Gov. Brown yesterday appointed two CalSTRS board members with decades of experience in law and financial firms, a first step toward an ambitious pension reform plan he issued in October to end abuses and cut costs.
One of the points in the governor’s 12-point plan calls for increased “independence and expertise” on pension boards, now often dominated by public employee union representatives and their allies.
Critics contend that overly optimistic earning forecasts were used to justify major pension increases a decade ago. Supporters told legislators the increased pension costs would be covered by CalSTRS and CalPERS investment earnings, not taxpayers.
“In the past, the lack of independence and financial sophistication on public retirement boards has contributed to unaffordable pension benefit increases,” said Brown’s plan.
“Retirement boards need members with real independence and sophistication to ensure that retirement funds deliver promised retirement benefits over the long haul without exposing taxpayers to large unfunded liabilities.”
An investment banker appointed by former Gov. Arnold Schwarzenegger to the CalSTRS board, David Crane, was denied confirmation by the Senate in 2006 after repeatedly questioning whether earning forecasts would cover future pension costs.
The Senate leader at the time, Don Perata, D-Oakland, told the Los Angeles Times the job of CalSTRS board members is “only to protect members’ benefits,” not to worry about the long-term effects of the benefits on the state budget.
A Brown news release said the appointments of the two Democrats “add significant public and private sector financial expertise” to the board of the California State Teachers Retirement System.
Michael Lawson, 58, of Los Angeles, has been an associate and partner at the Skadden Arps law firm from 1980 to this year. He was a staff attorney at the Pension Benefit Guaranty Corporation from 1975 to 1980. The Harvard Law School graduate serves on the board of Morehouse College and the Advancement Project.
Paul Rosenstiel, 61, of San Francisco, is a principal at De La Rosa & Co. Investment Bankers. He was deputy state treasurer from 2007 to 2009 and public finance director for First Boston from 1986 to 1995 before originally joining De La Rosa. The Stanford MBA is chairman of the California Budget Project and a board member of the USC Keston Institute for Public Finance and Infrastructure Policy.
The appointments require Senate confirmation and the compensation is a $100 expense payment per meeting. The terms of three of the 12 CalSTRS board members expire this month.
The board has had two vacancies since February, when Brown pulled two last-minute Schwarzenegger appointees. One of them was a co-author of a report last year that helped put the spotlight on public pension earning forecasts.
A widely quoted Stanford graduate student report said the debt of the three state pension funds is $500 billion over the next three decades, not $55 billion as reported at the time.
The students made the calculation using a risk-free earnings forecast based on government bonds, 4.1 percent, rather than the earnings forecast used by CalPERS, CalSTRS and UC Retirement, which ranged from 7.5 to 8 percent.
The Stanford students, working under the direction of former Assemblyman Joe Nation, D-San Rafael, said economists say a risk-free earnings forecast should be used because the debt or “unfunded liability” is risk free, guaranteed by taxpayers.
Support for using risk-based earning forecasts to report pension debt has come from, among others, the Congressional Budget Office and a brief issued last year by the Center for Retirement Research at Boston College.
A new brief issued by the Boston research center this week takes one of the first looks at how new rules proposed by the Governmental Accounting Standards Board might appear to sharply increase public pension debt.
The funding level of CalSTRS plummets, dropping from 71.5 percent to 38.9 percent. The funding level of the California Public Employees Retirement System, which already applies one of the big changes, only drops from 62.6 percent to 56.3 percent.
The study concluded that the total funding level for 126 large state and local public retirement systems would drop from 77 percent to 53 percent, well below the 80 percent considered acceptable by some experts.
The researchers said the GASB proposals “do not alter the underlying fundamentals: $1,000 owed to a retired teacher in ten years under current standards will remain $1,000 owed in ten years under the new standards.”
The report by Alicia Munnell, Jean-Pierre Aubry and others is intended to alert policymakers about how the new rules could appear to sharply reduce pension funding levels, often used in judging financial health.
“It would be unfortunate if the press and politicians characterized these new numbers as evidence of a worsening of the crisis when, in fact, states and localities have already taken numerous steps to put their plans on a more secure footing,” said the report.
“Reforms need to be done carefully and thoughtfully, remembering that pensions are an important part of the total compensation of public sector workers. Policymakers should not let new numbers throw them off course.”
The study applied two of GASB’s proposed changes. One would allow pension funds to continue to use their earnings forecast for assets expected to be available to offset or “discount” future pension obligations.
But if the assets fall short, the pension fund would presumably have to borrow to cover the remainder. So to reflect borrowing costs, the fund must switch to a lower government bond-based earning forecast for the rest of the obligation.
The other GASB change would value pension fund assets at market rates. Pension funds “smooth” their gains and losses over several years to avoid big swings in annual contributions from employers and employees.
CalPERS already uses the market value of its assets because it has a 15-year smoothing period, about three times the industry average. CalSTRS uses a three-year smoothing period.
Unlike most California public pension systems, CalSTRS cannot set its employer contribution rate, needing legislation instead. A spokeswoman said the new accounting rules would not change the way CalSTRS calculates its funding needs.
“Although the liability may be reported on a financial balance sheet as a new, significantly higher amount, the actual current shortfall of $56 billion projected by CalSTRS would not change as a result of any action taken by GASB,” said Gretchen Zeagler.
CalSTRS officials have urged lawmakers to begin phasing in a contribution increase, arguing that delay increases costs. Brown’s 12-point plan does not address the CalSTRS shortfall.
GASB is expected to issue rules next June, effective a year later for big plans and two years later for others. At a hearing in San Francisco in October, CalSTRS and CalPERS asked for a delay, saying more time is needed to prepare for the change.
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 1 Dec 11