CalSTRS rate hike: a start, full phase-in or delay?

The total spending increase needed to get CalSTRS, brought low by mismanagement, back to full funding may be the biggest-dollar scenarios ever presented to a California legislative committee.

Legislators were told last week an additional $181.7 billion would be needed for full funding in 20 years. If payments are spread out to ease the budget bite, the additional amount needed to reach full funding in 60 years is a staggering $618 billion.

The point made by comparing the large numbers: Delaying a funding increase drives up the total cost, not to mention forcing future generations to pay for the services of workers received by the current generation.

The California State Teachers Retirement System could project full funding over 30 years with an annual contribution increase of about $4.2 billion, a major rate shock for schools, teachers and the state that contributed a combined $5.7 billion last year.

To allow time for planning and budget adjustments, the funding scenarios prepared by CalSTRS staff phase in rate increases over several years, some not reaching the maximum until fiscal 2020.

A built-in problem for pension funds, which expect to get roughly two-thirds of revenue from investment earnings, is that they need a rate hike when employers are least able to afford one, during an economic downturn that hits tax revenue and investments.

The state budget has a surplus now after a decade of deficits. But there is fierce competition to restore deep recession-era cuts in schools, health, welfare, prisons and courts. Gov. Brown, meanwhile, wants to build a reserve to cushion future downturns.

Jason Sisney of the nonpartisan Legislative Analyst’s Office offered some perspective last week as he concluded his remarks to a joint hearing of the Assembly and Senate public retirement committees, the second in a series on CalSTRS funding.

“I think for many people, who are dealing with this in the Legislature and the executive branch right now, this may be one of the most difficult issues you ever face during your careers in public service,” Sisney said. “It’s not going to get easier.”

CalSTRS is projected to run out of money in about 30 years even if average investment earnings hit the current target, 7.5 percent a year, which critics say is too optimistic.

Some worry that another economic downturn like the last one, the deepest since the Great Depression, could drop the funding level, 67 percent last year, so low that full funding becomes impractical, requiring rate hikes too costly for employers to bear.

Part of the management problem is that CalSTRS, unlike other public pension systems, can’t raise employer rates, needing legislation instead. Dealing with deficits, the Legislature ignored repeated CalSTRS pleas for a rate hike, and the funding gap grew.

The CalSTRS investment portfolio, like most pension funds, tanked during the recession and stock market crash in 2008. The portfolio only recently climbed back to the 2007 pre-crash peak, $180 billion, after dropping to $112 billion in 2009.

CalSTRS had funding surplus in 2000 (Milliman actuaries chart)

CalSTRS had funding surplus in 2000 (Milliman actuaries chart)

Another management problem: As soaring investment earnings during a high-tech boom created a brief funding surplus around 2000, CalSTRS cut contributions and increased pension benefits.

After a slow climb from the 1970s, when CalSTRS only had 30 percent of the projected assets needed to pay for future pension obligations, a funding level of more than 100 percent was treated as a windfall to be split between employers and employees.

(The larger California Public Employees Retirement System did much the same, notably by sponsoring the retroactive SB 400 pension increase in 1999, while some employer contributions dropped to near zero.)

The state CalSTRS contribution was cut by more than 2 percent of pay. For 10 years, a quarter of the teacher contribution, 2 percent of pay, was diverted from the pension fund to a new individual investment plan for teachers.

A half dozen small CalSTRS benefit increases were enacted around 2000, including a longevity bonus that expired three years ago. CalSTRS has done something CalPERS has not done: calculate the impact of the benefit increases on solvency.

An annual actuarial report from Milliman last April said that if CalSTRS were still operating under the 1990 benefit structure, the plan would be 88 percent funded instead of 67 percent funded.

The CalSTRS pension (reduced by a reform for teachers hired after Jan. 1 last year) is lower than most CalPERS pension formulas. On average, for teachers retiring at age 62 with 25 years of service the pension is said to replace 54 percent of final pay.

A past CalSTRS estimate was that many retirees had about 70 percent of final pay replaced when supplemental retirement funds are included. CalSTRS members do not receive Social Security, and most do not receive employer-paid retiree health care.

At the hearing last week, the chairman of the Assembly retirement committee, Rob Bonta, D-Oakland, mentioned increasing the state CalSTRS contribution to the rate in 1997 before the cut, boosting the annual payment about $260 million.

“Maybe we should do something more aggressive this year,” he said, “but it’s something to consider as at least a floor for contributions from the state.”

Bonta asked the CalSTRS chief deputy executive officer, Ed Derman, for his view of the minimum step to “move the ball forward” on funding. Derman said a one-time cash fusion, though helpful, might cause lawmakers to think the issue has been addressed.

“It’s OK if the contributions don’t come in for a period of time,” Derman said. “I think what’s important is to get the (comprehensive funding) plan established.”

Sen. Mimi Walters, R-Irvine, introduced a bill last week, SB 984, that would provide $1 billion in emergency funding for CalSTRS and another $1 billion next fiscal year if a revised forecast in May shows enough unanticipated revenue.

Here’s a CalSTRS scenario for reaching full funding in 30 years, total cost $236 billion:

Teachers — Contributions, now 8 percent of pay, would increase to 10.83 percent of pay by fiscal 2017, costing the average teacher hired before 2013 an additional $2,150 a year.

Lawyers have told CalSTRS that under a series of state court decisions the pension offered teachers on the date of hire becomes a “vested right” that cannot be cut, unless offset by a new benefit of comparable value.

CalSTRS thinks that guaranteeing an annual cost-of-living adjustment of 2 percent, now a routine practice that could be suspended, would be the offset for a rate increase of 2.83 percent.

State — Contributions to the CalSTRS pension fund that were cut to 2 percent of pay are, under an old law, increasing in steps to 3.5 percent of pay. They would be boosted this year to 4.6 percent of pay, the rate paid in 1997 before the cut.

A separate contribution of 2.5 percent of pay goes to the CalSTRS Supplemental Benefit Maintenance Account that keeps pensions from falling below 85 percent of original purchasing power.

Several years ago the SBMA was spending $270 million a year but had a large reserve of $7 billion. The inflation-protection payment is said to be a “vested right,” which means the state cannot reduce its SBMA contribution.

Employers — School districts and community colleges, now contributing 8.25 percent of pay, would get a 12.8 percent increase phased in over several years, bringing the total to 21.05 percent in 2020.

The state general fund provides most of the money for schools. An issue that would need to be resolved: Would imposing a CalSTRS rate hike on schools increase the Proposition 98 school-funding guarantee?

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 24 Mar 14

20 Responses to “CalSTRS rate hike: a start, full phase-in or delay?”

  1. Tough Love Says:

    Public Sector pensions (considering BOTH the richness of the pension formula AND the generosity of the pension “provisions” such as COLA increases and young retirement ages) should be NO GREATER than the average paid to Private Sector workers with the SAME pay, retiring at the SAME age, and with the SAME years of service.

    Right now, when such a comparison is made, Public (vs Private) Sector pensions are always AT LEAST 2x greater in value at retirement, MOST OFTEN 3x-4x greater, and for safety workers, often 4x-6x greater.

    These grossly excessive pensions are CLEARLY the result of collusion between the Public Sector Unions and our elected officials …. the trading of campaign contributions and election support for favorable votes on Public Sector pay, pensions, and benefits.

    As such pension value greater than the pensions afforded comparable Private Sector workers should NOT be funded by Taxpayers.

    Taxpayers should RENEGE on funding any Public Sector pensions greater than what THEY get.

    In fact, Taxpayers have likely ALREADY fully funded MORE than their share of a pension equal in value to their own.

  2. Bubble-up Says:

    If teachers don’t like budget cuts–too bad. They are just STARTING and will increase as CalSTRS runs out of money.

  3. larrylittlefield Says:

    Phasing in means waiting until the next recession and fiscal crisis to solve the problem. If California can’t fund it during the latest tech bubble, how will it fund it in a bust?

  4. SeeSaw Says:

    “Private sector workers are being underpaid by six times what they should be paid.” Start working on the problem from that angle, TL.

  5. Tough Love Says:

    Seesaw, Perhaps you can enlighten us mortals where that 6 times came from ???

  6. SeeSaw Says:

    You are claiming that some public sector pensions are six times higher than those for the private sector. I am just suggesting that you turn the situation around and start saying that the private sector is paid “X” amount of times less than the public sector and they need to be upgraded so they are comparable.

  7. SeeSaw Says:

    The State Legislature created CalSTRS 100 years ago–it is their baby and there is no excuse for it not to be funded. There should be no debate–get with it, Legislature and fund CalSTRS!!!!

  8. Captain Says:

    “A half dozen small CalSTRS benefit increases (collectively large benefit increases that spanned a decade, and most of which still continue to this day) were enacted around 2000, including a longevity bonus that expired three years ago ….

    An annual actuarial report from Milliman last April said that if CalSTRS were still operating under the 1990 benefit structure, the plan would be 88 percent funded instead of 67 percent funded.”

    – In other words: CalSTRS, the Teachers Unions, our State Assembly & Senate, as well as the Assembly and Senate public retirement committees are all complicit in screwing up the CalSTRS Pension Plan because they were too busy appeasing the wishes of the unions that control their political future, and now want to fleece the taxpayers because they believe, and rightfully so, apparently, that taxpayers (Tax Payers vs. Unions) are the path of least resistance.

    “Jason Sisney of the nonpartisan Legislative Analyst’s Office offered some perspective last week as he concluded his remarks to a joint hearing of the Assembly and Senate public retirement committees, the second in a series on CalSTRS funding.

    “I think for many people, who are dealing with this in the Legislature and the executive branch right now, this may be one of the most difficult issues you ever face during your careers in public service,” Sisney said. “It’s not going to get easier.””

    – On that I agree. It must be very difficult for these people to Blow-Up School District budgets by increasing pension costs dramatically (increasing employee compensation/costs while simultaneously requiring substantial cuts to school programs) while at the same time defending the actions of CalSTRS, denying the unions control both the votes and political careers of Democratic politicians, and pretending to have the taxpayers (and their children’s) best interests at heart. It’s just easier for these self serving politicians & pension funds to bamboozle a slumbering public into voting for more School Bonds and Parcel taxes than it is for them to grow a set and push back against their militant financial backers (Teachers, Firefighters, and Police unions).

    It isn’t all about the children – just the opposite, but it is all about the paychecks, pensions, and what the CTA can get away with. What have they gotten away with:

    **”An annual actuarial report from Milliman last April said that if CalSTRS were still operating under the 1990 benefit structure, the plan would be 88 percent funded instead of 67 percent funded.”**

  9. Tough Love Says:

    Captain, Well said.

    or …

    As Walter Russell Mead, the James Clarke Chace Professor of Foreign Affairs and the Humanities at Bard College. said* ………. There is a kind of a conspiracy between government officials, politicians, and Union leaders ….

    *http://pensiontsunami.com/blog/?p=163

  10. Captain Says:

    Thanks, TL. And thanks for the link.

  11. Captain Says:

    “Teachers — Contributions, now 8 percent of pay (they were 6% for the past decade why Teacher’s were allowed to diverted two percent (25%) of their contribution toward their own individual retirement accounts with a guaranteed rate of return on the diverted funds of about 4 percent, courtesy of CalSTRS and our tax dollars – which provides additional retirement income beyond their pension), would increase to 10.83 percent of pay by fiscal 2017, costing the average teacher hired before 2013 an additional $2,150 a year.”

    – I guess they’re talking about the increased cost to Teacher’s Union Members when the phased in costs actually reach full funding in 2017. For that additional contribution/benefit they receive 2% cost of living increases for life, even if they only pay a portion of phased in contributions because they retire in the first year after the program is implemented. Like always, the devil is in the details. This is nothing more than a continuation of the shenanigans that got us to 65% funding in the first place.

    I thought Retroactive Pension Benefit increases were illegal under the governor‘s watered-down pension reform! And that is exactly what this is – a Retroactive Pension Benefit increase that will cost dearly.

    Just say NO WAY to this latest scheme that requires taxpayers and school district budgets to backstop even more guaranteed pension nonsense! This is a VERY BAD DEAL!

    *Can we get someone to write about this*

  12. toothbrushes Says:

    It is extraordinary how much the underfunding is despite the contributions level. The volitality of the markets is something any investor has to plan for. Clearly, the payouts are are too high. If these cannot change, the taxes need to go up. If the citizens are not happy, they can take steps to change. No solution is off the table; laws can be changed, the state constitution can be changed. The pension recipients can move if their pensions are reduced. No one said life is fair.

  13. Captain Says:

    “larrylittlefield Says: Phasing in means waiting until the next recession and fiscal crisis to solve the problem. If California can’t fund it during the latest tech bubble, how will it fund it in a bust?”

    – Excellent question. There’s a good chance that fully funding contributions, which requires a phased in taxpayer contribution increase of well over 100%, will happen in 2020:

    “To allow time for planning and budget adjustments, the funding scenarios prepared by CalSTRS staff phase in rate increases over several years, some not reaching the maximum until fiscal 2020.”

    – In other words CalSTRS will reach the pinnacle of their contribution rate hike about the same time we could be worrying about the next recession. And, also, about the same time the Prop 30 revenue that provides additional funding for schools has ended.

    What isn’t mentioned in this article is that CaLPERS rate hikes of up-to 50 percent, which will also be phased in, impact School District General FUNDS because they apply to all school district employees that do not teach.

    Talk about a perfect storm – I can see it coming!

  14. Tough Love Says:

    I’m waiting for a city in distress, but not yet ready to file for bankruptcy, to simply tell CalPERS .. “Sorry, but we won’t be paying you this year, as we ONLY have sufficient revenue for essential services, and funding pensions is NOT essential. We’ll pay when we can, but don’t expect that to happen anytime soon.”

  15. Mr. Tourkensen Says:

    Of course cities will fund this education mandate—supporting teachers is the right thing to do as is– keeping our word. All politics is local—sounds like the same old pension envy for these middle class workers out here– pathetic!

  16. toothbrushes Says:

    Yes, and the modest $95000 annual pension for a recently retired high school coach is below what the middle class is getting from tax free social security and lavish corporate benefits. People are trying to deny him and keep it all for themselves. That is so greedy. Why do we underfund education and all gov t services?

  17. Tough Love Says:

    Mr. Tourkensen,

    Oh please, not one dollar of additional funding will go to the children or get to the classroom.

    It’s ALL to fund PUBLIC Sector pension promises MULTIPLES greater than those typically granted PRIVATE Sector Taxpayers.

  18. SeeSaw Says:

    Wouldn’t that be great if we could just prioritize all our debts, decide which are important to us and which are not–then we would just tell the creditors that provide what we decide is not essential to go stick it! You should be doing, “stand-up”, TL–you are hilarious!

  19. toothbrushes Says:

    Like the city of Stockton. Under theirv proposed bankruptcy, the pensions are intact, and the Franklin Bond Fund is offered less than ten cents(far less) than the debt. That is more than fair. They could have received nothing and the 10 percent could go the pension fund.

  20. Captain Says:

    From the article, from Mr. Mendel:

    “The total spending increase needed to get CalSTRS, brought low by mismanagement, back to full funding may be the biggest-dollar scenarios ever presented to a California legislative committee.”

    – I just thought that powerful statement deserves repeating.

    “Legislators were told last week an additional $181.7 billion would be needed for full funding in 20 years. If payments are spread out to ease the budget bite, the additional amount needed to reach full funding in 60 years is a staggering $618 billion.”

    – Both scenarios will destroy school district budgets absent a taxpayer bailout. Unfortunately CalSTRS & the Teachers Unions are willing to bet that, when push comes to shove, the TAXPAYERS will pony-up – one way or another, because they actually believe “it’s all about the kids.” The UNIONS and School Districts, Sitting across the table from TAXPAYERS – are pushing their CHIPS ALL-IN!

    What do taxpayers get for providing all these additional dollars? IMO, there is absolutely nothing being offered in exchange for the 182 – 618 BILLION DOLLARS in additional funding. Why is that? Most of these Unions in Concert with their Pension Plans expect something of equal or greater value in exchange for reducing a benefit. Shouldn’t Taxpayers get some value in exchange for their (and their children’s/society’s) reduced benefit- instead of reduced services which is the obvious outcome of shifting money (BILLIONS) from educational dollars to pensions expenses?

    ** (the Teachers Unions count pension costs as classroom dollars because it pays money to the teachers that work in the classroom – that’s how they justify it even if those dollars don‘t create any additional value added (except to retirement benefits)**

    Doesn’t increasing tax-dollar funding from taxpayers (BILLIONS UPON BILLIONS of DOLLARS) deserve something of equal value? Shouldn’t CalSTRS/Teachers receiving a Taxpayer commitment of 100’s of BILLIONS of dollars require Taxpayers get something of value in return? I think so!

    I read this Guest Opinion from Tony Smith, a former superintendent of the Oakland Unified School District, which appeared in the Contra Costa Times (May 30, 2014): Let’s start protecting all of our students

    “California’s education laws are currently designed to almost unconditionally protect a group of adults — teachers — at the expense of our children.

    And students living in poverty — those most in need of every opportunity our public schools can offer — are being disproportionately punished by these laws. The system tells them: sorry, teachers’ jobs are more important than your education and your future.

    Is that right?

    No, it isn’t, say the nine students who brought the Vergara v. California case, currently awaiting a ruling in Los Angeles Superior Court. The students are suing the state because five state laws are denying them — and the other 6.2 million California public school students like them — their constitutional right to a quality education.

    If the court agrees, then the dysfunctional statutes controlling teacher tenure, dismissal and layoffs will be struck down, creating a transformational opportunity to design a new system that puts students’ needs first, ensures a high-quality teacher in every classroom and helps all Californians see a better future.”

    The Tony Smith opinion goes on to say that:

    “The tenure law forces administrators to grant lifetime employment to new teachers after less than 16 months in the classroom. I am aware of no other profession where someone is granted protected status in such a short time and without any real evidentiary basis for the decision.

    Once permanent employment is granted, it is nearly impossible to dismiss ineffective teachers for any reason other than criminal activity. The dismissal process is so cumbersome and costly that in the past 10 years, only 19 teachers out of California’s 1,052 school districts have been successfully terminated through the dismissal process for reasons including unsatisfactory performance.

    When funding reductions instigate layoffs, administrators are not allowed to base staffing decisions on the quality of a teacher’s service to children. The primary factor that may be considered is how long he or she has been employed by the district, so every year a district has layoffs, children lose passionate, hardworking, effective teachers — just because they lack seniority.

    As superintendent of Oakland Unified School District, I had to explain why excellent teachers were being let go, while parents pleaded and begged, saying, “Please, please keep this teacher. You don’t understand what this year has been like for my child. This is one of the most extraordinary educators I’ve ever seen in my life.”

    But under the law, there is nothing we can do to keep that extraordinary educator.

    Is the system I just described a system focused on what’s best for children?

    Not to me.

    A system that prioritizes meeting the needs of California’s students — as the state constitution demands — would focus on enhancing educational quality before protecting seniority.”

    Read the rest here (well worth it): http://www.contracostatimes.com/opinion/ci_25435767/guest-commentary-lets-start-protecting-all-our-students

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