California Pension Funding Provision Leaves State Uncertain

A 2014 California law – designed to make sure the state’s Teacher Retirement System remains funded in good markets and bad – is very likely to have a positive effect on CalSTRS’ health in coming years.

But there’s a downside: California’s annual pension payment now swings up and down with the market, leaving the state in a place of uncertainty.

From Bloomberg:

Beginning in mid-2017, California would pay less if the system bests its earnings assumption and more if it falls short, due to a formula that divides the responsibility for the unfunded liability between the state and districts, according to the Legislative Analyst’s Office, a nonpartisan agency that conducts research for lawmakers.

[…]

In a down market, “not only is the state getting less money from the way the tax structure is comprised, but it also forces them to increase their payments for their unfunded pension liability,” said Howard Cure, head of municipal research in New York at Evercore Wealth Management, which oversees $6.2 billion of investments. “It compounds the vulnerability of their tax structure.”

There is a limit to how high the state’s contributions could rise: 0.5 percent annually. That could slow the state’s progress toward eliminating the pension shortfall if the markets reverse course after a period of good years that allowed California to cut its contributions, said Ryan Miller, principal fiscal and policy analyst at the legislative office.

[…]

“This could certainly add to fiscal pressure on the state in the event of a down market,” Gabriel Petek, a credit analyst in San Francisco for Standard & Poor’s, said of the pension overhaul.

The provision is designed to bring CalSTRS up to 100 percent funding in 30 years.

There’s also a clause which allows the governor and lawmakers to review the terms of the measure every five years and make adjustments. That could lead to less volatility for the state; but it could also derail the stated funding goal for CalSTRS.