CalSTRS Report – September 2020

by Pat Geyer, CalRTA liaison

Executive Summary

  1. Stocks are up in the U.S. but down somewhat internationally.  Interest rates are close to 0% leading to an increase in the purchase of equities.  CalSTRS has done well compared to its peers.
  2. It is too early to know how COVID will affect investments.  The Federal Reserve has supported long-term investment and will continue.  Expect 2.5% inflation
  3. Experts predict a Real Estate loss in 2020 because of a decline in retail and tourism.
  4. The CalSTRS fund is $262 billion, an all-time high.
  5. The Committee heard the work plan for the transition to low-carbon investments.

Client Advisory Committee Meeting

Tom Buffalo reported on the Demographic Study.  There were 42,111 respondents to the survey; 30,426 retired and 11,685 active teachers.  2/3 of the teachers have an advanced degree.  That is compared with the total United States where fewer than 30% have an advanced degree.  Of the teachers who responded, 88% of mid-career members report they will stay in the profession until they retire.  27% of mid-career members report they are married to another member.  The Demographic Study will be repeated in 5 years.

David Lamoureux reported on SBMA funding.  There are extra resources in the SBMA fund.  CalSTRS has recommended 85% purchasing power.  Other options include a one-time permanent increase to retirees prior to December 31, 1998, increase the purchasing power protection percentage applied to all current and future retirees, or increase the purchasing power percentage based on the age of the retiree.  The choice will be made by the Legislature.

Larry Jensen reported on the lifecycle of the Employer Audit.  The Employer audit began in the 1990’s.  The purpose is to look for accurate information, identify problems and do employer training.  Pre Covid-19, the goal for 2020 was to complete 87 audits; 35 full scope and 52 limited scope. CalSTRS will bring more information in November and propose any changes in State law.  One proposed change is to require that employers inform members within 6 months of audit and see that corrective action is taken.

Joycelyn Martinez-Wade gave the legislative update.  AB 2101, which includes housekeeping provisions for CalSTRS has passed the legislature and will be sent to the Governor.  Staff expect to present proposed legislation relating to the Statute of Limitations to the Board in November. The proposal limits the timeframe in which CalSTRS can collect overpaid benefits from a member or beneficiary to the three most recent years when benefits are reduced as a result of erroneous employer information. Any remaining overpaid amounts that are a result of erroneous employer information would be collected from the responsible employer.

Investment Committee Meeting

The Committee heard from several speakers asking CalSTRS to divest from fossil fuels.

Under investment policy revisions, the Committee approved the proposal to transfer the Low-Carbon special mandate to the Sustainable Investment & Stewardship Strategies.  (SISS Portfolio)

The Committee heard the Semi-Annual Performance Report from Meketa.  Stocks are up in the U.S. but down somewhat internationally.  Interest rates are close to 0% leading to an increase in the purchase of equities.  CalSTRS has done well compared to its peers.  The challenges are: (1) Interest rates.  1982 interest on bonds was 14.6%. 2020, the interest on bonds is .6%.  However, capital gains are good.  (2) Equities are four times more expensive.  Yields are much lower because there is now low inflation.  The reason is that now we have and expect low inflation.  In 1982 it was high inflation.  Alan Emkin (Meketa) stated that CalSTRS should concentrate on what it can control: cost and risk.

It is too early to know how COVID will affect investments.  The Federal Reserve has supported long-term investment and will continue.  Expect 2.5% inflation (low).  CalSTRS has adequate liquidity.  State tax revenues are down.  Chris Ailman wants to revisit the economy and investment plans in January.

Private Debt has not yet been affected by the recession, but this could change.  Ailman reports that a recession offers investment opportunities.  The CalSTRS Board will receive more information on risk in the future, probably in November.  Low interest rates should affect CalSTRS policy.  Emkin suggests that CalSTRS use models to see how it will perform.

Real Estate is 13% of the CalSTRS portfolio and its performance is good.  2/3 of the real estate is core and is less risky.  That percentage has increased.  They predict a Real Estate loss in 2020 because of a decline in retail and tourism.  Industrial is doing well.  Expect a low return economy in the future.  Real Estate has opportunities in the debt markets.  The risks are that retail and office properties will be less used.

Private Equity has been doing well. CalSTRS has moved to (1) more co-investments (7% to 10%) because they are less expensive, (2) more stressed assets because they may have good future returns, (3) 90% investments are denominated in U.S. dollars.  Another focus is on distressed debt investments.

Chris Ailman gave the CIO report.  The stock market is at an all-time high.  Interest rates are low.  The CalSTRS fund is $262 billion as of the end of August, an all time high. Ailman is concerned about the lack of retail activity.  Another risk is the Presidential election.

The Committee heard the work plan for transition to low-carbon investments.  1.  The low-carbon investment belief is completed.  2.  Staff is analyzing the CalSTRS portfolio.  3.  Expanding investments in low-carbon solutions.  Low carbon is more than just a problem in transportation.  CalSTRS will discuss low-carbon investments at the November meeting.

Benefits and Services Committee

The Committee heard a report on employer education and outreach.  43 employer training sessions were completed in 2019-20, including 468 employers.  There was also training sessions on the Pension Solution Program.  Employers said that they had good understanding of the program and the computer training program went well.  84-93% rated that the training went well.  CalSTRS is encouraging employers to get training over the internet.  Board member Denise asked why employers are not required to be trained.  Harry suggested a library of training modules.

There were no suggested revisions to the Committee Charter.  The Next meeting will be in November.

Teachers’ Retirement Board

The Board heard the actuary report on the SBMA (Supplemental Benefits Maintenance Account) and the One-Time Death Benefit payment.  SBMA has projected excess resources of $11.2 billion.  Inflation is a problem but not now.  Staff recommends continuing the purchasing power percentage at 85%, and no change to the SBMA, this will go to the legislature for final decision.

Comments from the public:  Jennifer Baker supports 85% purchasing power.  Ed Foglia wants to increase benefits for pre-1999 retirees.  A retiree wants to increase the death benefit.

The proposal is to increase the operating budget by $40.9 million over the next 5 years.  Discussions with stakeholders will follow.  The plan is to bring more management in house saving CalSTRS money by not paying Wall Street.

Jack Ehnes, CEO gave his report.  The remaining 2020 CalSTRS board meetings will be virtual.  The next CalSTRS meeting is November 4-6, 2020.  8% of the staff is working in the CalSTRS building; the rest are working from home.  Business travel is prohibited.  Other companies are doing the same things as CalSTRS.

The risk factors in customer service are: 1. Harder to maintain service because of working from home.  2. Many Customer Service reps are working on the Pension Solution project.  3.  Changes due to COVIO are illness and children not in school.  Customer service is continuing and doing well.

Employer contributions compliance continues and doing well.  Headquarters expansion continues.  The one problem is getting concrete from plants down in the Bay Area.

Employee isolation is a concern.  However, some employees enjoy working from home.  CalSTRS may help with a home office for employees.  Dealing with frustrated CalSTRS members is a challenge.

The Board meeting reviewed the Board Discretion to Modify Incentive Awards.  CalSTRS compensation Plan is good, and there is no plan to modify.

The Headquarters expansion project is 19% complete and proceeding on schedule.

The Pension Solution computer project is on schedule.  The next project is training and user acceptance testing.  CalSTRS is more than 1 year away from going live, but testing is running slower than expected.  CalSTRS is not overly concerned about the project taking longer.

Under legislation, two CalSTRS-sponsored bills are held in the Assembly:

  • AB2219, which would have authorized CalSTRS to offer a traditional (tax-deferred) IRA, in addition to Roth IRA
  • AB2510, which would have expanded the Collaborative Model.

Items of interest for the November CalSTRS meeting are the CalSTRS funding plan, and a legislative review by John Stanton.  The CalSTRS meeting will be a full three days.  It was announced that Loretta Toggenburger, a long-time member has passed away.