For the first time since the Great Recession in 2008, the California State Teachers’ Retirement System had a negative return on investments for the year ending June 30.

CalSTRS, which provides retirement benefits for nearly a million current teachers and retirees, saw a minus 1.3% return on its portfolio. The year-end value of the portfolio dropped $8.6 billion to $301.6 billion as a result. The loss followed a record yearly investment gain in 2020-21 of 27.2%, CalSTRS reported.

CalSTRS attributed the decline to market volatility complicated by inflation, rising interest rates, the impact of COVID-19 and the ongoing war in Ukraine, according to a report by EdSource.

Earlier last month, CalPERS reported an end-of-year loss of 6.2% in value.

Investment income, replenished by contributions by teachers, the state and school districts as the employer, provides funding for retiree benefits. CalSTRS assumes an annual rate of return of 7% on investments to meet its yearly obligations.

The one-year drop in value, which also happened in 2015-16, won’t affect the level of benefits for teachers; those are a state obligation, as is the level of teachers’ payroll contributions, which is also locked in by law. However, a multiyear failure to meet the annual revenue target could lead to an increase in school districts’ payments, which already were scheduled to rise substantially — by about $1.3 billion statewide — in 2022-23. Together with scheduled CalPERS’ increases, districts are facing $1.6 billion more in pension contribution costs this year.

Districts’ additional obligation this year is on top of nearly a decade of steep rate increases to restore CalSTRS’ financial health. As a result of increases in retiree benefits that the Legislature passed in the late 1990s and a loss of about a quarter of its portfolio’s value at the start of the Great Recession, CalSTRS’ assets in relation to its liabilities fell dramatically. As a result, Gov. Jerry Brown in 2013 persuaded the Legislature to pass pension reforms that included a series of annual rate increases for teachers, the state and school districts.

As of June 30, 2017, CalSTRS’ portfolio had dropped to 63% of its ability to meet the long-term obligations of future retirees. As of June 30, 2022, this had risen to 73%. CalSTRS expressed confidence it was on target for full funding — the point at which assets meet or exceed liabilities – by 2046.

Since 2013, school districts’ pension contributions have more than doubled, from 8.3% of a teacher’s salary to 19.1% in 2020-21. For the past two years, Newsom applied $1.15 billion from the state budget surplus to offset districts’ increased obligations to CalSTRS. The  2022-23 state budget doesn’t include that subsidy, although it includes $4 billion beyond a statutory cost-of-living increase that districts could use for pension expenses.

CalPERS’ and CalSTRS’ $1.6 billion rate increases for districts this year will average $272 per student, according to School Services of California.

The state’s portion of CalSTRS has risen, too, but not as high, from 5% of a teacher’s pay in 2013-14 to 11.6% this year. Teachers contributed 8% of their pay to CalSTRS in 2013-14; it was capped at 10.2% or 10.25% of their pay in 2016-17, depending on when they were hired.

CalSTRS said that on average teachers who retired in 2020–21 had 25 years of service and a monthly benefit of $4,813, adding that a diverse investment strategy prevented the loss in value of the system from falling further over the past year. While its investment in publicly traded stocks, which makes up more than a third of its portfolio, fell 16.6%, its holdings in real estate rose 26.2% and in private equities by 23.7%.

Notwithstanding the portfolio loss, CalSTRS said its overall performance for 2021-22 was 0.9%  better than benchmark comparisons, which are a blend of indexes like the Russell 3,000 Custom Index that CalSTRS’ board of directors established for comparisons.