P&I reported that CalSTRS generated a 6.8% return for their fiscal year ending June 30, 2019, which exceeded their benchmark’s 6.5% return. Unfortunately, this is no cause for celebration, as CalSTRS funded ratio was only 65.5% as of June 30, 2018. Given the funding deficit, a small level of outperformance will not chip away at the significant underfunding.
CalSTRS has a plan in place that will provide them with a 70% chance of getting to full-funding in 2046, but a significant market dislocation (or two or three) during that timeframe will obviously adversely impact their ability to achieve this objective, as approximately 2/3rds of their benefit payments come from investment returns. Unfortunately, CalSTRS portfolio will have to generate outsized returns or contribute significantly more to the fund to whittle away at the deficit. There is already considerable risk being assumed with a 7% investment target. Contributing more may be an even more difficult hurdle as the state currently contributes more than 9% of total teacher payroll into the fund.