On February 19, California State Teachers’ Retirement System (CalSTRS) CEO Jack Ehnes appeared before a committee of the California State Assembly considering CalSTRS’s request for a $240 billion bailout, starting with $4.2 billion this year.
There is no question that CalSTRS needs the money....But there is a question about why CalSTRS needs help. In that regard and according to two attendees at the hearing, Ehnes referenced the Great Recession of 2008-9 and claimed that “two-thirds” of CalSTRS’s deficit is related to investment problems. Let’s evaluate that claim.
Assume you had some money to invest on July 1, 2003 and that you measure your investment performance annually on June 30 of every year. Assume further that, as of June 30, 2013, your annual performance for the past ten years — including the Great Recession in the middle of that period — looked liked this:
2004: +17.38%Next, ask yourself what compound annual rate of return is produced by that series of investment returns. The answer: 7.52% per annum. The two down years of the Great Recession were more than offset by eight up years, including six double-digit gain years. 7.52% per annum for ten years is a wonderful return. In all, it was a good decade for your investments, despite the Great Recession...
2005: +11.09%
2006: +13.21%
2007: +21.03%
2008: - 3.69%
2009: -25.03%
2010: +12.20%
2011: +23.10%
2012: + 1.84%
2013: +13.80%
Needless to say, any organization – especially a public organization run by public employees — seeking billions in public assistance should be completely forthcoming. CalSTRS is a huge financial intermediary, just like AIG was before its bailout in 2008, and no different than AIG’s CEO at that time, CalSTRS’s CEO must level with the authorities from which it seeks help....
