California State Teachers' Retirement System Outlook To Positive From Stable On Potential Improvement Of Funded Ratio
NEW YORK (Standard & Poor's) May 5, 2015--Standard & Poor's Ratings Services has revised its outlook on California State Teachers' Retirement System (CalSTRS) to positive from stable. At the same time, Standard & Poor's affirmed its 'AA-' issuer credit rating (ICR) and 'A-1+' short-term rating on CalSTRS. "We base the outlook revision on recent legislation that we believe should improve CalSTRS' funded ratio over the next two years, assuming CalSTRS meets its actuarially projected investment returns," said Standard & Poor's credit analyst David Hitchcock. We base the ICR and short-term rating on what we view as the system's:
- Adequate 69% funded ratio of actuarial assets to liabilities for the State Teachers' Retirement Plan (STRP), which is CalSTRS' main defined-benefit plan, according to the most recent actuarial valuation as of June 30, 2014; this is up only slightly from the previous year;
- New state legislation passed in 2014 that will substantially boost both employer and employee retirement contributions and achieve a projected 100% actuarial funded ratio by 2046, under current actuarial assumptions;
- High degree of diversity and good liquidity among CalSTRS' large pool of investments, totaling $191.2 billion at March 31, 2015; and
- Independent board structure.
Offsetting factors include the fact that CalSTRS' annual employer contribution rates remain limited to percentages of payroll under state law, rather than the size of the unfunded liability. Although we expect that the recent pension reform legislation will boost funded levels, if future investment returns or actuarial experience deviate significantly from actuarial assumptions, further state legislation may be necessary to ensure sound actuarial funding, and this may not occur on a timely basis. The 2014 reform legislation followed many years of annual underfunding of STRP's actuarial annual required contribution that resulted in a long-term decline in funded ratios before the recent reforms. Standard & Poor's bases its 'A-1+' short-term rating on CalSTRS on its view of the system's general creditworthiness, as well as CalSTRS' very strong current liquidity in relation to the size of its short-term liabilities that include the system's $488 million credit enhancement program (CEP), which provides short-term liquidity support to a portfolio of various municipal bond issues. The positive outlook on CalSTRS reflects our view that the STRP's actuarial funded level will gradually improve over time as the phase-in of increased employee and employer contribution rates proceeds, and as high recent investment returns are smoothed into actuarial valuations under the system's three-year asset smoothing methodology. Should actuarial funded levels continue to improve materially during our two-year outlook horizon, we could raise our rating on CalSTRS. However, if poor investment returns, or other changes in actuarial assumptions or experience restrain or reduce actuarial funded ratios, we could revise the outlook back to stable. In addition, we expect that CalSTRS will continue to reduce the size of its CEP and show active management in continuing to arrange creditworthy financial parties to front potential CEP demand draws, currently with State Street Bank. CalSTRS is the second-largest pension fund in the U.S., after the California Public Employees Retirement System, with total assets equal to $218.5 billion at June 30, 2014. RELATED CRITERIA AND RESEARCH Related Criteria
- USPF Criteria: Public Pension Funds, June 27, 2007
- USPF Criteria: Pension Fund Credit Enhancement And Related Guarantee Programs, Sept. 25, 2006
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| Primary Credit Analyst: | David G Hitchcock, New York (1) 212-438-2022; david.hitchcock@standardandpoors.com |
| Secondary Contact: | Gabriel J Petek, CFA, San Francisco (1) 415-371-5042; gabriel.petek@standardandpoors.com |
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