Will CalSTRS sue state for more funding?

CalSTRS is underfunded, lacks the typical public pension power to force employers to pay more, and is being told by lawyers that the Legislature should come up with a funding plan.

But a deadlocked Legislature faces historic budget cuts and a $19 billion budget gap this year, with similar forecasts for the future. So how does a pension fund not expected to run out of money for 34 years get a seat at the table?

One way might be a favorable ruling in a lawsuit demanding that the state live up to its obligation as the legal “plan sponsor” of the California State Teachers Retirement System, the nation’s second largest public pension fund.

Suing the state was not mentioned last week as the CalSTRS board received a briefing on the legal issues of the funding shortfall from Brian Bartow, the CalSTRS general counsel, and Harvey Leiderman, a pension law expert and veteran litigator.

But a repeated emphasis on the state’s legal requirement to ensure proper CalSTRS funding, and the board’s own “fiduciary” obligation to protect pensioners, seemed to suggest that suing the state is an option.

“In sum, it is clear that the State will ultimately be responsible for finding a way to fully fund the benefits that it has promised to CalSTRS’ members and their beneficiaries,” said a briefing paper presented by the two lawyers.

“The board has the authority and the fiduciary responsibility to demand that the state sufficiently fund the system to ensure a ‘financially sound retirement system…[with] stable and full funding over the long term.’”

The paper cites two cases that Leiderman said are precedents for the state being successfully sued to ensure proper CalSTRS funding: California Teachers Association vs. Cory in 1984 and Teachers Retirement Board v. Genest in 2007.

Whether suing the state makes sense politically would be something for the CalSTRS board to consider.

For example, a court order could deflect arguments that delaying pension payments is a lesser evil than devastating budget cuts now. But the arguments could be coming from powerful teacher unions.

The CalSTRS board also is getting conflicting legal advice on its funding strategy. Ian Lanoff, the CalSTRS fiduciary counsel, said he “respectfully disagrees” with the view that the board does not have the option of making a specific funding proposal.

“In my view one of the options that you have, in light of your fiduciary duty, is for you to do it yourselves and take the bull by the horns and look at everything that’s available and come up with a package of recommendations to the Legislature,” Lanoff said.

Lanoff said one of his clients, a New Hampshire public pension board, chose to remain on the sidelines as the Legislature came up with a “hodge-podge mess,” resulting in several lawsuits, one against the pension board.

“I wasn’t their lawyer at the time they decided that,” Lanoff said. “I’m their lawyer now, defending it against the litigation. We are trying to get them out of it on the grounds that it’s none of their business, sort of what Mr. Leiderman is saying.”

Bartow said he was aware of Lanoff’s view and had asked him to save it for closed session. Board member Carolyn Widener said she wanted to hear from Lanoff, who said Bartow told him he was the “independent” fiduciary counsel on this issue.

“What specific action you take,” Bartow told the board, “what responsibilities you choose to exercise and how you choose to exercise those have very real potential for litigation, and I would hope that we have most of that discussion in closed session because of the potential for litigation.”

Leiderman said Legislatures in several states have directed pension boards to come up with funding solutions, which then must be approved by the Legislature.

“That authority doesn’t exist in California,” he told the board. “You have a constitutional independence that prevents the Legislature from ordering this board to come up with proposed solutions.”

Another consideration, said Leiderman, is that the board has an obligation to all members of the retirement system, not just retirees, and should be impartial to all constituents.

“Once you go down the path of participating and initiating plan design choices you run a risk of picking and choosing among your membership as to who should get and who should give up,” he said.

In the fiscal year ending in June of last year, CalSTRS received $5.3 billion in contributions based on 8 percent of pay from teachers, 8.25 percent from districts and 4.5 percent from the state.

Some states view public pensions as “gratuities” that can be cut at any time, said the briefing paper given to the CalSTRS board last week. But a series of court decisions say California pensions can’t be cut unless replaced by something of equal value.

The paper said the teacher pension contribution, 8 percent of pay, can’t be increased without an offset of equal value. The only benefit that can be cut without an equalizer is a 2 percent annual cost-of-living adjustment for retirees.

California teachers do not have one of the more generous retirement packages. Their “2 at 60” pension formula is two percent of final pay for each year served at age 60. They get no Social Security and many, if not most, do not have retiree health benefits.

By contrast, most state workers have a “2 at 55” formula, receive Social Security in addition to their pension, and are eligible for cost-free retiree health coverage after 20 years of service.

State workers also are in the giant California Public Employees Retirement System, which unlike CalSTRS has the power to set rates paid by the state.

The annual state payment to CalPERS is $3.9 billion, up $600 million (18 percent) from last year. The state is paying an additional $1.4 billion for state worker retiree health care.

The state payment to CalSTRS this year is $1.2 billion. Actuaries told the board last week that CalSTRS needs an annual contribution increase of 14 percent of pay, about $3.8 billion, to be fully funded after 30 years.

A staff recommendation that CalSTRS lower its earnings forecast from 8 to 7.5 percent would push the contribution increase needed for full funding to 20 percent of pay, about $5.4 billion.

It’s a case of pay now or pay more later. If payments to the pension fund are not increased, the annual payment needed for full funding goes up. And without an increase, CalSTRS is projected to run out of money by 2044.

The system would revert to pay-as-you-go, with no investment earnings to help pay benefits, now about $9 billion a year. The CalSTRS consulting actuary, Milliman, said pay-as-you-go costs in 2044 would be about 50 percent of payroll.

To provide some perspective on CalSTRS’ situation amid widespread reports of troubled public pension funds, Nick Collier of Milliman mentioned a recent study of state pension funds.

“Some of these studies you have to take with a grain of salt, but it seemed like their assumptions were reasonable,” he said. “They said seven statewide systems were projected to run out of money by 2020.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 7 Sep 10

7 Responses to “Will CalSTRS sue state for more funding?”

  1. Christine Says:

    My mother was a teacher, and what articles, like this one, fail to say is that the teachers do not collect Social Security because they do not pay into Social Security. It is terribly misleading to cast the players in the role of victim unless one also tells the entire truth. A retirement system that has enough funding for the next 34 years (as stated in your article) is unlikely to garner much sympathy in a legislature struggling to pay bare necessities for the poor and disabled population and to keep current teachers in the classrooms.

  2. mrek Says:

    You’re perpetuating the “cost-free health care” fallacy for state retirees. Not true. There’s a formula based on the lowest-cost plan (one that only covers catastrophic situations without large copays) — the decent plans cost something, usually substantial, out of pocket for retirees. Same thing for state employees: the health plans cost a few $100/month out of pocket for a family after state contribution, and when the cost goes up 10% (as it will in January) the State covers maybe (usually less than) 1/2 the difference depending on the unit contract. Bottom line: health care ain’t free.

    I agree about the Social Security comment. State employees pay into SS and Medicare like most in the private sector, so they get something at the end. Also, there’s a penalty for teaching: if you work for years paying into SS, then “give back” for a while teaching, you lose most of the SS that you paid for.

  3. Fake OCO Says:

    My mother was a teacher, and what articles, like this one, fail to say is that the teachers do not collect Social Security because they do not pay into Social Security.
    ==============
    Your mother was “opted out” of social security-the unions could bring it back ANYTIME they want to.

    But the age for FULL retirement in SS is 67, not 57 which is the average age for teahers to retire, and the MAXIMUM SS benefit, at age 67, with even 40-45 years of service is $30K. The average teacher pension is over $40K, at age 57 with 30-33 years of service.

    There is a reason teachers are not in SS, they have it 20 tiems better in Clastrs.

  4. My Question Says:

    Do individual school districts have separate liabilities like CalPERS participants? Or is the state itself responsible for the entire liability?

  5. munner413 Says:

    Unions continue to breed mediocrity and appeal to ‘dumbed down’ members (teachers) who sit back and wait for others to solve their problems.

    You continue to rape our system, rape our kids with your furloughs, and rape the private sector – in support of your pay, benefits, and pensions that are mismanaged, unrealistic, and remain unfunded…. until you sue the People of California.

    “Live Better (off the backs of others)- Work Union (don’t think, just be average, and don’t worry becuase someone else will pay for you!)”

    This times… they are a changin’………………..

    Munner413

  6. vcoffey Says:

    One thing this teaches us is that there is no such thing as an overfunded pension fund. Another is that we all have to work together to make necessary change. If retirees give up one percent of their raise each year, teachers pay one percent more in strs cost, and districts match that, we are all contributing. Would this be enough to make a difference? Our pensions are not unrealistic, given how much we pay for them and how long our money is held and earns interest. Can our number crunchers come up with a workable plan? Has the market recovery helped at all?

  7. Two Cents Says:

    Christine, many teachers have also worked earlier in the private sector and contributed to Social Security. But because of their pensions, their SS benefits are cut to a bare bones minimum (around $500/month).

    Salaries in the private sector are way higher than in government jobs and employees have more opportunities to save more and supplement their Social Security. Teacher salaries are still low by comparison. Pensions are a way to offset decades of lower salaries. If pension benefits are also cut, how many qualified people would want to be teachers rather than private sector employees? All this at a time when the education system is slipping in comparison to the rest of the world. Go figure.

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