The percentage of new charter schools choosing CalSTRS pensions began a sharp drop in 2014, the year long-delayed legislation began to more than double CalSTRS employer rates by 2020.
Whether the trend toward 401(k) plans or Social Security threatens the actuarial soundness of CalSTRS is scheduled to be part of an annual risk report in November.
Some board members are urging a response to the trend, possibly even legislation to make CalSTRS mandatory.
Compared to the national average, California charter schools operating outside of usual regulations are a larger part of the total K-12 schools (12.2 percent compared to 7.2 percent) and are growing at a faster rate, said a June report to the CalSTRS board.
The number of new charter schools opening each fiscal year that did not choose CalSTRS had been roughly around 10 percent for eight years (see chart) until falling in fiscal 2014-15 to 20 percent and in 2015-16 to 33.3 percent.
“I don’t know what the right process is but my sense is maybe we need some statewide legislation — or an initial conversation that if you are going to be a publicly funded public charter school in the state of California, there is one option, and the option is you’re in CalSTRS,” board member Harry Keiley said at the June meeting.
Keiley said a well-managed pension system provides the best retirement security. He said CalSTRS should follow its beliefs and challenge the view that there are equivalent retirement alternatives to a pension.
“I don’t think we should allow that to perpetuate,” he said, “and I think we have some control over that, at least the conversation.” The board chairwoman, Dana Dillon, followed his remark with a soft, “Hear, hear.”
A survey of charter schools for the CalSTRS report only got 13 responses to a question about why CalSTRS was not chosen. “Cost prohibitive” replied 42.9 percent, followed by “not sure” 35.7 percent, and “other” 21.4 percent.
Apart from the skimpy survey and the timing, there is little evidence that charter school decisions may have been influenced by legislation in June 2014 that raises school district CalSTRS rates from 8.25 percent of pay to 19.1 percent of pay by 2020.
A pension reformer campaign has been showing that back-loaded teacher pension systems typically do not earn more benefits for young teachers than a 401(k)-style plan until about 25 years on the job, prompting a CalSTRS rebuttal study.
The cloud around underfunded pensions with record employer rates may or may not have affected some of the 35 percent of new University of California hires who chose a 401(k)-style plan, instead of a pension, during the first 10 months of the new option.
At the CalSTRS board in July, the chief executive officer, Jack Ehnes, outlined a plan for a charter school report in November on actuarial, audit, and financial risks, followed in February by a report on elections, renewal, membership, and outreach.
The board chairwoman, Dillon, said it’s a complex “hot-button issue” and the research should not be rushed to meet deadlines. She advised reaching out to academics and thanked the California Charter Schools Association for agreeing to assist.
“There are going to be entities on all sides of this,” Dillon said. “They will all have their own agenda. We want to try and get as unbiased information as we possibly can. We will have state and national constituency groups — and even our state and national constituency groups are torn pro- and anti-charter. So it does get convoluted.”
For more than a year the California State Teachers Retirement System staff has been looking into charter school actuarial and financial risks, particularly if the trend of choosing an alternative retirement plan continues, Ehnes said in the July report.
A significant increase in the number of charter schools not choosing CalSTRS could lead to a decline in members, said his report, making it difficult for the board to set contribution rates needed to reach full funding.
The June report said charter schools had 9.5 percent of full-time K-12 teachers in fiscal 2014-15, up from 3.2 percent in 2005-06. At the same time, the number of charter schools grew from 543 (5.6 percent of the total) to 1,277 (12.2 percent).
CalSTRS has been one of the few, if not only, California public pension system that lacked the power to set employer rates, needing legislation instead. For the first time, the funding legislation in 2014 gave CalSTRS some rate-setting power.
But state lawmakers limited the power. CalSTRS can raise state rates, 8.8 percent of pay last year, by up to 0.5 percent of pay each year until 2046. After school district rates reach 19.1 percent in 2020, CalSTRS can raise them no higher than 20.5 percent.
A CalSTRS audit of eight charter schools found other risks. Charter schools had a lower problem rate than traditional schools except in a key area: accurate reporting of pay. Two charter schools were said to have filed for bankruptcy before the audits ended.
“Filing for bankruptcy creates a risk that CalSTRS may not be able to collect contributions timely that are due from charter schools and may impact member retirement benefits,” said the audit report in June.
Tri-Valley Learning, the manager of two Livermore valley charter schools, filed for bankruptcy amid allegations of conflicts of interest, commingled funds, and the misappropriation of part of a $67 million tax-exempt bond, the East Bay Times reported.
Oxford Preparatory Academy in Chino, which had the top K-8 test scores in San Bernardino County in 2015-16, closed amid allegations that the founder turned public school dollars into private profit, the Inland Valley Daily Bulletin reported.
The CalSTRS reports are expected to take a close look at charter schools that were created not as start-ups but as coversions of traditional public schools. It’s a relatively small group, about 17 percent of charter schools, said the June report.
The pension earnings of current CalSTRS members could be curtailed if a converted charter school does not choose CalSTRS. Whether this violates vested rights is one of the legal topics to be considered in the November report.
CalSTRS members do not receive Social Security. If they move to a charter school that provides Social Security, those federal benefits could be reduced by the Windfall Elimination Provision that teachers have been trying to change for years.
One of the topics of the upcoming CalSTRS reports is improving outreach to ensure that “all affected parties” are fully aware of charter school retirement benefits and the consequences of not choosing CalSTRS as the retirement plan.
Another topic: “Should legislation be pursued to require all new charter schools provide retirement benefits through CalSTRS?”
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 11 Sep 17
Calpensions 
September 11, 2017 at 3:23 pm
Quoting ………….
“A significant increase in the number of charter schools not choosing CalSTRS could lead to a decline in members, said his report, making it difficult for the board to set contribution rates needed to reach full funding.”
We hear that a great deal, but reasoned thought shows that it’s ONLY a problem because Public Sector pension Plans deliberately and systematically low-balled the TRUE expected cost of their pension promises …….. thereby creating a Ponzi scheme whereby new member contributions are the only way it can be sustained.
Thank about that……..
First, the FULL cost (100%) of each participant’s promised pension should be 100% funded upon retirement….. thereby NOT needing any further contributions from active members or taxpayers.
Second, Given how the TRUE expected cost Public Sector Pension Plans is CONSISTENTLY low-balled ……….and therefore underfunded ………. the contributions from current workers don’t even come remotely close to funding their OWN accruals. To believe that a portion of their contributions is available to fund those of retirees or the shortfall of longer-service actives, is simply preposterous.
September 11, 2017 at 5:52 pm
CalSTRS is busy trying to get new suckers into their Ponzi scheme just like Bernie Madoff was. Instead of focusing on getting the investment returns, CalSTRS is focused on perpetuating their Ponzi scheme.
September 11, 2017 at 6:37 pm
John Freeman, You are only 1/4 correct.
While getting better returns would certainly help, the ROOT CAUSE of the problem are the ludicrously excessive Final Average Salary DB pensions granted CA’s Public Sector workers. Nobody in the Private Sector now gets …or EVER got (even in the long since frozen Fortune 500 Company DB Plans)…….. DB Plans anywhere near the ludicrous generosity that is routine in CA’s current Plans.
Notwithstanding Constitutional provisions, contract law, regulations, case law, and a self-interested judiciary, THAT, being the ROOT CAUSE of the “problem”, must be the necessary focus of reform efforts…… specifically, to VERY materially reduce the FUTURE SERVICE accruals of all CURRENT workers.
NOTHING else will work.
September 11, 2017 at 7:05 pm
Forgive him (her) Joan. You’re lucky he got the second name correct. In full rant mode, Tough Love sometimes eschews spelling. Or grammar. Or common sense. Or manners
SMH.
September 11, 2017 at 7:25 pm
Quoting TL…
“Nobody in the Private Sector now gets …or EVER got (even in the long since frozen Fortune 500 Company DB Plans)…….. DB Plans anywhere near the ludicrous generosity that is routine in CA’s current Plans.”
EVER !!!
My daughter’s father in law (the retired IBEW electrician) laughs at you (and me) all the way to the bank.
May be you’re both wrong…
Ed Ring…
“And because risk in a defined benefit fund is shared across generations of workers, during eras when investment returns are low, existing workers guarantee extra cash coming into the plan to keep it solvent, and during eras when investment returns are high, surpluses are fed into the pension fund that can also be used to make up the shortfall during lean years.”
“And comparing defined benefits – or social security, for that matter – to Ponzi schemes or Pyramid schemes are specious arguments that do not belong in serious debate.”
SMH
September 11, 2017 at 8:08 pm
TL says, the ROOT CAUSE of the “problem”
The root cause of CalSTRS funding problems are the many years that the Legislature declined to make only partial contributions or none at all. It’s the Illinois syndrome. For decades the government doesn’t make all of the needed contributions, then when the pensions are underfunded the pension-haters come out of the woodwork and blame the pension system, the unions, etc.
September 11, 2017 at 9:02 pm
SMH,
Conceptually Ed Ring is correct. “Conceptually” because that ONLY works when the contribution requirements aren’t low-balled as they ALWAYS are under Public Sector Final Average Salary DB Plans.
100% funded (above which some Plans claim to have a surplus) under typical Public Sector valuation assumptions & methodology is about 70% funded using the valuation assumptions & methodology used in the valuation of the Private Sector Plans.
Bottom like………. Public Sector Plans very very very very very rarely have ANY surplus to offset the bad periods. They are deliberately and systematically underfunded to make them appear far less generous and hence costly than they really are.
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And responding to you last (above) comment. Public Sector worker/retiree “takers” such as yourself love to INCORRECTLY label the lack of “full funding” as the CAUSE of the pension mess.
Step back and “think”. The calculated annual amount to fully fund the promised pension is A FUNCTION OF and varies IN DIRECT PROPORTION TO the generosity of the promised pension benefits. ………….twice the generosity requires twice the funding. The lack of full funding is not the CAUSE of the problem, but the CONSEQUENCE of the real ROOT CAUSE…………. grossly excessive pension generosity.
September 11, 2017 at 9:13 pm
Politicians are in office for a short term and that is as far as they care about. They can promise huge benefits to gov workers since they will not be around to deal with the consequences of their actions. Both sides of the aisle are guilty.
September 11, 2017 at 11:29 pm
TL…
“twice the generosity requires twice the funding.”
and…
half the generosity requires half the funding.
Dueling tautologies. But if you have half the generosity, and you don’t even fund that… you’re still scrod.
Yeah…
“Notwithstanding Constitutional provisions, contract law, regulations, case law, and a self-interested judiciary,……”
Those pesky constitutional provisions and laws. What were they thinking?
Without those, we could allow ersatz pension experts such as TL to rewrite the rules.
NOTHING else will work?
SMH
September 12, 2017 at 2:02 am
Quoting SMH……….
“Notwithstanding Constitutional provisions, contract law, regulations, case law, and a self-interested judiciary,……” Those pesky constitutional provisions and laws. What were they thinking?”
*******************************************************
We know EXACTLY what they (i.e. Our Elected Officials) were thinking ……… protect at all costs those (the Public Sector Unions/workers) who feed us huge amounts every year in campaign contributions and election support.
Indeed, and in any other venue, it would be racketeering and bribe giving & receiving.
September 12, 2017 at 9:36 pm
YOU…
“know EXACTLY what they (i.e. Our Elected Officials) were thinking ……… ”
SMH
September 13, 2017 at 1:23 am
Or SMH, if you’re a charlatan, a liar, or just a dummy, you do what you do ….. deny the obvious.
September 13, 2017 at 6:13 pm
Interesting article from an Ohio Public Sector retiree with a financial background….
https://seekingalpha.com/article/4105695-state-pension-funding-crisis-will-likely-result-pension-benefit-cuts-article-5-10?page=12
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Now let the “denying” begin !
September 13, 2017 at 6:14 pm
Woophs, the above is a 12 page article. To start at the beginning, change the 12 at the end of the link to a 1
November 9, 2017 at 10:13 pm
Can a Charter school who is currently enrolled in CalSTRS Switch out of CalSTRS and into SSI?