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LAO update on the progress of the CalSTRS Funding Plan

The Legislative Analyst’s Office has just published the following post:

Update on the Progress of the CalSTRS Funding Plan

The LAO released a post on the progress of the California State Teachers’ Retirement System (CalSTRS) funding plan, which has the goal of paying down CalSTRS’ Defined Benefit program’s unfunded actuarial obligation (UAO) by the mid-2040s.

This post follows our March 2021 publication Strengthening the CalSTRS Funding Plan and provides an update based on CalSTRS’ most recent actuarial valuation (for the fiscal year ending June 30, 2020), which reflects investment returns of 3.9 percent. In addition, the post considers future impacts of CalSTRS’ historic investment returns in 2020-21 of 27.2 percent.

This unprecedented year-over-year volatility in CalSTRS’ investment returns will result in significant changes to the Defined Benefit program’s overall UAO and to the shares assigned to the state and employers—underscoring the complexity of the funding plan and the outsize effects of investment return volatility on the state’s share of UAO. Given this context, and other issues we raise in this post, we recommend the Legislature take action soon to make a few key changes to the funding plan.

Specifically, we recommend the Legislature amend statute to:

  1. allow the state’s contribution rate to increase by more than is currently allowed,
  2. determine a fixed proportional division of UAO between the state and employers, and
  3. enable CalSTRS to develop a standard amortization policy to address future UAO.

This post is available using the following link: https://lao.ca.gov/Publications/Report/4475

This article was released by the Legislative Analyst’s Office.