CalSTRS: Action on a long-delayed rate increase?

More money for the underfunded California State Teachers Retirement System may be considered by the Legislature next year, thanks to new attention from lawmakers and a state budget deficit narrowed by a voter-approved tax increase this month.

 

After years of ignoring pleas for a rate hike, the Legislature approved a resolution last August, SCR 105, that asks CalSTRS to meet with “affected stakeholders” and present three options for a long-term funding solution by next Feb. 15.

 

A phased-in rate increase would not begin for several years, if it follows scenarios suggested earlier this year. And splitting a rate hike between teachers and employers may be a difficult legal and political task, complicated by new pension reform legislation.

 

But after years of spending cuts to close big deficits, the state budget picture has sharply improved, brightened by a slowly recovering economy and a major tax increase approved by voters this month, Proposition 30 sponsored by Gov. Brown.

 

“Assuming steady economic growth and restraints in augmenting current program funding levels, there is a strong possibility of multibillion-dollar operating surpluses within a few years,” Legislative Analyst Mac Taylor said in his recent fiscal outlook.

 

The forecast fits the timing of a half dozen funding scenarios CalSTRS gave the Legislature early this year. Small rate increases would not begin until 2016. Only one scenario is expected to get CalSTRS to full funding, but not until 2085.

 

Given competing demands for state funds, the additional money needed to project a fully funded CalSTRS in the 30 years prescribed by government accounting standards seems unlikely to be available, even with a windfall surplus.

 

The shortfall is about $3 billion a year.

 

The CalSTRS pension fund, valued at $155 billion Oct. 31, is currently projected to run out of money in a little more than 30 years. The goal of the rate-hike examples is to keep the pension fund from running out for at least another 75 years.

 

Another sign that the time may be arriving for action on a CalSTRS rate increase is the apparent interest of the California Teachers Association, a powerful voice in education funding at the Capitol.

 

At a CalSTRS board meeting this month, a lobbyist for the teachers union in the audience urged the board to act when some members balked at setting the “normal cost” for new-hire pension rates needed under the pension reform legislation.

 

“I can tell you we are not going to be able to do any work on the unfunded (liability), and I know you want to have discussions in December,” Jennifer Baker told the board. “That’s all going to be put on hold with you if we are going to have to focus on the normal cost.”

 

Unlike the California Public Employees Retirement System and most public pension systems in California, CalSTRS lacks the power to set annual rates that must be paid by employers, needing legislation instead.

 

The new pension reform, AB 340, calls for an equal split between employers and employees of the “normal cost,” the payment needed to cover pensions earned during a year that does not include the debt or “unfunded liability” from previous years.

 

What troubled some CalSTRS board members is that by adopting a normal cost for new hires the board seems to be setting the employer rate, which under the new law signed by Brown in August is half the normal cost.

 

As it happens, the normal cost recommended by the Milliman actuaries for new hires, 15.9 percent of pay, means that the current rates comply with the 50-50 split called for in the reform bill: employers 8.25 percent and teachers 8 percent.

 

Baker said the Legislature retains the power to set rates and is expected to clarify the reform bill. She said the board should adopt a normal cost so employers know what to pay and there is no doubt at the December meeting on the unfunded liability.

 

“We ask you to do your job and let us know what your priority is,” said Baker, who had asked persons in the Senate to watch the board meeting webcast. “Because right now it doesn’t seem like the shortfall is your priority, and it’s causing concern.”

 

On a split vote, the board adopted the 15.9 percent normal cost for new hires and acknowledged the current employer and employee rates set by legislation. Now there could be other complications at a stakeholder meeting on a rate increase.

 

Baker said the California Teachers Association “strongly opposed” having teachers pay half the normal cost and had “multiple conversations” with Brown’s office and his finance department as the governor pushed the reform bill.

 

“The practical reality is AB 340 says this is something that’s going to happen,” Baker told the CalSTRS board. “Now we are going to continue opposing that, but we will have to figure out where the future is going to be.”

 

The rate paid by current teachers, 8 percent of pay, is less than half of the normal cost calculated by actuaries for all CalSTRS members, 18.3 percent. It’s higher than the new-hire normal cost, 15.9 percent, because the reform gives new hires lower benefits.

 

The opposition to an equal split of the normal cost was not pushed as vigorously by some state worker unions. Under AB 340, the rate paid to CalPERS by a third of current state workers increases by 1 to 3 percent of pay over the next two years.

 

A CalSTRS legal opinion, which echoes a widely held view of state court rulings on public pensions, contends that the rate paid by current teachers is a “vested” right that cannot be increased without providing an offsetting benefit.

 

Under one proposal a routine 2 percent cost of living adjustment, given now at the discretion of the Legislature, would be permanently guaranteed to offset an increase in the teacher contribution rate of 2 percent of pay.

 

Another way that CalSTRS is different from most public pensions systems is multiple employers. In addition to the 8.25 percent of pay contributed by school districts and other employers, the state general fund makes two contributions to CalSTRS.

 

The state contributes 2.6 percent of pay to the CalSTRS pension fund, which will increase annually to a maximum of 3.5 percent in 2015. The state also contributes 2.5 percent of pay to a separate inflation-protection fund for long-time retirees.

 

A half dozen examples of how all of the rates could be adjusted for an increase was given to the Legislature by CalSTRS last February. The current contributions total 19 percent of pay.

 

Milliman actuaries said this month an additional 12.2 percent of pay (12.9 percent before the pension reform) is needed to project full funding in 30 years. That’s about $3 billion.

The half dozen funding examples get to an increase of roughly 12 percent, but not immediately. The phased-in increases beginning in 2016 would not push the total contribution to 30 percent or higher until 10 to 15 years from now.

 

An example that would increase the total contribution to 33 percent of pay in 10 years also shows the importance of the earnings expected from the investment of CalSTRS funds.

With the current earnings forecast, 7.5 percent a year, CalSTRS would be projected to be 100 percent funded in 2085. With the previous slightly higher forecast, 7.75 percent, full funding would be projected in 2064.

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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 http://calpensions.com/