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Clock ticking on CalSTRS shortfall

Getting CalSTRS back to full funding, if rates are steadily increased over the next half dozen years, would take an annual increase reaching more than $5 billion a year by 2020 — about what the state general fund currently spends on UC and CSU combined.

The Legislative Analyst’s Office made the comparison last week while giving the first in a series of Assembly hearings on CalSTRS funding this message: Each year of delay could add $150 million to the cost of full funding, compounding over time.

“In our view the best thing that the state can do to address these costs is to act quickly and to ramp up contributions as quickly as possible,” Ryan Miller of the LAO told the committee.

The analyst’s four preliminary scenarios, based on CalSTRS estimates presented to the board earlier this month, begin with increased payments of $900 million to $1.8 billion next fiscal that increase to $5.7 billion to $5.3 billion in fiscal 2020-21.

The high end figure, $5.7 billion, for beginning with the low $900 million scenario increase is roughly the same as the current total annual contribution, $5.9 billion, received by the California State Teachers Retirement System from all three sources.

So, getting to full funding in a half dozen years could nearly double the amount currently spent on CalSTRS. The big increase in pension costs would come as schools are struggling to restore what some say was $20 billion in cuts during the recession.

“As employer (CalSTRS) rates increase we will see a reduction of funding available for compensation restoration and program restoration and our classroom expenditures,” Sal Villasenor, a lobbyist for school administrators, told the committee.

A politically powerful union, the California Teachers Association, wants the additional pension contributions to be outside of the Proposition 98 school-funding guarantee and an increase in state CalSTRS contributions to a previous level.

“CalSTRS benefits are not collectively bargained at the local level,” said Jennifer Baker, a CTA lobbyist. “So this in a sense is the beginning of our collective bargaining cost, a much more complicated issue.”

Teachers contribute 8 percent of pay, an amount unchanged since 1972. CalSTRS thinks the teacher contribution could be raised 2.8 percent, if the current 2 percent cost-of-living adjustment is guaranteed to provide a legally required offset to a pension cut.

Most of the additional money will have to come from school districts, now contributing 8.25 percent of pay unchanged since 1986, and the state, which is contributing 5.5 percent of pay and providing most of total funding for school districts.

Unlike most public pension systems in California, the CalSTRS board lacks the power to set annual contribution rates that must be paid by employers, needing legislation instead.

“We would have started to adjust those contributions 10 years ago,” Jack Ehnes, the CalSTRS chief executive, told the committee. “That’s how long this now is starting to fester.”

The giant California Public Employees Retirement System, which has the power to set employer rates, is in the process of raising contributions roughly 50 percent to reach full funding, not facing a doubling of rates like CalSTRS.

Gov. Brown’s budget said “the state’s long-term role” as a CalSTRS contributor should be evaluated. The Legislative Analyst suggested a “grand bargain” with the state paying existing debt and districts and teachers alone responsible for future pension costs.

Baker called not for a restructuring of CalSTRS but a way to evaluate the progress of a comprehensive long-term funding solution, including a teacher rate increase, to “ensure that we are not over- or under-paying.” Villasenor made a similar comment.

The governor, Assembly Speaker John Perez, D-Los Angeles, and the Legislative Analyst are urging “full funding” of CalSTRS, which usually means projecting enough assets to cover 100 percent of pension obligations in 30 years.

Miller said the Legislative Analyst thinks full funding should be a “key goal” to minimize the pension costs for current workers passed to future generations and to maximize the time for contributions to yield investment earnings, cutting long-term costs.

But if fully funding pensions requires services and programs to be cut, some think 80 percent funding of future pensions is adequate. A credit rating agency, Fitch, said in 2011 a funding level of 70 percent is generally adequate and less than 60 percent weak.

Critics say public pension investment earnings forecasts, 7.5 percent a year for CalSTRS and CalPERS, are overly optimistic, hiding massive debt. They would argue the proposed rate hikes have to be much higher to reach full funding.

Public pension funds rarely reach full funding. But when they do, the past practice of CalPERS and CalSTRS has been to treat the surplus as a windfall and reward members with a pension increase and employers with a rate cut.

When the funding level of CalSTRS, about 30 percent in the 1970s, climbed briefly above 100 percent during a tech-driven stock market boom around 2000, legislation gave members a half dozen benefit increases and the state a contribution cut.

Then the CalSTRS investment fund had huge investment losses last decade during a stock market crash and deep recession. The fund peaked at $180 billion in 2007, dropped to $112 billion in 2009 and was back up to $180 billion last week.

At the legislative hearing, the CalSTRS chief executive, Ehnes, said most of the benefit increases were aimed at keeping teachers on the job longer, when schools needed more teachers for class-size reduction and other reasons.

“I want to make sure that we don’t get misdirected why we do have this $71 billion hole,” he said, referring to the CalSTRS “unfunded liability,” the shortfall in projected assets needed for full funding in 30 years.

During public comment, former Assemblyman Dave Elder, D-Long Beach, whose legislation helped CalSTRS reach full funding, said one benefit increase diverted a quarter of the teacher contribution into an individual investment plan for 10 years.

The bill, AB 1509 in 2000, diverted 2 percent of teacher pay from the pension fund to a new Defined Benefit Supplement with a guaranteed minimum return based on the 30-year Treasury bond. A bill analysis said the CalSTRS surplus will “absorb” the cost.

“You might ask the question what if that 2 percent had been put into the STRS funding operation, what would have been the effect?” Elder said.

The Milliman report last April cited by Ehnes found that the diversion of teacher contributions had a relatively small effect on CalSTRS funding. But the one-third of the hole due to all of the benefit increases had a significant impact.

“If we were still operating under the 1990 benefit structure, the plan would be about 88.4 percent funded instead of 67 percent,” Mark Olleman of Milliman told the CalSTRS board. “So the difference between 88.4 percent and 67 percent shows that one of the impacts on the funding of the plan currently is benefits.”

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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