Worst-case scenarios for CalSTRS and CalPERS

CalPers know about your benefitsSometimes it’s good to consider worst-case scenarios. Maybe they won’t even happen, but it can help to look at every possibility. Two analysts have done that for California’s two biggest pension systems.

As of the most current figures, the California Public Employees’ Retirement System is 76 percent funded and the California State Teachers’ Retirement System is 67 percent funded. Most bond advisers peg sufficient funding at 80 percent or higher, so both funds are close to that. Both funds project a 7.5 percent annual return on their investments.

As CalPERS explained last May on its website:


  • “CalPERS investments have earned an average 7.6 percent annual return over the past 20 years and 9.4 percent over the past 30 years.
  • “CalPERS investments earned 13.2 percent in Fiscal Year 2012-13.
  • “CalPERS assumed rate of investment return is a long-term (20 years or more) average. Any given year is likely to be higher or lower than the assumed rate.” 

And last July, CalSTRS stated on its website:

“Continued growth in the equity market, coupled with a bias to U.S. companies, fed a second year of healthy investment returns at the California State Teachers’ Retirement System (CalSTRS), which closed the 2013-14 fiscal year with an 18.66 percent return on its investments. 

“The picture for the fiscal year July 1, 2013 to June 30, 2014 shows investment returns well above the actuarial assumed rate of 7.5 percent. On a long-term, portfolio-wide basis, CalSTRS’ returns reflect the following performance levels: 

“11.2 percent over three years

“13.7 percent over five years

“7.7 percent over 10 years

“8.4 percent over 20 years.”

But when those numbers came out last year, David Crane warned, “A few above-par years will have little impact on pension costs for California’s governments because pension liabilities greatly exceed pension assets and continue growing at a rapid rate.” A Democrat, pension expert Crane advised former Gov. Arnold Schwarzenegger. 

Worst case

So, what is the worst-case scenario? It’s that the pension funds make more modest growth, requiring taxpayers to pick up the tab for the gap between projections and reality.

Money manager John Mauldin looked at CalSTRS. Worst case, to be actually solvent he calculated CalSTRS requires an additional $30 billion per year starting now.

That $30 billion also is six times the $4.5 billion more a year CalSTRS concedes it needs to become solvent.

Ed Ring, Executive Director of the California Policy Center, likewise has estimated how much in annual payments it would cost to close his estimated $71 billion funding gap for CalSTRS. Using a 3.5 percent annual rate of return, Ring estimated the payment to fully fund CalSTRS would be $25.3 billion per year (Note: See Ring’s “Table: Impact of Lower Rates of Return on CalSTRS” in the embedded link).

Both Mauldin and Ring believe future CalPERS and CalSTRS pension fund rates of return on their investments are overly optimistic by half due to a stock market bubble and a failure to take economic recessions into account.

CalPERS funding

If it would take $30 billion per year more to fully fund CalSTRS, how much more would it take to also fund the even bigger CalPERS?

Ring described the problem of estimating the yearly payment to plug CalPERS’ pension funding gap:

“It’s worth noting that for CalPERS, we can’t even get data on how they break out their normal contributions and their unfunded contributions because doing so would require sifting through the financials of every one of their participating entities. But there is nothing uniquely troubling about CalSTRS. … Imagine what would happen if CalSTRS had to pay $25 billion per year … instead of what they actually paid in 2012, $5.8 billion?”

That is, a true accounting would be 4.3 times the current amount. He added, “Replicate these methods with nearly any pension fund in California, and you will almost always get similar results.” 

Add them up: $25.3 billion for CalSTRS and $25 billion for CalPERS. Total = $50.2 billion.

That $50.2 billion needed to be fully funded would amount to 44 percent of the $113.3 billion for the state general fund Gov. Jerry Brown proposed in January for fiscal year 2015-16, which begins on July 1.

Again, this is a “worst case” scenario. It probably won’t come to pass. The U.S. and California economies may continue to perform as expected, with stock market and real estate investments continuing to lift up the funds’ bottom lines.

But the opposite also is something at least to keep in mind.


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  1. John Moore
    John Moore 4 March, 2015, 09:24

    The worst case is a modest down year in the market, say 7.5%. That would result in a loss on the value of assets of 7.5%, assets that are only 76% of PVB (present value of benefits) for CaLPERS; but it would also result in a failure to earn 7.5% on PVB as required by the actuarial income rate of return. Down years result in two different losses. Up years only increase the market value of assets, but nothing is earned on the 24% deficit in assets (In the case of CaLPERS). Failure to take into account the occassional down year in the market(say every eight years) is a major flaw in Ca. defined benefit plans. If actuarys included a contribution for down market years, it be so expensive, it would show how Ca. DB plans are mathematically set up to go broke over time. Imagine another 28% loss(2008-9) in the market value of pension assets(don’t fail to account for a 7.5% failure to earn on PVB).

    Reply this comment
    • Wayne Lusvardi
      Wayne Lusvardi 4 March, 2015, 10:26

      As pointed out by former state budget analyst David Crane, even if CalSTRS and CalPERS meet their 7.5% target rate of return, their pension obligations are growing faster than that and would overwhelm their assets at some point in the future. Thus, the worst case scenario is plausible.

      it should also be noted that while CalSTRS is dependent on the state general fund budget for 6.3% of its contributions that it relies on investments for 83.7% of its funding, while CalPERS does not depend on the state general fund and relies on investments for 55.9% of its funding.

      The article is an exercise is asking the question: if CalSTRS and CalPERS did not meet their 7.5% target rate of return over, say, 20 years then how much in contributions from the state general fund would be needed? In a worst case scenario, unmet pension obligations would overwhelm the general fund budget and not just for one year.

      Reply this comment
      • maximilian
        maximilian 4 March, 2015, 13:44

        Wayne, thanks for the update.
        I spend a lot of time on CalPERS and CalSTRS sites working on pension issues and I’m always curious about the ‘elephant in the corner,’ healthcare contributions. If CalSTRS handles this at the local level and CalPERS must include this category in their calculations, is the 55.9% investment figure inclusive of the healthcare requirement? I have read conclusions on both sides; yes and no.

        Reply this comment
        • Wayne Lusvardi
          Wayne Lusvardi 4 March, 2015, 15:57

          I don’t know for sure but presume that the estimates provided by John Mauldin and Ed Ring do not include health care contributions.

          Health care would not be paid from proceeds from investments but from contributions (out of the general fund) for Cal-STRS.

          Cal-PERS members pay for health care if an employee retires early at 55 until age 65 and then when Medicare kicks in at age 65 they stop funding is my understanding. Some cities, however, promise to pay 100% medical coverage forever!

          Reply this comment
    • Rex the Wonder Dog!
      Rex the Wonder Dog! 4 March, 2015, 16:00

      John Moore gets what 99% of the population does not. When CalTURDS LOSES 28% of their value, like in 2008, the loss is not just the 28% for THAT YEAR, but the loss is the 28% for that year, PLUS the 7.75% it was supposed to earn that year PLUS the ROI going FORWARD on that 35.75% each and every year going forward. So an 8%, or 10% or 12% return on a 10, 15 or 20 years basis is not dispositive of meeting the obligations because just a ONE year loss of 28%+7.75%= 35.75%, that loss wipes out a 35.5% return on every subsequent year after 2008. For our math challenged GED trough feeders look at it this way. In 2007 CalTURDS had $300 billion, it should have had a 7.75% return- or $23.25 billion. Instead it fell to $260 billion. 7.75% of $260 billion is only 16.7 billion, when the fund should be returning 7.75% of $323.25 billion, or $25 billion….Get the big picture now GED Wonders???

      Reply this comment
      • SeeSaw
        SeeSaw 4 March, 2015, 20:18

        Someone who continues to refer to the country’s largest DB pension plan as “Calturds” does not even possess enough brain capacity to be qualified to obtain a GED!

        Reply this comment
        • Bill - San Jose
          Bill - San Jose 5 March, 2015, 13:23

          Yes. Yes he does possess the brain power to see a boondoggle.

          I have asked before how does a corrupt system have the nicest building in Sacramento?

          Next obvious abuse of the taxpayers please.

          Reply this comment
        • Rex the Wonder Dog!
          Rex the Wonder Dog! 6 March, 2015, 10:41

          Someone who continues to refer to the country’s largest DB pension plan as “Calturds” does not even possess enough brain capacity to be qualified to obtain a GED!

          Seesaw, I KNOW you are laughing at “CalTURDS” at home as you read it, because you have to admit, it IS FUNNY! 🙂

          Reply this comment
          • Ted
            Ted 6 March, 2015, 13:28

            See folks? This is why I have ALWAYS assumed that the Poodle is truly a kid about 12 maybe? He/She honestly thinks its funny!

          • Rex the Wonder Dog!
            Rex the Wonder Dog! 6 March, 2015, 18:04

            See folks? This is why I have ALWAYS assumed that the Dork is truly a kid about 4 maybe? He/She honestly thinks Marbury v. Madison was the very first case ever decided by the SCOTUS! And Dred Scott was second…Oh…wait… Citizens United must have been third then 😉

          • Ted
            Ted 9 March, 2015, 14:20

            Poor Poodle is still, of course, of a very limited imagination! God bless ya little buddy!

      • GED
        GED 24 December, 2016, 12:09

        Math challenged?

        Reply this comment
      • Jon Doh!
        Jon Doh! 6 July, 2017, 13:00

        More dog than wonder, based on the derogatory remarks about people who only have GEDs, when you yourself use the crass CalTURD name.

        Reply this comment
    NTHEOC 4 March, 2015, 10:54

    Sometimes it’s good to consider worst-case scenarios.
    LOL! ahh C’mon, for you DOOMERS it’s all the time! But I understand to keep the CWD thread up and running you need to recycle these type of articles continuously, even in a thriving economy…..

    Reply this comment
    • Wayne Lusvardi
      Wayne Lusvardi 4 March, 2015, 15:59

      Lack of a worse case scenario is why California has something called a drought. It was also the reason it had an Energy Crisis in 2001. Sorry, not Right or Left but newsworthy.

      Reply this comment
  3. S Moderation Douglas
    S Moderation Douglas 4 March, 2015, 11:44

    “If it would take $30 billion per year more to fully fund CalSTRS?”

    CalSTRS only pays out $13 billion a yearin pensions. What is the other $17B for?

    Reply this comment
  4. Ted
    Ted 4 March, 2015, 12:56

    What a joke
    worst case scenarios are the bread and butter of the fear mongering far right.
    utter waste of space Wayne.
    you’re better than this?

    Reply this comment
    • Ulysses Uhaul
      Ulysses Uhaul 4 March, 2015, 13:34

      Trotting out these pension tomes is sorta old news. Taxpayers make up any deficit….if it gets bad….just move. The Ozarks await-

      You cannot get a buck out of a turnip.

      Reply this comment
    NTHEOC 4 March, 2015, 21:44

    Total CalPERS Fund
    Market Value
    Reflects market value, as of market close on 3/3/2015.
    $299.0 Billion
    And look what’s at the end of my rainbow!!! I love it…..

    Reply this comment
  6. bob
    bob 6 March, 2015, 07:36

    Anyone who doesn’t believe there is a very good chance of another stock market collapse in the next five or ten years is a fool.

    In fact how can it not happen in this Neo-Feudal Plantation Casino-Gulag economy?

    What if it collapses and never comes back?

    Think it can’t happen? Look at Japan’s Nikkei. Peaked at nearly 40000 in Dec 1989 and never got back anywhere near that level and today isn’t even 20000.

    But if this happens there is no problem, right Doglass? Calturds will still be fully funded, right?

    But if not there is still no problem because the law says taxpayers HAVE to pay according to him. So you may have to take a second job to pay for it all, Wayne.

    Of course there will be very few available jobs in this Neo-Feudal Plantation Casino-Gulag economy.

    Reply this comment
  7. Teddy T
    Teddy T 9 March, 2015, 14:23


    Do you know how many stock market collapses and corrections have occurred in 300 Billion dollar Cal Pers history?

    a ton little buddy….

    Reply this comment
  8. Roger Plessen
    Roger Plessen 16 February, 2018, 02:53

    Increase contribution rate to 10% End of problem. It might be even possible to do a 3 % annual inflation adjustment which is more realistic as ?ational inflation figures are understated.

    Reply this comment

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