Mario Iacone: INVESTMENT LOSSES & FUNDING PERIOD

From Mario Iacone, November 7, 2009

The huge impact of investment losses on the funding period can best be illustrated USING STRS DATA.

The following was obtained from the STRS update of 8/11/2009.

STRS stated the following,

Even with these changes, the funding period for the pension fund stood at 41.2 years on July 1, 2008………………………………………

However, due to the recession, the market value of our investment assets declined by about $24 billion over the past two fiscal years. As a result, STRS Ohio's unfunded liability almost doubled in just one year and the funding period now stands at "infinity."

If investment losses can impact the funding period so drastically, one would expect that investment strategy would be changed and/or effective risk management implemented to avoid huge future losses.

Furthermore, the funding period that existed TWO FISCAL YEARS AGO was 26.1 years.

The high of STRS asset value was close to 80 Billion and that was achieved at some point in 2007.

That would mean the funding period in the last two years has gone from 26.1 years to infinity, mostly due to investment losses.

Please review the following chart obtained from the STRS website. Note that the amounts shown are Actuarial Value of Assets and N0T Actual Value of STRS assets.

Click image to enlarge.

Further note on the chart what investment losses did to the great funding periods from 1999 to 2001.

However, the past is the past and in all fairness, I am not faulting the STRS Investment Department for the past because as we have all found out during the current financial crisis, high risk was the thing to do.

However, I would like to see the results of the past used to avoid the same mistakes in the future.