Originally published February 2, 2012 at 4:25 p.m., updated February 2, 2012 at 5 p.m.
The board overseeing the nation's second-largest public pension fund on Thursday lowered the fund's investment forecast for the second time in 14 months in a move that acknowledges the financial strain of lower market returns in the years ahead.
The California State Teachers' Retirement System board of directors voted 9-1 to lower its assumed annual investment return from 7.75 percent to 7.5 percent. The move will increase the state teacher pension system's projected unfunded liability by $5.9 billion.
It also is important because as the fund makes less money through investments, it needs more from rank-and-file teachers, school districts or the state's general fund.
According to a staff report, only two out of 11 systems with assets over $50 billion besides CalSTRS have reduced their assumptions since 2007-08. They include the state pension systems in Wisconsin and New York.
Public pension systems have come under scrutiny for what some view as generous benefits and unsustainable liabilities for taxpayers. Gov. Jerry Brown, a Democrat, has presented a pension-reform plan that is now before the Democratic-controlled Legislature and has urged lawmakers to address the problems this year.
He sent a letter and his proposed legislation Thursday to lawmakers pushing them again to act.
"Continuing these plans in their current form will put taxpayers on the hook for substantial costs now and in the future," Brown wrote. "Urgent and decisive action is imperative."
In taking their vote Thursday, members of the teacher pension board said they would err on the side of caution amid stock market volatility.
"I would prefer the risk associated with adjusting the rate of return a little bit lower and hopefully we'll be surprised at the upside, rather than taking the higher rate of return with a less than 50 percent probability," said attorney Michael Lawson, who was appointed by Brown in October.
The board last lowered the assumed rate of return in December 2010, when it was reduced from 8 percent. That was the first time in 15 years it had taken such action.
Unlike the larger California Public Employees Retirement System, the teacher pension fund needs legislative approval to receive a greater contribution from the state's general fund.
The CalPERS board has not taken an action similar to the one taken Thursday by the teachers board. A CalPERS consultant last year recommended reducing that fund's estimated annual return to 7.5 percent, but the board decided to stick with 7.75 percent. The fund covers California state and local government workers
Critics have said such an assumed rate of return is unrealistic and say pension funds should be far more conservative in their estimates.
Pedro Reyes, a proxy on the teachers' fund board for state Finance Director Ana Matosantos, was the only member to vote against the reduction. He said he hesitates changing the investment rate while the stock market remains volatile.
"If we act now to change it as it's changing, we're going to be here in a year based on what's happening to the market," Reyes said.
He said it was more prudent for the fund's board to look "30 years out."
As of the end of 2011, the teachers' pension fund was valued at $144.8 billion. Its value is down from a peak of $172 billion in 2007. CalSTRS manages the fund for about 440,000 teachers and 167,000 retirees and has $56 billion in unfunded liabilities.
CalPERS runs a $237.5 billion pension system for more than 1.6 million state employees, school employees and local government workers. The total is down from $251.4 billion in 2007. That system has an unfunded liability of at least $75 billion.
The governor's proposal calls for increasing the retirement age to 67 for new, non-public safety employees and having local and state workers pay more toward their retirement and health care. It would require all new and current employees to contribute at least 50 percent of their retirement costs; some public employees now contribute nothing from their paychecks.
He would move new public employees into a hybrid plan that blends pensions with 401(k)-style programs. Brown also wants to raise the age state employees are eligible for full retirement benefits from 60 to 67 to align with Social Security.
For new employees, he wants to calculate pension benefits based on the highest average annual compensation for three years, rather than the current one-year system, which critics call a form of pension spiking.
Californians for Retirement Security, a coalition representing more than 1.5 million public employees and retirees, described the governor's proposal as "an unprecedented and unacceptable assault" on current and future public employees.
Conservatives say the governor's plan doesn't go far enough because it doesn't make changes to current workers' benefits, a move the legislative analyst has said would be legally questionable. One Republican group is pushing a ballot initiative to move new public employees to a 401(k)-style program.
Also on Thursday, CalSTRS staff prepared six different scenarios for raising contributions from the state, school districts and teachers starting in 2016 in an effort to help the Legislature figure out how to fully fund the pension system.
The teachers fund receives $5.5 billion a year from the state, school districts and teachers but says it needs at least $4 billion a year more to be sustainable. That amount will grow by $500 million now that the investment forecast is lowered to 7.5 percent.
The consultant's report suggested the teachers' pension fund adjust for longer lifespans and smaller pay raises for the state's teachers.
Board member Jerilyn Harris, who represents retirees, said there are teachers who can't afford dental insurance. "These are scary times," she said.
Both the governor's new appointees challenged the consultants on why they used some overly assumptions. Brown had said last year that he wanted to appoint board members with greater independence and stronger financial backgrounds to public retirement boards.
Lawson and Paul Rosenstiel, a former deputy state treasurer, asked the consultants why they assume teacher wages will be higher than they have been for the past 30 years.
The consultants recommended assuming teacher wages would grow 0.75 percent above inflation even though their wages have actually gained just 0.3 percent over the last 30 years. Nationwide, the consultants said wages have been 0.9 percent above inflation, which they projected at 3 percent.
"As dedicated as teachers are, at some point it's going to get harder and harder to retain teachers" if their wages don't keep pace with national trends, said the consultant, Mark Olleman.