Deep-in-debt CalSTRS also has $9.8 billion surplus

The main CalSTRS pension fund is seriously underfunded, and school district pension costs are more than doubling, biting deep into classroom budgets. But a CalSTRS inflation-protection fund has a growing $9.8 billion surplus and an eye-popping positive cash flow.

The Supplemental Benefit Maintenance Account keeps retiree pensions at 85 percent of their original purchasing power, a particularly important safeguard for teachers with modest pensions who live to an advanced age.

It’s an addition to the regular CalSTRS pension cost-of-living adjustment, an unchanging 2 percent of the original pension that does not compound earnings, thus falling well short of keeping pace with inflation over the years.

The 2 percent cost-of-living adjustment is funded the same way as the pension. The money comes from the main CalSTRS defined benefit investment fund that receives contributions from teachers, school districts, and the state.

But the add-on inflation protection is a separate special fund. The program, paid for only by the state, began in 1982 and evolved through a series of legislative changes. Step-by-step, inflation protection grew from 58.4 percent to 85 percent of original purchasing power.

Some increases included cuts in state contributions. When the state withheld a $500 million payment in 2003, a court ordered repayment. But there has never been an analysis to see if building a huge separate fund is a cost-efficient way to provide inflation protection.

The unusual California State Teachers Retirement System program created through negotiation and conflict, not rational long-term planning, has had extreme positive cash flow for decades.

Spending $161 million. The cost of keeping pensions at the inflation-protection line has not changed much for nearly three decades. It was $169 million in fiscal 1990 for 52,199 retirees at 68.2 percent, and $161 million last fiscal year for 61,387 retirees at 85 percent.

Income $699 million. The state must contribute the equivalent of nearly 2.5 percent of the teacher payroll every year: $699 million last fiscal year, $649 million the previous year. It’s a “vested right” of CalPERS members, protected by contract law.

Reserve $14.2 billion. The inflation-protection fund is guaranteed to earn the CalSTRS earnings forecast, now 7 percent a year, whether investment yields are good or bad. The fund more than doubled from $5.3 billion in 2008 to $14.2 billion by June 30 last year.

The rationale for the huge reserve is CalSTRS wants a fund that, combined with the projected future annual payments from the state, is large enough to keep retiree pensions at 85 percent of their original purchasing power through June 30, 2089.

If inflation is no higher than CalSTRS assumes, 2.75 percent, the current inflation-protection fund is large enough to maintain 85 percent purchasing power for the next 70 years, with an excess or surplus of $9.8 billion. But inflation is the key.

If inflation increases to 3.5 percent annually, actuaries say the inflation-protection fund will be depleted by 2069. And if inflation increases to 4 percent annually, the fund will be depleted by 2048.

What’s never been analyzed is whether switching the CalSTRS inflation-protection program to conventional pension funding could save money, possibly billions if the $14.2 billion reserve and the annual 2.5 percent of teacher pay were used to pay down pension debt.

CalSTRS should be looking for ways to put more money into the pension system. It had 100 percent of the projected assets needed to pay future pension costs before the international financial crisis and stock market crash in 2008.

The value of the CalSTRS pension fund plunged from $180 billion to $112 billion, then climbed back to $229 billion by last Sept. 30. The pension fund may have doubled since the bottom in 2009, but the pension debt or “unfunded liability” ballooned to $107 billion.

Last year CalSTRS was only 65 percent funded, despite a bull market of record length. Now because of the failure to recover, if there is a market crash or a long slump it’s a much shorter drop to 50 percent funded, a red line experts say can be a crippling blow.

CalSTRS officials know the value of promptly paying down debt. “Pay now or pay more later,” they said while urging the Legislature to raise rates. Unlike most California pension systems, CalSTRS historically couldn’t raise employer rates, needing legislation instead.

Legislation in 2014, six years after the market crash, finally raised teacher, school district, and state rates. CalSTRS was given limited power to raise state rates, up to 0.5 percent of pay a year until 2046, and also to raise school district rates, but only by about 1 percent of pay.

The rate increases have CalSTRS on a path to full funding by 2046. But as the plunge from 100 percent funding a decade ago showed, full funding can be only an illusion if it’s based on unpredictable stocks, rather than investments as certain as U.S. bonds.

And the rate increases, including school district costs going from 8.25 percent of pay to 19.1 percent of pay over seven years, were not large enough, even assuming investments earn 7 percent, to prevent debt from continuing to grow until 2026.

That’s when rate contributions are projected to end the “negative amortization” and become larger than the interest on debt from previous years, usually from below-target earnings. But some experts say earnings next decade will likely be less than the current 7 percent target.

A report to the CalSTRS benefits committee in September outlined the complex legislative history that led to a $14.2 billion reserve for supplemental inflation protection, nearly three times more than the $5 billion rate increase four years ago.

The first level of inflation protection, the 2 percent cost-of-living adjustment authorized by legislation in 1972, is funded through the main pension fund. A similar CalPERS program that keeps pensions at 75 or 80 percent of original purchasing power is funded the same way.

Apparently to control costs, a separate fund was chosen for the CalSTRS supplemental inflation protection created in 1982. Over about three decades, protection was ratcheted up in a half dozen steps from 58.4 percent to 85 percent of original purchasing power.

A major change in 1989, during a tight state budget, shows how negotiations shaped the inflation-protection program. To skip its payment for one year, the state agreed to a new rate: 0.5 percent of pay the first year, then up to the current 2.5 percent of pay.

In 1997 as purchasing power was increased from 68.2 percent to 75 percent, legislation allowed the state to reduce its inflation payment by $320 million for one year, offset by a similar amount from the sale of school lands.

Revenue from federal land given to the state to support schools had been used for the inflation-protection program since fiscal 1984. Two years ago the remaining school land, and property purchased with money from the sale, yielded only $5 million.

In 2008 in exchange for reducing its annual payment by $72 million, the state agreed to raise original purchase protection from 80 to 85 percent, the current level. That was enough then to lower the state payment from 2.5 percent of pay to about 2.2 percent of pay.

But as teacher pay increased during the last decade, the $72 million is now a much smaller part of the more than $700 million payment to the supplemental inflation-protection fund this fiscal year.

At the biennial report on the inflation-protection fund in May, the CalSTRS board asked staff to meet with school groups and the Legislature to work on options for using some of the $9.8 billion surplus to aid retirees most in need of economic assistance.

Teachers do not receive Social Security, unlike state workers who have Social Security in addition to CalPERS pensions. Some long-time CalSTRS retirees have small pensions, particularly if they retired before a big spike in inflation around 1980.

The board has heard emotional testimony about impoverished retirees who served long careers. But some think dipping into the reserve might open the door for negotiations on other contentious issues, maybe even a second look at the 2014 funding legislation.

Next month the board is expected to receive a report on the cost of delaying a rate increase until 2014. An analysis to determine whether the supplemental inflation-protection fund is a costly waste might be a prudent next step.

Among other things, if experts are right about below-7 percent earnings during the next decade, maintaining 7 percent earnings for the inflation-protection fund would reduce earnings by the pension fund.

CalSTRS gave these examples in response to a question. When investments earned 9 percent last fiscal year, the amount earned over 7 percent by the inflation fund was credited to the pension fund, boosting its earnings to 9.15 percent.

But if CalSTRS investments only earned 5 percent last year, the pension fund would be credited with 4.85 percent earnings because of the need to maintain 7 percent earnings for the inflation fund.

Meanwhile, the $14.2 billion inflation-protection reserve will continue to grow because of the guaranteed 7 percent earnings and the vested annual state payment of 2.5 percent of the teacher payroll (minus $72 million).

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 17 Dec 18

14 Responses to “Deep-in-debt CalSTRS also has $9.8 billion surplus”

  1. MikeB Says:

    Then there are the separate county systems. Some have no inflation protection at all, not even regular COL adjustments. Sonoma’s is basically an annuity – payment is fixed at the start and never changes – your classic fixed income. If they have a surplus and expect to keep it, they might do a purchasing power adjustment similar to what this separate fund would provide – after you’ve been retired for at least 20 years. They expect you to have other retirement funding, in addition to the pension, that covers inflation. Much more complicated and many more failure points than STRS or PERS for the retiree, but much easier to manage for the system.

  2. Tough Love Says:

    Just MORE in Public Sector worker/retiree beneficial pension provisions that Private Sector Plans NEVER include.

    Why should TAXPAYERS fund benefits such as this 85% COL-maintenance when THEY NEVER get anything in comparable benefits from their employers ?

    Why are the Taxpayers always looked upon as “suckers’ who can be soaked to pay for special benefits/protections for a privileged inferiority (Public Sector workers/retirees) ?

    The whole structure is patently absurd and materially unfair to taxpayers.

  3. relevance? Says:

    TL: did you actually read the article? This is about a small piece of the teachers’ plan that seems to be working. Perhaps for both good and bad reasons, but if we’re going to support purchasing power (inflation) protection – in this case at <100% of the impact, note – we need the money. Somehow, STRS got this program more than fully funded, while the regular plan took a punch from the 2008 recession and never really recovered. Despite the editorial slant that tries to make this sound bad, it really isn't.

    Then, your hate for everything and everyone involved in government is obvious as always – it's of what relevance to the story?

  4. Tough ZLove Says:

    Quoting relevance ………….

    ” ………. but if we’re going to support purchasing power (inflation) protection – in this case at <100% of the impact, note – we need the money. "

    Oh really? And WHY exactly should Private Sector Taxpayers care so much about protecting the purchasing power of PUBLIC Sector retirees when they (PEIVAT Sector retirees) NEVER get such "protection" (or typically ANY COLAS …at all) in Private Sector DB pension Plans ?

    What makes Public Sector workers/retirees "special" and deserving of a better deal, than those (PRIVATE Sector workers/retirees) who THEY (PUBLIC Sector workers/retirees) want to pay for THEIR FAR more generous pensions ?

    This isn't a matter of "hate", it's a call for basic "fairness" and EQUALITY. Got a "problem" with EQUAL ?

  5. Logic over emotion Says:

    Quoting Tough ZLove

    “What makes Public Sector workers/retirees “special” and deserving of a better deal, than those (PRIVATE Sector workers/retirees) who THEY (PUBLIC Sector workers/retirees) want to pay for THEIR FAR more generous pensions ?

    This isn’t a matter of “hate”, it’s a call for basic “fairness” and EQUALITY. Got a “problem” with EQUAL ?”

    What makes them special? Their not given special treatment at all, just different treatment. Their higher pensions are balanced out by lower salaries and additional compensation. Most public sector jobs pay significantly less than their private sector equivalents. This is the trade off for getting a potentially better retirement plan.

    If you want fairness and “EQUALITY” by reducing public sector retirement benefits to what you claim is equal to private sector retirement benefits, you would have to adjust salary and total compensation upward for nearly all public servants. The pay differential between public and private sector workers becomes increasingly divergent as you reach the upper management, director and executive levels. For example, a typical fortune 500 CEO may earn tens to hundreds of millions or more in salary and total compensation, whereas a CEO of a multi-billion dollar pension fund may earn a modest few hundred thousand. Why take that public sector job when you could earn 10 – 50 times more in the private sector? Because, 1) you want to serve the public, and 2) as an added bonus, you may fare a bit better with your pension than the private sector equivalent worker.

    Unfortunately, the solution is not as simple as just throwing all public servants in a private sector equivalent DB or DC plan like everybody else. People much brighter than you have already considered this option and, unlike you, understand the complexities involved. If you’re going to equalize the retirement plans, your tax dollars would need to fund an immediate and substantial across the board increase in salaries/additional comp to equalize the pay scales – not something most taxpayers would get super excited about.

  6. Tough ZLove Says:

    Quoting Logic over emotion ………………

    “What makes them special? Their not given special treatment at all, just different treatment. Their higher pensions are balanced out by lower salaries and additional compensation. Most public sector jobs pay significantly less than their private sector equivalents. This is the trade off for getting a potentially better retirement plan.”

    Hogwash, and I’m sure you know it.

    Sure, SOME Public Sector jobs ….. most being in a few highly “professional” fields such as medicine, law, or PHD-research occupations …….. pay less in “wages” than their Private Sector counterparts, but VERY rarely is Public Sector “Total Compensation” not materially greater when their MUCH MUCH MUCH richer pensions & benefits are added into the comparison.

    The ONLY thing we agree on is that “fixing it” is a complex problem ……. but ONLY because the Public Sector Unions have been very successful in not only BUYING their ludicrously excessive pensions and benefits from our self-interested Elected Officials with BRIBES disguised as campaign contributions, but ALSO at getting those same self-interested BRIBE-accepting Elected Officials to construct legal “protections” that make TRUE/material pension reform (such as reducing the accrual rate for FUTURE service of CURRENT workers …….. something both legal and routinely done in PRIVATE Sector Plans) so very difficult ………… with nothing even remotely similar to those “protections” extending to the pensions typically granted Private Sector workers.

  7. Stephen Douglas Says:

    Logic,

    You are partially right about ZLove. If it isn’t hate, it is some other equally debilitating emotion clouding his logic.

    But it is not really true that “Most public sector jobs pay significantly less than their private sector equivalents.” Particularly not in the big five… Connecticut, New York, Illinois, New Jersey, and California. Many (but not most) state workers, when comparing total compensation …wages plus the value of pensions and benefits… earn pay equal to or less than equivalent private sector workers.

    In general, lower educated, unskilled state workers earn more than their peers in the private sector.
    Highly educated, professional state workers, even with their alleged exorbitant benefits, earn less (often significantly less) than those in the private sector.
    Logically, between those two cohorts are a large number of state workers who are “roughly equal” to the private sector.

    Several studies confirm this phenomenon, although they disagree on where the break points are between the three groups, or what the “average” compensation comparisons are.

    This is the study I most highly recommend, because it has the most detailed description of methodology, and it is the only one which tries to quantify the comparison of public and private compensation in the various educational levels…

    Overpaid or underpaid? A state-by-state ranking of public-employee compensation

    Biggs and Richwine, American Enterprise Institute, April, 2014.

    Problem number one: this is also the extreme outlier of the studies, showing a much greater overall public sector advantage.

    Number two, the data is from 2008-2012, and a lot has changed since then.

    Still, highly recommend the study, as well as several other studies about the same time frame.

    And, as you implied, it is not valid to compare pensions outside the context of total compensation.

  8. Stephen Douglas Says:

    LOL

    Hogwash, they name is ZLove… “and I’m sure you know it.”

    Quoting TZ… “but VERY rarely is Public Sector “Total Compensation” not materially greater when their MUCH MUCH MUCH richer pensions & benefits are added into the comparison.”

    Absolutely untrue, according to Biggs. And even more untrue according to similar contemporary studies.

    “and I’m sure you know it.”

    The majority of state workers compensation was less than …or equal to… the private sector. That is… If you believe Biggs over Munnell and other studies and… If you believe the value of pensions haven’t been significantly reduced in the last decade.

    If you insist on relying totally on Biggs, at least acknowledge the entire study, not just your cherry-picked parts.

  9. Stephen Douglas Says:

    Quoting Logic… “People much brighter than you have already considered this option and, unlike you, understand the complexities involved.”

    More true than you know, Logic. It is complicated.

    Or, as Juvenal says…
    ” you are just wrong about the comparison of public sector and private sector total compensation (except at the level which requires no education–sorry for giving them benefits other than Medi-Cal).”

    The concept of less wage dispersion in the public sector than the private sector is consistent in every state and in most OECD countries. There is a virtual floor under which public pay doesn’t fall and a ceiling on higher paid public employees. The “average” difference in pay is meaningless.

    See “PUBLIC-SECTOR WAGE COMPARABILITY:
    THE ROLE OF EARNINGS DISPERSION”
    Belman and Heywood, 2004

    Monique Morrissey:
    “The national pattern that public-sector workers with college degrees are compensated somewhat less and those without college degrees are compensated somewhat more than their private-sector counterparts holds true for Connecticut as well. The more compressed pay structure—with top and bottom pay closer together—reflects the fact that people are drawn to public service for nonpecuniary reasons and that government employers have an interest in setting a higher floor on compensation than private-sector employers, some of whom pay poverty-level wages and pass health care and other costs onto government programs. Because public-sector workers are more likely to have college degrees, public employers—and taxpayers—are getting a bargain while ensuring a decent standard of living for less educated workers.”

  10. Tough ZLove Says:

    Responding to Stephen Douglas’s 2 comments above…….

    First, the readers should know that Mr. Douglas is a retired CA Public Sector worker whose work-responsibilities included changing light bulbs.

    So when HE states …………. that the AEI Study authored by Andrew Biggs is an “extreme outlier”, the readers should understand that HIS OPINIONS are (a) colored by conflict of interest due to his Public Sector-worker background, and (b) those of a “light-bulb-changer”, hardly one qualified to judge what constitutes an “extreme outlier”, especially when the STUDY author has a PHD in economics, has held VERY high-level positions in the US Gov’t, and and has impeccable credentials.

    And speaking of “picking and choosing”, how come he neglected to inform that that AEI Study concluded that in his home State of CA (on average for ALL PUBLIC Sector workers taken together in one group …… very clearly the measure that financially impacts the taxpayers) PUBLIC Sector Total Compensation (which includes wages + pensions + benefits) is 23%-of-pay greater than that of the group’s Private Sector counterparts. And (from the SAME Study), if the value of the MUCH greater PUBLIC Sector “job security” is also included, the that 23%-of-pay PUBLIC Sector Total Compensation ADVANTAGE rises to 33%. And the AEI Study excluded Saftey workers (e.g., Police & Fire), and given that they make MUCH higher than average Public Sector wages, and get the RICHEST pensions & benefits, had they been included in the AEI Study, the above 23% and 33% Public Sector Total Compensation ADVANTAGES would have assuredly been materially higher.

    Readers ……………

    How much MORE would YOU have for YOUR retirement needs if YOU had an ADDITIONAL 23% (or 33%, or more) of YOUR annual wages to save and invest in every year of your career? An extra $500K, $1 Million, perhaps $2 Million for some ? Are those then not reasonable estimates of how much Taxpayers are now OVERCOMPENSATING the average full-career Public Sector worker?

  11. Stephen Douglas Says:

    Jane the actuary has a recent series in Forbe’s on multi-employer (union) pension plans, which seem to share some of the same problems of public plans, largely because they do not have the same restrictions and requirements of single employer plans.

    It’s not just the size of the pensions that is the problem…

    “… first, rather than framing the discussion in terms of “government bailouts” what we’re really talking about is Congress making restoration payments to certain multi-employer plans to restore them to funding levels they may have had were it not for this past inappropriate legislation.”

    Pension reform… is not just pension reduction.

    And like the multi-employer plans, for many government pensions…
    “The bottom line: there’s no easy fix, no way of finding free money somewhere. The best we can hope for is that everyone is unhappy in a reasonably equitable way.”

    “Suck It Up, Buttercup. No One Will Be Happy With Multi-Employer Pension Fixes”
    (Forbes, Dec. 19, 2018)

  12. Tough ZLove Says:

    It’s interesting how you (Stephen Douglas) continue to “pick and choose” ONLY the portions of articles that support your agenda for Taxpayers to be stuck with unjust costs.

    Didn’t Jane the Actuary (actually Elizabeth Bauer in the link below) ALSO point out that per collective-bargaining agreements, Multi-employer Plans often HAD to “spend-down” the high returns of good years on BENEFIT INCREASES instead of saving those good-year-returns to balance the returns of bad years ? Why should TAXPAYERS fund the consequences of such outrageous provisions?

    And didn’t she point out the BAD-consequences of retroactively-applied benefit-increases (that cannot be undone) and that perhaps NOT honoring such post-hire increases might be an appropriate component of a solution package.

    How can anything you say NOT be looked at as untrustworthy and incomplete?

    —————————————-
    https://www.forbes.com/sites/ebauer/2018/12/19/suck-it-up-buttercup-no-one-will-be-happy-with-multi-employer-pension-fixes/#7a32019a5efd

  13. Stephen Douglas Says:

    Quoting ZLove…
    “Didn’t Jane the Actuary (actually Elizabeth Bauer in the link below) ALSO point out that per collective-bargaining agreements, Multi-employer Plans often HAD to “spend-down” the high returns of good years on BENEFIT INCREASES instead of saving those good-year-returns to balance the returns of bad years ?”

    Meh… It’s complicated. My remark might be construed as incomplete because I only recommended the series of articles, rather than copying and pasting the entire series.

    “saving those good-year-returns to balance the returns of bad years” wasn’t an option… Until it was too late.
    What she actually said about spending down the good years was a matter of federal restrictions…

    “From 1974 until 1994, based on the original ERISA provisions, employers could not make any additional contributions to a plan once it was deemed 100% funded, using a valuation interest rate based on the plan’s asset return assumption.  This was called the Full Funding Limitation.”

    “From 1994 to 2006, based on a new law, the Retirement Protection Act, plans could  use an alternative measure and fund up to 90% of the “current liability,” if greater, an amount which might or might not be higher than the original funding maximum, because (among other differences) it used a long-term government bond rate instead of the plan’s funding rate.”

    “Only beginning in 2006, with the Pension Protection Act, were plans finally permitted to fund up to 140% of the “current liability” funding level.”

    That was from her first article in the series. Easier for anyone interested to read it, rather than me copy/pasting here. That article ended with this line…

    “…Which means that, to a real degree, however unpleasant it may be to contemplate a bailout, Congress owns this problem.”

    As per Ms Bauer, instead of (or in addition to) reading her series, one might read the report prepared by the Center for Retirement Research.

    “MULTIEMPLOYER PENSION PLANS: CURRENT STATUS AND FUTURE TRENDS”

    (Dec. 2017)

    Truth in advertising… I have not read the entire series yet, or the Boston College report.

    But the quote is not mine… It is Jane/Elizabeth…

    “to a real degree, however unpleasant it may be to contemplate a bailout, Congress owns this problem.”

    Real pension reform. That’s what is needed. In MEPs and in public pensions.

  14. Tough ZLove Says:

    Stephen, It’s not surprising that you recommend reports produced by the “Center for Retirement Research”.

    Interestingly, from their website ………………. “The Center gratefully acknowledges the Center for State & Local Government Excellence for its support”

    And not surprisingly from the “Center for Sate & Local Government Excellence” website…………………. “The Center for State and Local Government Excellence assists municipal governments become better employers, allowing them to attract and retain better individuals in public service jobs.”
    ————————

    Certainly sounds like a bunch of pro-Public Sector workers scratching each other’s backs.

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