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Fewer charter schools choosing CalSTRS pensions

September 11, 2017

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


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