Tuesday, October 18, 2011

Just What Every California Teacher Wants To Read

Outlook goes from bad to worse for CalSTRS under proposed accounting standards

As Brown and the Legislature prepare to wrestle over pension costs, an organization that sets the industry standards for how government finances are reported, the Governmental Accounting Standards Board, is proposing new rules for calculating pension fund liabilities – the amount of money such funds owe retirees.

The proposal wouldn't have much effect on CalPERS, the nation's largest public pension fund. But it would have an enormous impact on the second largest public fund, CalSTRS.

The California State Teachers' Retirement System already faces a funding gap of $56 billion – the difference between the money it expects to have on hand over the next 30 years and what it will need to pay out in benefits during the same period.

The accountants' proposal would triple the gap – on paper – to around $150 billion, said Ed Derman, deputy chief executive officer at CalSTRS.

"It complicates things," Derman said. "People are going to see this other number … and they're going to say, 'Oh my gosh, it's a much bigger problem.' "

Derman said CalSTRS' financial problem won't actually worsen. It will just look worse to accountants – and maybe elected officials. That could complicate CalSTRS' efforts to plug its funding gap.
As one teacher at school said today, "It's not like a $56 billion deficit isn't bad enough."

3 comments:

3rseduc / handsinthesoil said...

Wait so....there is a 56 billion deficit, shortage, whatever, and now there will be a 150 million one, in the future? Saying it will "be on paper" means, to me, that in reality, yes, we're screwed but if we just say it looks bad on paper, we can pretend it isn't as bad as it is.

It is scary that I will likely not have (Calstrs/my pension) retirement. But what frustrates me is that it is like social security- the money I pay goes to retirees now. So if the funding dries up by the time I retire, I get nothing, nada, not a cent, even though I paid into the system. Shouldn't everyone just get what they give? (At least the amount they personally give, the "matched by tghe district/Calstrs" amount can be dependent upon financial circumstances).

Darren said...

I think we're going to have to do what's going to have to be done for social security--people within x years of retirement get what they were promised (from the general fund, if necessary), and people after that will get stepped-up contributions or the retirement formula will be gradually tinkered with or something along those lines.

Anonymous said...

A large part of the problem here is that no one knows what the future returns to stocks will be *AND* these retirement funds are counting on stocks for most of their returns.

We have the $56B deficit today while making some fairly optimistic assumptions. If we make less optimistic assumptions, then we have a ~$150B deficit.

Except that these are both guesses!

We won't know what the true deficit (or surplus!) until the future arrives.

The argument here is whether a 7.75% annualized return on an investment mix of 60% stocks and 40% bonds (more or less) is a good guess. If it *IS* a good guess, then we have a $56B shortfall. And that shortfall is *today* even though we haven't run out of cash yet.

If, instead the pension funds gets only a 4% return on their investments, then the pension funds have a $150B deficit. Today.

If we see a 6% return going forward, then the deficit is somewhere between these two. Again, today.

So ... the deficit is *NOW*, except that we just don't know the size. It is "on paper" because of this lack of knowledge ... but not knowing the size of the deficit doesn't make it any less real.

-Mark Roulo