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Brown: Clock ticking to avoid ‘disaster ahead’ for CalSTRS

A new state budget Gov. Brown proposed last week does not have a long-sought rate hike for CalSTRS, which is projected to run out of money in three decades. But the budget does call for talks with teachers, schools and others to work out a rate-hike plan.

Most California public pension funds have the power to raise annual employer rates when they need more money. The California State Teachers Retirement System, a century old this year, is an outlier that needs legislation to raise rates.

As lawmakers at the Capitol struggled with budget cuts during a deep economic recession, pleas for a CalSTRS rate increase were not acknowledged with a legislative hearing until last year.

The budget calls for a CalSTRS plan that would not be enacted until fiscal 2015-16 and then phased in over several years. Among the issues is whether the rate hike would be part of the Proposition 98 school-funding guarantee.

Now the rate hike needed to project full CalSTRS funding in 30 years has ballooned to an additional $4.5 billion a year, nearly doubling the $6 billion received from current rates and a big bite from the $107 billion proposed state general fund.

The budget calls for a CalSTRS plan that would not be enacted until fiscal 2015-16 and then phased in over several years. Among the issues is whether the rate hike would be part of the Proposition 98 school-funding guarantee.

Another issue is how the rate hike would be split among the three CalSTRS contributors. The state currently contributes 5 percent of pay, school districts and community colleges 8.25 percent of pay, and teachers 8 percent of pay.

The governor’s proposed budget said the long-term role of the state as a CalSTRS contributor “should be evaluated.” An end to direct state funding might open a discussion about whether CalSTRS should be given the power to raise employer rates.

“I’ve set forth a period of time to meet with all the stakeholders and work it through,” Brown said at a news conference. “It’s going to be daunting. It has to be done, and sometimes it’s hard to get things done until people really see the disaster ahead.”

“If the Legislature can do it this year, fine,” he said. “I think it’s going to take a little longer. But I am fully committed to it. I certainly want to reserve the fiscal capacity in our budget, so that we are able to pay it when we can afford the agreement.”

During a 10-year period that ended three years ago, a quarter of the teacher pension contribution, 2 percent of pay, was diverted into a new individual investment plan for teachers.

Gov. Brown proposes new state budget

Hit hard by the recession like other pension funds, the CalSTRS investment portfolio dropped to $112 billion in 2009 and only recently climbed back to about $180 billion, the pre-crash peak reached more than six years ago in 2007.

Part of the funding gap is self-inflicted. As a soaring stock market gave pension funds surpluses around 2000, CalSTRS joined the California Public Employees Retirement System in raising pension benefits and lowering contributions.

The state CalSTRS contribution was cut by more than 2 percent of pay. During a 10-year period that ended three years ago, a quarter of the teacher pension contribution, 2 percent of pay, was diverted into a new individual investment plan for teachers.

About $5 billion was diverted from the troubled CalSTRS pension fund into the new Defined Benefit Supplement, a “cash balance” plan with guaranteed minimum earnings based on 30-year U.S. bonds.

The bill that made CalSTRS a hybrid plan (the DBS receives funds from summer school and some short-term pay raises) emerged from a back-room deal and went directly to the legislative floors, bypassing committee hearings.

A brief Assembly floor analysis of AB 1509 in 2000 said: “Fiscal effect: No General Fund effect and no effect to the solvency of STRS; the STRS surplus will absorb the cost of DBSP.”

A CalSTRS legal opinion argues that the teacher contribution, 8 percent of pay, is a “vested right” protected by the same court rulings said to bar pension cuts unless offset by a new benefit of comparable value.

A half dozen small CalSTRS benefit increases were enacted around 2000, including a longevity bonus that expired three years ago. Unlike most state and local government workers, teachers do not receive Social Security in addition to their pensions.

The benefit increases around 2000 did affect solvency. An annualactuarial report last April said if CalSTRS were still operating under the 1990 benefit structure, the plan would be 88 percent funded instead of 67 percent funded.

“In the future, we advise policymakers to avoid changing pension contributions or benefits based on any short period of strong investment gains,” the nonpartisan Legislative Analyst’s Office said in a report on CalSTRS funding last year.

Teachers hold a strong hand in rate-hike talks. A CalSTRS legal opinion argues that the teacher contribution, 8 percent of pay, is a “vested right” protected by the same court rulings said to bar pension cuts unless offset by a new benefit of comparable value.

Some suggest a routine 2 percent cost-of-living adjustment, given now at the discretion of the Legislature, could be permanently guaranteed to offset an increase in the teacher contribution rate of 2 percent of pay or more.

The governor’s proposed budget said “school districts and community colleges should anticipate absorbing much of any new CalSTRS funding requirement” because retirement benefits are part of compensation.

At a legislative hearing last year, there was a disagreement on whether an increased school contribution to CalSTRS would be covered by Proposition 98, a minimum guarantee of state funds that provide most of the money for schools.

The Legislative Counsel said requiring schools to contribute more to CalSTRS would trigger an offsetting increase in Proposition 98, in effect passing the cost to the state. But the state attorney general was said to disagree.

The governor’s proposed budget calls not only for a rate-hike plan but also a possible reshuffle: “The state’s long-term role as a direct contributor to the plan should be evaluated.”

The analyst said school districts could have the flexibility to provide different pension options to meet local needs, local officials could make decisions and be held accountable, and the state would reduce a long-term fiscal risk.

The state directly contributes $1.4 billion to CalSTRS this fiscal year. Half the amount, roughly 2.5 percent of pay and increasing slightly in recent years, goes to the troubled pension fund. The state contributed 4.6 percent of pay until a cut began in 1997.

The other half of the current state contribution, another 2.5 percent of pay, goes to the Supplemental Benefit Maintenance Account to keep pension payments to long-time retirees from dropping below 80 to 85 percent of their original purchasing power.

While the main pension fund is said to be running out of money, the SBMA has a large and growing reserve, $9.3 billion in the latest annual financial report. Officials have said the supplemental payments are vital and a healthy reserve is a necessary safeguard.

The proposed budget’s evaluation of direct state contributions to CalSTRS sounds similar to the suggestion in the Legislative Analyst’s report last year that a rate-hike plan is a “key opportunity to increase local control of pensions.”

The analyst said school districts could have the flexibility to provide different pension options to meet local needs, local officials could make decisions and be held accountable, and the state would reduce a long-term fiscal risk.

“A shift to local control of CalSTRS likely would require giving the system the authority to set and adjust district contributions,” said the analyst’s report.

Brown urged more local control of education in his State of the State address last year. He cited the principle of decentralization or as he called it “subsidiarity,” creating a buzz word at the Capitol.

Ed’s Note: 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.


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