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For CalSTRS, an investment bet that failed

The state's teachers retirement fund had hoped four years ago that a flourishing bull market would help make up for a big projected shortfall. Now the fund is $43 billion behind as of June.

March 16, 2010|By Marc Lifsher

The annual contributions from the state, local school districts and community colleges to CalSTRS, about $3.5 billion for the upcoming fiscal year, would need to be raised by an additional $4 billion in 2011, the fund estimates.

Waiting just five years to raise the contribution level would boost that annual increase to $6 billion, and waiting 10 years would increase the amount to $8 billion, CalSTRS said.

The increases are necessary because CalSTRS' actuaries say the fund would need a return on investments of more than 20% a year over the next five years to make up for recent recessionary losses. Over the last 30 years, CalSTRS' portfolio has increased an average of 8.65% a year.

In an attempt to be more conservative, the board now is considering reducing its assumed annual return to as low as 7.5%. CalPERS also is considering lowering its 7.75% benchmark.

Those assumed numbers are still higher than the 6.9% annual return that investment guru Warren Buffett assumes for investments held by pension funds at units of his Berkshire Hathaway Inc.

"Who are they [CalSTRS] kidding? They should not be assuming more than 6%," said David Crane, a former investment banker and the governor's special advisor for jobs and the economy.

"Unreal assumptions," he warned, "will come out of the pocket" of future generations of Californians.

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