than the current 2.4 factor. Our government is going broke and we can make a difference by not getting such pensions and having the folks save to pay for their cruises, etc.

 

Edy

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Edy :

 

Lowering the benefit accrual for new hires will not have any impact on the $42B deficit for accrued benefits in STRS which can only be fixed by larger contributions from employees, the SDs and the state of at least 14%.

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Does it make any sense that an individual make $499,000 on the CALPERS pension???

 

Can you identify one teacher making that income on a CalSTRS pension? Ridiculous.

 

I, too, am a teacher, and am tired of seeing folks buy their daily lattes and SUVs or other new cars every 4 years or so ...

 

Right. We teachers are just loading up with Starbucks and new cars, aren't we?

 

... the current 2.4 factor ...

 

Again, this is available only those who are 61 1/2 or older. As I pointed out in a earlier post, the factor is far lower for younger retirees.

 

Our government is going broke and we can make a difference by not getting such pensions and having the folks save to pay for their cruises, etc.

 

Do you think that there might be other explanations besides public employee pensions for the fiscal difficulties of states? Do you understand the effects of a severe recession on a state's revenues? The comment about cruises is simply laughable.

 

Edy

 

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