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Brown budget eyes full funding for teachers’ pensions

Lobby of the CalSTRS building in West Sacramento. (Photo: Paul Houseberg)

Gov. Brown has made a long-delayed proposal to get CalSTRS to full funding over the next three decades, giving the biggest rate hike to schools and smaller increases to the state and teachers.

The nation’s largest teacher pension fund, which received $5.8 billion from the three sources last fiscal year, needs an additional contribution of about $4.2 billion a year to project full funding in 30 years.

The plan proposed by the governor this week as part of his revised state budget is roughly similar to a CalSTRS scenario presented to a legislative committee in March, which would have cost an estimated $236 billion over the three decades.

The massive rate hike, proposed in a revised state budget plan for the new fiscal year beginning July 1, would be phased in over three years for the state and for teachers and seven years for school districts.

CalSTRS has been unsuccessfully seeking a rate increase for about a decade. Now after years of deficits and deep budget cuts, the state budget is showing a modest surplus due to an improving economy and a voter-approved tax increase.

Brown’s plan stakes out a position on the major issues: allocating the rate hike among the three contributors, not raising the Proposition 98 school-funding guarantee to cover the cost, and full funding rather than a less costly target like 80 percent funding.

The phase in of the rates would begin with a $450 million increase in the new fiscal year. The state general fund would contribute $73.2 million, teachers $40 million and the remainder would come from schools.

At a Capitol news conference, Brown was asked if a $450 million increase in the first year is sufficient.

“Well, I would say if you can get more from the Legislature be my guest,” the governor replied. “But we are going to have a hard time getting what we are proposing.”

Unlike most California public pension funds, the California State Teachers Retirement system lacks the power to set annual rates that must be paid by employers, needing legislation instead.

CalSTRS has been unsuccessfully seeking a rate increase for about a decade. Now after years of deficits and deep budget cuts, the state budget is showing a modest surplus due to an improving economy and a voter-approved tax increase.

Without a rate increase, CalSTRS is projected to run out of money in 32 years, burning through an investment fund valued at $183 billion at the end of March, even if earnings hit what critics say is an overly optimistic target, 7.5 percent a year.

CalSTRS had a debt or “unfunded liability” of $73.7 billion as of June 30 last year, according to a Milliman actuarial report, and 66.9 percent of the projected assets needed to cover future pension obligations.

“I believe in what’s practical, and my program is what I believe the Legislature can live with,” Brown said, “and that’s why I propose it the way it is.”

Brown said in January, when presenting his original budget plan, that he expected to propose a CalSTRS funding plan next year. He invited the Legislature to act this year if an agreement could be reached.

The governor said yesterday that each year of delay on a CalSTRS funding solution adds “hundreds of million” to the cost. He said the state is in effect paying 7.5 percent interest on pension debt.

“I believe in what’s practical, and my program is what I believe the Legislature can live with,” Brown said, “and that’s why I propose it the way it is.”

A key player in school funding, the California Teachers Association, issued a statement saying it was “encouraged” by the governor’s proposal to tackle the CalSTRS unfunded liability.

“The CalSTRS shortfall did not happen overnight and it cannot be addressed overnight,” said Dean Vogel, the CTA president. “It is going to take time, commitment and collaboration from all stakeholders — the state, districts and educators — so we appreciate the governor’s plan to fully fund the teachers’ retirement defined benefit plan within 30 years.

“Making sure educators have a secure retirement is critical to attracting and keeping quality educators in the profession. We look forward to working with lawmakers and the governor to ensure the approved budget reflects the intentions set forth today.”

Schools get about half of their money from the state budget. Whether the state should give school districts additional money to pay for a CalSTRS rate hike may be an issue.

Under the governor’s plan the annual school district payment to CalSTRS, now 8.25 percent of pay, would gradually more than double over seven years to 19.1 percent of pay.

The rate hike would not trigger a matching increase in the Proposition 98 school-funding guarantee. So schools, hit with layoffs and other reductions during the recession, would have less money to restore cuts.

Why does the governor’s plan give schools the big rate increase? There is a history-based rationale for limiting the state increase, and a legal rationale for limiting the teacher increase.

The state pension rate, now 3 percent of pay, increases in the governor’s plan to 6.3 percent of pay over three years. (A supplemental inflation payment, 2.5 percent, would remain unchanged, bringing the state total to 8.8 percent.)

“The state’s share reflects the shortfall that would exist had benefits or contributions not changed after 1990,” said the governor’s budget summary, when CalSTRS for the first time had “a long-term sustainable funding plan in place.”

After a slow climb from the 1970s, when CalSTRS only had 30 percent of the projected assets needed to pay future pension obligations, a soaring stock market briefly pushed CalSTRS funding over 100 percent, sparking actions that led to underfunding.

The state CalSTRS pension contribution was cut from 4.6 percent of pay to about 2 percent of pay. For 10 years, a quarter of the teacher pension contribution, 2 percent of pay, was diverted to a new individual investment plan for teachers.

A half dozen small benefit increases were enacted, including a longevity bonus. A Milliman actuarial report last year said if CalSTRS still operated under the 1990 structure, the pensions would be 88 percent funded instead of 67 percent funded.

Under the governor’s plan the teacher CalSTRS rate, now 8 percent of pay, would increase to 10.25 percent over three years.

Lawyers have told CalSTRS that a series of state court decisions mean the pension offered teachers on the date of hire becomes a “vested right” that cannot be cut, unless offset by a new benefit of comparable value.

The theory is that guaranteeing an annual cost-of-living adjustment of 2 percent, now a routine practice that could be suspended, would be a new benefit offsetting a requirement that teachers contribute more to their pensions, 2.25 percent of pay.

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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