Grim forecast for public pension funds in California and elsewhere

EdSource

John Fensterwald

December 29, 2022

CalSTRS, the pension fund for teachers and school administrators, recorded its first loss, for the year ending June 30, after a year with a record gain and a string of positive returns since the Great Recession. It was only minus 1.3%, dropping its portfolio to $301.6 billion.

But next year could be a lot worse for all of the big public pension funds, Politico reported Thursday in an article that focused on three states with Democratic governors “who have touted their records as fiscal stewards as they angle for a bigger role on a national stage.” They are Gavin Newsom of California, J.B. Pritzker of Illinois and Phil Murphy of New Jersey.

Pension funds in all three states are underfunded, and a recession, which many on Wall Street are predicting, could set back a timetable for recovery and eventually lead to higher employer contributions by school districts to both CalSTRS and CalPERS, the nation’s largest public pension fund. The latter serves county, state and local employees, including classified workers, such as classroom aides and bus drivers in schools.

CalPERS CEO Marcie Frost acknowledged a difficult year is coming in a statement to Politico, stating she sees “a challenging road ahead as major economies around the world continue to slow and market volatility grows. We understand these low-returning environments can put pressure on our employer partners and local government budgets.”

CalPERS reported an end-of-year loss of 6.2% in value. Both it and CalSTRS rely on an annual return of 7% on investment to meet current and future obligations to employees.

Since 2013, school districts’ pension contributions have more than doubled, from 8.3% of a teacher’s salary to 19.1% in 2020-21 to put the retirement system on track for full funding in 2046.

For the past two years, Newsom used budget surpluses to chip away a CalSTRS’ unfunded obligations and also twice applied $1.15 billion from the general fund to reduce districts’ immediate payments.

But with forecasts pointing to a substantial drop in state revenues, more state subsidies are unlikely in 2022-23, adding pressure on superintendents and school boards to balance their budgets. They’ll know more soon; Newsom will release the 2023-24 budget by Jan. 10.

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