CalSTRS was bracing to report the nation’s biggest pension debt under new government accounting rules that take effect this fiscal year — $167 billion, an amount so huge some thought it might increase the cost of issuing local school bonds.
But a long-sought rate increase approved by the Legislature and signed by Gov. Brown in the nick of time, a week before the current fiscal year began July 1, will allow CalSTRS to report a debt that is shrinking not ballooning.
Last week the CalSTRS board received a preliminary estimate from Milliman actuaries that drops the new debt report by nearly two-thirds to $59.9 billion. That’s less than the current unfunded liability under the old accounting rules, $73.7 billion.
Jack Ehnes, CalSTRS chief executive officer, said that in “the final moments” the Legislature asked CalSTRS about the impact of passing the funding bill before the new Governmental Accounting Standards Board statement period began on July 1.
“We explained to them that the timing issue has a very significant impact, although it’s not the reason we passed the bill by itself,” Ehnes said.
“But nevertheless, we were facing a $167 billion net pension liability. We were facing the highest net pension liability disclosure in the entire country — there is no doubt about that — prior to July 1.”
While talking to school officials about the need for a CalSTRS rate increase, Ehnes said he found a mixed view of the impact if a funding solution was not enacted by July 1 and school districts had to report a huge pension debt under the new rules.
“Some arguing it would have no effect if people understood the basis for this,” he said, “others arguing that it would have a significant effect on the bond market for schools. So the question was out there.”
With passage of the funding bill, any anxiety about a California State Teachers Retirement System pension debt shock, alarming the public and driving up bond costs, has been replaced by good news.
“We will not be the headline story in the country next year when GASB numbers are put out there, because of the success of the Legislature and the administration on this bill,” Ehnes said.
The accounting board is best known for new rules last decade directing government employers to begin calculating and reporting the often-ignored debt for retiree health care. Now new pension rules are having an impact.
Better alignment with the new GASB rules was one of the reasons mentioned for new actuarial methods adopted last year by the California Public Employees Retirement System, which pay down debt in a shorter period and raise employer rates.
The new rules do not require a change in pension operations or actuarial rate-setting methods. The goal is to give the public a better view of pension debt, prominently displayed on balance sheets in a way that reflects annual up-and-down movement.
The new public reporting term, “net pension liability,” is a compromise with the view of critics who say pension fund investment earnings forecasts (currently 7.5 percent a year for CalSTRS and CalPERS) are too optimistic and conceal massive debt.
Pension systems can continue to use their earnings forecasts to offset or discount the part of their future obligations covered by the projection of their assets. But if assets fall short, the systems must switch to a lower risk-free bond rate for the rest of the debt.
For CalSTRS, what the Milliman actuaries found is that with the funding bill, a $5 billion rate increase phased in over seven years, enough assets can be projected to avoid crossing over to the lower bond rate.
“We have found that the STRP (State Teachers Retirement Plan) Fiduciary Net Position is projected to pay all projected STRP benefit payments in all future years,” said the Milliman actuaries report.
Unlike most California public pension systems, CalSTRS lacks the power to set annual rates that employers must pay, needing legislation instead. Pleas for a rate hike had been ignored for years.
The phased-in rate hike that will grow to $5 billion after seven years nearly doubles the annual contributions, $5.9 billion, that CalSTRS currently receives from three sources: schools, teachers and the state.
Last year CalSTRS paid $11.9 billion in pension benefits to 269,274 retirees and beneficiaries. Without a rate increase, the investment fund, valued at $187 billion on July 31, was projected to run out in about 30 years, even if earnings averaged 7.5 percent.
The big rate increase (AB 1469) allows CalSTRS to project full funding in 30 years, when the system would have 100 percent of the assets needed to pay pension obligations.
The last time CalSTRS funding reached 100 percent, during a stock market boom around 2000, teacher and state contributions were reduced and retirement benefits were increased in several ways.
In what now looks like questionable management, full funding apparently was regarded as a windfall that allowed less money to be put into CalSTRS and more money to be taken out through higher benefits.
A Milliman actuarial report last year said that if CalSTRS had continued to operate under the contribution and benefit structure in place in 1990, without the changes made around 2000, the pensions would be 88 percent funded.
Instead, CalSTRS pensions were 67 percent funded last year. Now the school CalSTRS contribution will increase from 8.25 percent of pay to 19.1 percent by 2020, a big bite from school budgets in a state where per-pupil funding is well below the national average.
Gov. Brown started the move toward a CalSTRS rate hike last January, calling for talks to work out a plan. Then former Assembly Speaker John Perez, D-Los Angeles, and Assemblyman Rob Bonta, D-Oakland, announced a push to get the rate hike this year.
Asked about pensions during a governor’s race debate last week with challenger Neel Kashkari, Brown mentioned his pension reform two years ago (AB 340) and the CalSTRS funding bill this year.
“Is it enough, no?” Brown said. “But I can tell you I have been in government a fairly long time. Things don’t get done with a press release or a glib statement. They take many, many years.
“We’ve made major progress, the first pension reform, but this is not easy. So in my next four years, yeah, we’ll go further in the pension for the PERS. We’ll do something about retiree health care and, most importantly, we’ll keep paying down our wall of debt.”
State Controller John Chiang and others have urged pension-like investments to help pay for state worker retiree health care, which is pay-as-you-go and costing about $1.8 billion this fiscal year.
The controller’s actuary estimates the unfunded liability for retiree health care promised state workers is $64.6 billion, more than the $49.9 million unfunded liability for state worker pensions as of June 30 last year.
The funding bill will pay down the CalSTRS debt. What the governor intends for CalPERS remains to be seen.
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 8 Sep 14