From CalPensions: Deals raised CalSTRS pensions, cut state costs

In exchange for boosting CalSTRS payments to retirees, the state has saved money by cutting its annual contribution to the pension fund with two different legislative deals during the last dozen years.

It’s not the main reason the nation’s second largest public pension fund is now seriously underfunded. Investment losses in the stock market crash get the bulk of the blame.
But the need to cut deals, giving something to get something, shows how the California State Teachers Retirement System is different from nearly all of the other public employee pension systems in California.

Most public pensions funds have the power to set the amount of the annual payment they get from government employers. But CalSTRS needs legislation to set its contribution rate.
A common complaint about other public pension funds is the tendency, when investments are doing well, to increase pension benefits without properly funding the higher costs, leaving taxpayers with the bill later.

A nationwide study of 213 state retirement systems issued by the Pew Center on the States last month has a section titled “Unfunded Benefit Increases.” None of the cases have a CalSTRS-like swap of higher retiree payments for lower pension contributions.

The other big California state pension fund, CalPERS, is being criticized for telling legislators that a major increase in state worker pensions, SB 400 in 1999, would be paid for by investment earnings, keeping state contributions stable for a decade.

But state payments to the California Public Employees Retirement System have soared, going from $150 million a decade ago to an expected $3.5 billion in the new fiscal year that begins on July 1.

Critics are putting much of the blame on the pension increases in SB 400. But part of what happened is that state contributions to CalPERS in the late 1990s had been dramatically lowered from more than $1 billion in previous years.

Investment earnings in a strong economy had given CalPERS a surplus. So the CalPERS board gave the state what amounted to a contribution “holiday,” another nationwide tendency of public pension funds mentioned in the Pew report.

In a reply to critics, CalPERS says only 27 percent of the increase in the state pension contribution from 1997-98 to 2090-10 is due to SB 400. Half of the increase is attributed to payroll growth, 8 percent to other benefits, and 14 percent to other changes.

It seems likely that joining the other big pension fund in giving the state a break, though not a complete “holiday,” may have been part of the thinking when legislation in 1998 increased CalSTRS benefits and cut the state contribution.

The CalSTRS funding level, about 30 percent in the 1970s, had slowly climbed to nearly 100 percent of the estimated amount needed to pay for obligations during the next 30 years.
The main bill, AB 2804, cut the state contribution to CalSTRS and was expected to result in general fund savings of $577 million in fiscal year 1998-99, according to a legislative committee analysis.

The benefit increase, AB 1150, gave older teachers an incentive to stay in the classroom during a time of teacher shortages. A pension that paid 2 percent of final pay for each year of service at age 60 was boosted in small steps to 2.4 percent at 63.

The benefit increase was expected to cost $363 million in fiscal 1999-00. The state Department of Finance opposed the bill, saying benefit increases were premature because CalSTRS still had a $1.9 billion unfunded liability.

Another bill in the package (AB 1102) made a smaller pension boost, allowing unused sick leave to count toward years of service. Members who joined CalSTRS and CalPERS prior to 1980 already had the unused sick leave provision.

The California Taxpayers Association opposed the bill, arguing that the change was first proposed as a savings for employers but studies in the late 1970s found that allowing unused sick leave to count as a pension service credit was more costly.

A fourth bill (SB 1528) provided $200,000 to study giving CalSTRS members retiree health care. Many school districts, if not most, do not provide retiree health care for teachers.

Unlike most government employees, California teachers seldom receive Social Security or Medicare. And a CalSTRS pension can result in cuts in Social Security earned on other jobs, an “offset” Congress routinely declines to change despite bitter complaints.

The backers of the retiree health study bill in 1998 said “lack of access to affordable health benefit coverage for many retired teachers in California is alarming,” according to a legislative analysis.

Now a dozen years later the state contribution to CalSTRS, which was 4.43 percent of payroll in 1998, has been cut by more than half to 2.017 percent of payroll. Teachers contribute 8 percent of pay, school districts 8.25 percent.

The CalSTRS funding level, 87 percent before the stock market crash, is now 77 percent when losses are “smoothed” over a three-year period, 58 percent if there is no smoothing.
Ed Derman, the CalSTRS chief deputy executive, told the board last month that if there had been no market crash and average annual earnings had hit the 8 percent target, the funding level would have been 109 percent at the end of last year.

“Overwhelmingly it’s clear that it was the market which caused the issue and not the benefit enhancements,” Derman said.

This year the proposed state budget would give CalSTRS $1.2 billion, about half for the regular pension fund and the rest for a special account used to help payments to retirees keep pace with inflation.

The inability of CalSTRS to raise contribution rates allowed state lawmakers, without fear of immediate retaliation, to withhold a $500 million payment to the inflation or “supplemental benefit maintenance account” in 2003 to help balance the state budget.

The courts later ordered the state to repay the $500 million along with $200 million in interest, making the withholding of the payment to the pension fund a very expensive loan.

Two years ago state budget writers tapped into the CalSTRS inflation account again, but this time in a smaller way and with a deal.

A state budget trailer bill (AB 1389) increased pension benefits, moving the target of the inflation account from maintaining 80 percent of original purchasing power to 85 percent.

In exchange, the bill also reduced the state payment to the supplemental benefit maintenance account by $66 million in the first year, an annual cut increasing to $72 million in fiscal 2011-12.

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/ Posted 9 Mar 10