Newsom offers some relief for hard hit schools

Gov. Newsom proposed a state budget yesterday that would give CalPERS an extra $3 billion to pay down debt and CalSTRS a potential extra $5.9 billion, most to pay down debt but also some for relief to schools hard hit by doubling pension costs.

“We are investing an historic amount and doing what no previous governor has done on PERS and STRS,” Newsom said at a news conference yesterday, just three days after he was sworn in.

But echoing his predecessor, Jerry Brown, one of the themes of the budget presentation was the need to be ready for a downturn in the economic cycle after a long recovery from the financial crisis a decade ago.

If the downturn begins before the May revision of the budget for the new fiscal year starting July 1, a vulnerable target for cuts in proposed spending could be the extra payments to the two big state pension funds.

They did not recover from huge investment losses a decade ago, when both were 100 percent funded. CalPERS only had 67 percent and CalSTRS 64 percent of the projected assets needed to pay future pension costs as of June 30, 2017, said the governor’s proposal.

After a long delay in paying down debt, costly in the long run, the Legislature enacted a rate increase in 2014 that requires annual school district rates to increase in annual steps from 8.25 percent of pay to 19.1 percent of pay by 2020.

Newsom is proposing a $3 billion general fund payment to CalSTRS, outside of the Proposition 98 school-funding guarantee, that will spend $700 million over the next two fiscal years to reduce school district rates.

“This is a big deal,” Newsom said. “This is not paying down the state’s obligation. This is helping relieve the districts’ burden.”

Gov. Newsom

Although school funding has sharply increased since deep cuts a decade ago, many school districts are said to be spending more than half of the new money on pension costs. The giant Los Angeles Unified School District is on the brink of a teachers’ strike.

The extra $700 million would reduce the school district CalSTRS rate from 18.1 percent to 17.1 percent next fiscal year and from 19.1 percent to 18.1 percent the following fiscal year.

The remaining $2.3 billion from the $3 billion payment would be used to pay down the school districts’ penson debt. Why more than $700 million is not used to provide more rate relief is not clear from the budget material.

“As an association, we are really encouraged by the proposal,” said Ivan Carillo, a lobbyist for the Association of California School Administrators. “It’s in line with what we have been advocating — an investment of nonProposition 98 general funds to mitigate the rising employer rates.”

The $2.3 billion payment is “expected to save employers $6.9 billon over the next three decades, with an estimated reduction in the out-year contribution rate of approximately half a percentage point,” said a summary of the budget proposal.

In addition, the budget proposes another $2.9 billion over four years to pay down the state share, not the school district share, of the California State Teachers Retirement System unfunded liability of $103.5 billion.

The state budget this fiscal year would only contain $1.1 billion of the $2.9 billion, with the rest presumably to come in the following three fiscal years. An estimated $7.4 billion would be saved over three decades.

Apart from the extra payments, next fiscal year the annual required state payment to CalSTRS in the proposed budget is about $3.3 billion, a roughly $235 million increase from the current fiscal year.

The California Public Employees Retirement System unfunded liability for state workers is $58.7 billion, part of a total unfunded liability of $139 billion in 2017 that includes about 3,000 cities, counties, special districts and school districts (non-teaching school employees).

Newsom said his proposed extra $3 billion payment to CalPERS, called an “optional” payment, is the first time the “general fund will pay down” the unfunded liability.

Brown’s action to curb retirement costs, in addition to requiring new hires to work longer and pay more for their pensions, made a $6 billion extra payment to reduce the CalPERS unfunded liability that encouraged similar payments by local governments.

But the payment was a loan from the surplus in a short-term state investment pool. Newsom said the proposed budget makes a $390 million payment on the interest on the $6 billion loan.

Next fiscal year the annual required state payment to CalPERS is an estimated $6.8 billion, up about $566 billion from the current year. The general fund pays $3.9 billion and the rest comes from restricted special funds like transportation.

CalPERS has the power to set annual rates the state must pay. CalSTR had no rate-setting power until the funding legislation in 2014 authorized its board to raise state rates up to 0.5 percent of pay each year.

The unfunded liability for state worker retiree health care is $91 billion, more than the $58.7 billion unfunded liability for state worker pensions. The proposed budget summary says the state retiree health payment next year is nearly $2.3 billion.

A Brown reform began building a pension-like investment fund to help “prefund” retiree health care costs in the future. State worker unions agreed in bargaining to make contributions to the the fund ranging from 1.4 to 4.6 percent of pay, matched dollar-for-dollar by the state.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 11 Jan 19

5 Responses to “Newsom offers some relief for hard hit schools”

  1. larrylittlefield Says:

    “They did not recover from huge investment losses a decade ago, when both were 100 percent funded.”

    That’s the original lie of this whole mess. If you are 100 percent funded at the peak of a bubble, on the assumption that there will be historically average or above average returns going forward rather than a correction to normal, you are not fully funded.

    The bubble has been reinflated twice by every lower interest rates and qualitative easing. If CALPERS and CALSTRS are not “fully funded” again at the peak of another bubble, then something else happened to cause it.

    For all state and local government pension funds in California, the average rate of return from 1987 to 2016, as reported to the U.S. Census Bureau, was 8.9%. How much could they have possibly assumed during those years?

    Investment returns are the chosen scapegoat by a generation that doesn’t want to talk about retroactive pension increases, and underfunding of the pensions public employees had been promised to start with.

  2. moore Says:

    They also don’t admit that much of the increased annual costs and deficits arose because the liability to pay pensions (PVB) has increased dramatically, mainly from a crooked salary increase process. As long as salary increases are based on peer salaries, NO reform is possible. Let the market set salaries and current levels would drop by 30-40%.

  3. #deplorablenurse (@bluestateTEA) Says:

    Misleading headline. Newsom is not sending relief to schools. This money is going to the teachers.

  4. Grrr Says:

    The problem with investment losses is that you your returns have to be double the loss to get back to where you were, plus whatever you should have earned on the original amount during the down time. That’s really hard to do when the losses are large as occurred in the last recession. Add to that, for PERS especially, the politically driven limits on their investments. PERS should be run strictly as a fiduciary responsible for managing investments to provide for the pension and health care commitments, but they get all kinds of political interference in how they can invest. Essentially, we continually shoot ourselves in the foot.

  5. Ken Churchill Says:

    CalSTRS has about $45 billion in pension assets expected to return 7.25% per year in investment returns. This calendar year the pension fund probably lost about 5% or more of their assets instead of gaining 7.25% meaning they really suffered a 12.25% loss on their expected return for a dollar loss of $5.6 billion (.125 times $45) so the $3 billion payment is $2.6 billion short of the losses suffered this year.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: