A day of reckoning may be coming for a huge CalSTRS shortfall: an “unfunded liability” estimated to be $56 billion over the next three decades, requiring a contribution increase of $4 billion a year to close the gap.
The CalSTRS board was told last week that new rules proposed by the Governmental Accounting Standards Board will require school districts and other employers in the system to begin reporting pension liabilities on their balance sheets.
“It’s not a drop in the bucket,” said Robin Madsen, the California State Teachers Retirement System chief financial officer, who gave a hypothetical example.
“It might change a balance sheet from being a number in terms of total liabilities of about $300 million to a number in terms of total liabilities of about $600 million or $700 million,” she said.
Madsen said early versions of the pension accounting proposal had little detail on unusual “cost-sharing” systems such as CalSTRS, but updates are revealing more. CalSTRS has been working with the accounting board to field test proposed changes.
At a GASB hearing in San Francisco on Oct. 13, CalSTRS may request a one-year delay in the changes, now scheduled for fiscal 2013-14. That would allow more time to prepare the 1,042 school districts, 72 community college districts and other employers.
CalSTRS is different from most California public pension systems in several ways. The pension board cannot set contribution rates that must be paid by employers, and teachers do not collectively bargain through unions for pension benefits.
Instead, the CalSTRS contribution rates and pension benefits are set by legislation. Another way CalSTRS says it’s different: The pension “plan sponsor” is not the employer, as is usually the case. It’s the state.
How costs are shared in the unusual retirement system, particularly for covering the huge unfunded liability, may soon become more than an accounting issue.
Gov. Brown is expected to announce a revised pension reform plan that may include a long-term solution for the CalSTRS unfunded liability, one of the 12 points in a plan he announced last March along with a 401(k)-style option.
The governor’s proposal would be heard this fall by a special two-house pension committee announced by legislative leaders last week as the lawmakers adjourned until January.
A plan to address the CalSTRS unfunded liability presumably would phase in contribution increases over a number of years. But in the unusual cost-sharing plan, whose contributions would be raised and by how much?
The current contribution rates are employers 8.25 percent of pay, teachers 8 percent of pay, and the state about 2 percent of pay.
(The state also contributes 2.5 percent of pay to a separate inflation-protection account with a huge reserve, $7 billion, that is paying out $269 million a year. See Calpensions 13 Jul 11.)
In the latest estimate as of June 30 last year, CalSTRS had 61 percent of the assets needed to cover projected costs during the next three decades. Getting to 100 percent would require an additional 14 percent of pay, about $4 billion a year.
Critics contend the shortfall is much larger because the CalSTRS investment earnings forecast is too optimistic. CalSTRS lowered its forecast from 8 to 7.75 percent, not to 7.5 percent as advised by actuaries. Some think the forecast should be even lower.
At the CalSTRS board last week, the question of who is responsible for the huge liability arose indirectly. A comment by member Beth Rogers drew a reply from Pedro Reyes, the Brown administration’s Department of Finance representative on the board.
“You made a statement about the state’s liability for the fund, and I think when you made that statement I had about eight sets of eyes looking at me for a reaction,” said Reyes.
“That question is still yet to be resolved from our perspective,” he said. “I just want to go on record as saying that. I don’t want my silence to be taken as acquiescence to that.”
Jack Ehnes, the CalSTRS chief executive, said: “Just so the record is clear, you were speaking on behalf of the Department of Finance?”
“That is correct,” replied Reyes. “Finance, the administration, and CalSTRS have not come to an agreement on this yet.”
State worker unions, all 21 bargaining units, agreed last fiscal year to new contracts that increase their pension contributions. From a range of 5 to 8 percent of pay, state worker contributions increased to 8 to 11 percent of pay.
Because state workers agreed to pay more (prompted in part by a record 100-day budget deadlock last year), the state contribution to the California Public Employees Retirement System dropped from $3.9 billion to $3.5 billion this fiscal year.
But once again, CalSTRS may be different. A legal paper presented to the board last year argued that under state education law the teacher pension contribution, 8 percent of pay, can’t be increased without an offset of equal value.
The CalSTRS “2 at 60” pension formula, two percent of final pay for each year served at age 60, is not among the more generous. Under the new state worker contracts, many new hires get “2 at 60” rather than the “2 at 55” provided current workers.
In yet another difference, CalSTRS is a “hybrid” plan combining a pension with a 401(k)-style individual investment plan. The typical CalSTRS pension is said to be about 62 percent of final pay, but the total retirement package can be much higher.
For a decade ending last January, a quarter of the teacher contribution, 2 percent of pay, was redirected into a Defined Benefit Supplement. The earnings are the same as the CalSTRS portfolio, but with a minimum guarantee based on the 30-year federal bond.
Diverting a quarter of the teacher contribution, and guaranteeing minimum earnings during a period of investment losses, added to the growing CalSTRS unfunded liability during the last decade.
Members of CalSTRS do not receive Social Security in addition to their pensions, unlike most state workers. But the 6.2 percent of employee pay that would go to Social Security can be invested in funds offered through CalSTRS or in other options.
So with the pension, the supplement and $100 a month invested in a tax-deferred plan, a teacher at age 63 with 34.5 years of service could retire with 103 percent of final pay, according to a report to the CalSTRS board in June 2009.
A new survey reported to the board last week found that 69 percent of active CalSTRS members said that CalSTRS benefits are “one of the top reasons” they continue to teach or work in education.
The survey also found that 77 percent of active members are “highly concerned that CalSTRS will have sufficient funds to pay benefits,” up from 67 percent in a similar survey three years ago.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 12 Sep 11