Who pays CalSTRS debt: state, schools, teachers?

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

26 Responses to “Who pays CalSTRS debt: state, schools, teachers?”

  1. Captain Says:

    Who pays CalSTRS debt: state, schools, teachers?

    -Taxpayers.

  2. Rex The Wonder Dog! Says:

    “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.”

    BOTH plans are far better than ANYTHING in the real world-the private sector. 3%@50 is 100 times better. 2%@67 should be the BEST pension-anmd that would eb 3 times better than SS.

    The worst part is teachers (virtually ALL gov emloyees) make a tremendous amount of money in base salary alone. For teachers it is $51 and hour on average-in JUST CASH SALARY. Soem make 2-3 tiems that.

    And face it, a teaching job is NOT a hard job to qualify for-getting hired is hard because of all the politics in gov jobs (connections), and the job itself can be very difficult, but to qualify is not hard. A BA degree and a cream-puff joke certificate program that no one fails and there is no criteria testing coming out to receive it.

  3. Rex The Wonder Dog! Says:

    I would 1) lower all pensiions for all future work,2) I would make sure no one has anything above 2%@67, 3) I would freeze ALL teacher salaries statewide (all gov employees salries) 4) no raises for 10 years or until the pension system is funded at 120%. All raise would go directly into the pension systems.

    “Rex’s 4 Part Plan” to fix the problems-on the backs of those that created the problems, not the backs of the taxpayers .

  4. Captain Says:

    “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.” That sounds like a quote from the Marcia Fritz study. I’m not sure I buy it.

    It isn’t just 2@60. Teachers also get 2.4@63. If they work 20-25 (my recollection) years they also get a longevity bonus of $400 per month ($4,800 per year). That is on top of their contractual longevity bonus and the 2.4@63.

    A neighbor of mine was set to retire but waited to turn in her papers because the union was negotiating early retirement for senior teachers claiming it would save the district thousands, or hundred of thousands, because senior teachers (she taught 3rd grade) would be replaced by younger teaches that cost less. This seems to be a trend. They also have the opportunity to work summer school. Not a bad gig.

    This person that was set on retiring waited until the teachers union negotiated the contract and received two years of additional service credit costing the taxpayers thousands of dollars in additional pension costs (and hundreds of thousands to the district for all the teachers that received the gift). They claim the cost was offset but is that really the case? I ‘m not sure it is true. Seems they could accept retirement papers first and then offer the early retirement incentive later if it was really about saving money.

    She now substitutes for the district she retired from earning about 135 dollars per day for 6.5 hours of work. Not big bucks but a nice way to augment your pension.

    The town I live in has many teachers making over 100K in salary alone, for 170 days of work. PE teachers are among that group.

    Mr. Mendel, you mentioned several other perks that I haven‘t included in my little rant. I’m not against teachers, but I am against the lies that keep coming from the teachers union!

    So what is 2.4@63 pension really worth when you include the 400 per month longevity bonus? BTW, the teacher union never tells anyone about these additional enhancers. And they can receive a discounted pension at 55 if they so desire.

  5. Captain Says:

    …and I keep hearing how they’ve been contributing 8%. Thanks to a previous Calpensions article (and this one) I know that isn’t true.

  6. Rex The Wonder Dog! Says:

    This person that was set on retiring waited until the teachers union negotiated the contract and received two years of additional service credit costing the taxpayers thousands of dollars in additional pension costs (and hundreds of thousands to the district for all the teachers that received the gift). They claim the cost was offset but is that really the case?’

    it does not save ANY money-they are 1) PAYING THE OLD TEACHERS increased PENSION COSTS OVER 20+ years PLUS the NEW teachers comp, complete rip off. Nevr saves money b/c the higher penion costs are over 20 or mroe years.

  7. Rex The Wonder Dog! Says:

    All teachers DO pay their own 8% contribution, they do not get it “picked up”, but the state then kicks in another 12.5%, and taxpayers cover all unfunded liabilities.

  8. Rex The Wonder Dog! Says:

    “She now substitutes for the district she retired from earning about 135 dollars per day for 6.5 hours of work. Not big bucks but a nice way to augment your pension.”

    And HER taking that sub job is DENYING a job to someone who is unemployed.

    Gov employees should NOT be able to accept other gov jobs once they “retire”, it drives up the costs of social services. Because she was taking an unemployed person’s job that unemployed person is now ON welfare, costing us ALL money.

  9. Captain Says:

    Rex,

    Teachers have only contributed 6% toward their pension for the past decade. They contributed 8% of their salary but only 6% went toward their pension plan. Read here (from this article):

    “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.”

    For ten years, ending in January, they have only contributed 6% toward their pension. The other two percent went toward some supplemental medical coverage.

  10. Rex The Wonder Dog! Says:

    When I was teaching it was 8%-but that was some time ago. I did not realize only 6% went to CalSTRS though. Are you sure the current contribution rate is only 6% to CalSTRS?

  11. Captain Says:

    Rex,

    It was that way for the past 10 years ending in January. I think January 1, 2011, the teachers resumed paying 8% toward their pension.

  12. Rex The Wonder Dog! Says:

    OK, got it, it was not that way when I was teaching school.

  13. skippingdog Says:

    The thought that Rex may have had access to children is truly chilling.

  14. Tough Love Says:

    Skippy, Unless you know something we don’t, that comment has connotations that are uncalled for.

  15. Rex The Wonder Dog! Says:

    Skippy is getting close to getting kicked off of the CO Punch over his comments……..

  16. spension Says:

    Strange that CalSTRS would guarantee the Federal Bond Rate without…. investing that 2% in… Federal Bonds!

    Nice little quip on how Defined Benefit plans (when they don’t overpromise benefits, as has happened in CalPERS, CalSTRS, and UCRS) are more economical, by, Jack Bogle…

    “One of the biggest differences between individual accounts and traditional pension plans is that they transfer what Bogle calls “longevity risk” from pension funds to individuals. What that means in practice is that you need to save more — a lot more — in your account than a pension plan would include in order to cover the chance that you’ll live to a very old age.

    Right now, we have no good solution to this. In theory, you should be able to put your money into an annuity at retirement that’ll cover this risk. But as Bogle points out, there are virtually no annuities that will let you do this at a low cost. So now your underfunded retirement account looks even worse.”

    http://articles.moneycentral.msn.com/Investing/Extra/america-s-looming-retirement-crisis.aspx

    Oh yes… the long term (1802 to 1999) real return on stocks, after inflation considered, was about 7% according to Bogle…

    http://books.google.com/books?id=acSxsst51psC&lpg=PA13&ots=KjmGPydlSv&dq=bogle%20stock%20market%20performance%201802&pg=PA10#v=onepage&q&f=false

    Since inflation was about 3.5%… you can reason out why CalXXXX etc assumes 7% or 8% for a stock/bond portfolio.

    But the point is… that is the central value. Over any 30 or 50 year time period the return maybe be much lower due to the volatility of all investments (andinflation)… maybe only 3%. And that is the point of the new accounting rules should be planning for, and what our CalXXXX got skewered by.

    It is indeed a travesty that taxpayers are asked to make up for the CalXXXX managers (and all the politicians who didn’t understand returns could be low over 30-50 years and negotiators, etc).

    And it is also a travesty that Wall Street bankers got their $10 million bonuses guaranteed by the taxpayer after those bankers crashed the financial system.

  17. Rex The Wonder Dog! Says:

    “One of the biggest differences between individual accounts and traditional pension plans is that they transfer what Bogle calls “longevity risk” from pension funds to individuals.
    ==
    While gov DB pensions transfer that risk to TAXPAYERS.

    /
    What that means in practice is that you need to save more — a lot more — in your account than a pension plan would include in order to cover the chance that you’ll live to a very old age.
    ==
    Totally false, what it means is that you trough feeders can no longer transfer YOUR RISK for mutlimillion dollar, retire at age 50 pensions to the poor who retire at age 70 and get $1,000/month from SS.

  18. SeeSaw Says:

    Shut up the yelping, Rex. Public workers don’t retire at 50, just because its in the regs, of their pension plans. The average age of a CalPERS, miscellaneous annuitant, is 60; the average pension amount, is less than $36,000/yr. By the way, my spouse started collecting SS at age 65, and he gets $1800/mo. I started collecting my public pension at age 72–there is no multi-million dollar account, in my future–unless I win the lottery.

  19. spension Says:

    Rex… not quite.

    The risk that has gotten transferred to the taxpayer is market risk… if the market doesn’t give the 7-8%/year performance that the pension officials predict, the taxpayer is on the hook for the difference. Assuming only 3% or so for the last 50 years would have resulted in the far lower DB benefits, and we’d not be in the mess we are now in.

    When you pool lots of people into a plan the average age at death really is 85 or so, with astronomically tiny probabilities of *everyone in the plan* surviving to age 101. When there is only 1 person in the plan (a defined contribution plan) the probability of surviving from retirement age to age 101 is something like 1%, and needs to be planned for. So instead of making the money last for 20 years or so (as a big pool can plan for) you need to plan for the money to last 36 years or so.

    That is why Bogle says, `in practice is that you need to save more — a lot more — in your (DC) account than a pension plan would include ..’ DB plans actually achieve lower longevity risk… risk is not a quantity that stays the same size and just gets moved around. Pooling actually lowers risk, which is the basis of our entire insurance industry.

    I’m no fan of the over-generous pensions that CalXXXX and UCRP have promised… they are mainly the result of bad mathematical understanding at the core of CalXXXX and UCRP and then opportunistic behavior by politicians and unions (although lots of people in those plans are *not* represented by any union).

    They should have promised a *much* smaller benefit in those plans than they did. Roughly 1/2 the benefit.

    But I’m not convinced it was unusual greed… more like standard greed and ignorance.

    Nevertheless, those are binding contracts, and I’m in favor of a uniform Sovereign Default on all State debt holders to get out of this fiasco.

  20. Rex The Wonder Dog! Says:

    Shut up the yelping, Rex.
    /
    ruff….ruffff…..ruff!

    Public workers don’t retire at 50,
    /
    Any cop or FF can and DO retire at age 50 seesaw-stop spinning.
    /
    The average age of a CalPERS, miscellaneous annuitant, is 60; the average pension amount, is less than $36,000/yr.
    /
    “average” public employee in CalTURDS with *****30 years in of service***** is receiving $67K per year in pension and another $25K in free medical. Local systsems is $85K in pension and $25K in medical.

    BAM! :)

  21. Rex The Wonder Dog! Says:

    The risk that has gotten transferred to the taxpayer is market risk…
    /
    The risk that has been transferred to taxpayers is the pension loss risk.

  22. SeeSaw Says:

    That is a cherry picked group of workers in CalPERS, who all retired with 30 years, Rex. It is only a small percentage of the total number, of all public workers, who retired, on CalPERS, that year–the average pension amount for the total number of retirees, is much lower than your quote. My, “free” medical is $6,384/yr. out of a total cost of $23,076/yr, for medical premiums, for my spouse and me. My pension is much lower than $85,000/yr., and I am in the group, that is above the CalPERS average. If you are going to quote numbers, for a pension system, that you are not even a member of–at least quote true numbers.

  23. spension Says:

    The pension loss is caused because the market returns have been lower than expected, Rex. Statistically the current situation is unremarkable in 200 years of US stock market history, which pension fund managers should have realized.

  24. spension Says:

    SeeSaw, sure, anyone honest knows that the great bulk of pension benefits are not princely in absolute terms.

    But the pension managers messed up and the benefits awarded are still more than they should have been given working salaries, contributions, and worst-case stock market performance.

    The medical care is a whole different issue, where our medical system is just a mess, so costs are running out of control. I think it is the future projections including the medical rate of inflation that breaks the bank.

  25. Rex The Wonder Dog! Says:

    “SeeSaw, sure, anyone honest knows that the great bulk of pension benefits are not princely in absolute terms.”

    Baloney. The pensions are past “princely” and are now “kingly”. How else do you elxplain 50 year old Firewhiners “retiring” at age 50 with $300K per year in penion and medical?????? Try to Spin THAT ONE!

  26. StewartWindsor Says:

    On one hand you have to hand it to the government employees who saw a good thing and stuck with it (ending up with a pension). On the other hand it could turn out to be too good to be true because of how the pension money is supposed to grow (%7.75) and the bad news could come when it’s too late to regain employment. I don’t think the stockmarket can grow (over the next 30 years) like it did in the past because so many things are different now (shrinking population and rapidly aging average age) compared to the past (baby boom, end of world war, etc).

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