Issue link: http://digital.copcomm.com/i/22108
would have increased the unfunded liabil- ity from $41 billion to $45 billion. CalSTRS is currently funded at the level it was fund- ed in 1990. Can you give us a simple analogy to explain the situation with the unfunded liability? CHRIS AILMAN: The Investment Committee here at CalSTRS knows I love to use analogies, so let’s use a mortgage. For all of us, the bank or mortgage company tells us how much we need to pay. In the CalSTRS case, the actu- ary tells us the rate, which we call the normal cost of the pension. However, since about 2000, we have been paying less than the required rate, in other words underpay- ing the mortgage bill. Since it’s financed over 30 years that underpayment com- pounds to a big number. Looking at it today, the bank, or our actuary, says we need to pay more per month to pay off the mort- gage and make up for the lost ground from the past few years. When was the unfunded liability at its lowest? CHRIS AILMAN: In 2000, CalSTRS had a $1.9 bil- lion actuarial surplus. In its 96-year history, CalSTRS has been fully funded only three years before the decade of the 2000s. The Internet bubble and 9/11 plunged the coun- try into a major recession and the invest- ment portfolio declined. How do you get the fund back up to a respect- able amount? CHRIS AILMAN: Pension experts consider 80 per- cent funding to be a healthy level. This lat- est move puts CalSTRS at the 76.5 percent funding level, increasing the gap between the assets at hand and the pension obliga- tion, which hasn’t changed. Sure, that’s be- low what’s considered healthy, but it’s not insurmountable. But it is important to re- member that the specific funding level is not as important as having sufficient funds to be able to pay benefits into the indefinite future, and given our current assets and li- abilities, that is not the case unless contri- butions are increased. A pension plan should range between 80 percent and 100 percent to be considered a healthy plan — 90 percent would put us right there. As mentioned before, there are just two ways to get there. One is bringing in more contributions, and obviously, that will take time. The other is through higher than expected investment returns. It’s not insurmountable. We did it before, in the 1980s through the 1990s, with nearly dou- ble-digit average annual returns. However, the past 120 years of U.S. stock market his- tory and our current environment tell us it is not reasonable to expect that pace of in- vestment income to return. I want to point out that the current economic malaise is also not likely to persist for decade after de- cade. To make a higher than expected re- turn we either take on more risk or find opportunities to generate profit that others miss. The board has already decided we don’t want to take on more risk to try to earn a higher return. So the key to better results is to tactically manage the portfolio in the global market and find growth op- portunities around the world. I think our diversified portfolio will find pockets of op- portunity as it has in the past. I wish I could tell you we can make it back to 90 percent funding as fast as we did in the 1980s to 1990s, but right now that is not very likely. Is there a silver lining to all this? CHRIS AILMAN: First of all, I’d like to remind our members that CalSTRS has been around since 1913 and survived the Great Depres- sion without missing a payment, so we’ll survive this crisis. I also want to assure our members that their defined benefit is guar- anteed by both the California and U.S. con- stitutions as well as through case law. The state of California, as the system’s guaran- tor, will be obliged to pick up the tab should all of the assets of CalSTRS be depleted. Fi- nally, even though rates may go up, or new members may be faced with 401(k)-type defined-contribution plans or higher con- tributions, our current members can count on the defined benefit they signed up for. You are 1 degree of separation from changing your world. Which 1 will it be? 76 affordable degrees of distinction -100% online, including: M.Ed., Teaching - Instructional Leadership (K-12) M.Ed., Teaching - Special Education Master of Public Health M.Ed., Teaching - Elementary Reading * M.Ed., Teaching - English Language Learners* M.Ed., Teaching - Curriculum & Instruction for Elementary Teachers* *Enrollment opens September 1, 2010 8 and 16 week graduate level courses start monthly at only $300 per semester hour. AWARD WINNER 2009 Ralph E. Gomory Award for Quality Online Education Let us help you get started today. 1.877.777.9081 studyatAPU.com/education Respected. Affordable. Online. DECEMBER 2010 • JANUARY 2011 | www.cta.org 27