Funds for teachers’ pensions gets approval

Full funding of the troubled California State Teachers Retirement System has been approved by the Legislature, with most of the additional $5 billion coming from school districts that get no offsetting money from the state.

(Ed’s Note: The governor signed the budget on Friday, a spending plan that includes CalSTRS funding.)

With only one “no“ vote, lawmakers approved Gov. Brown’s plan to phase in a massive rate increase over seven years, nearly doubling the $5.8 billion CalSTRS currently receives each year from school districts, teachers and the state.

“This is more than the increased level of funding many districts will receive via the new funding formula and will have major implications as boards are finalizing budgets,” the two groups said.

A California Teachers Association lobbyist told a two-house legislative committee in February the politically powerful union wanted additional school funding from the state to cover the cost of the rate increase.

But the legislation, AB 1469, does not raise the Proposition 98 school-funding guarantee to help school districts pay the new CalSTRS rates. And a “poison pill” repeals the rate increase if a court ruling requires the state to reimburse districts.

The only apparent relief in the state budget package that might make more money available for teacher salaries is a cap on school district reserves linked to passage of Brown’s “rainy day” state budget reserve on the November ballot.

The reserve cap was backed by the California Teachers Association but opposed by management groups on the other side of the labor bargaining table, the Association of California School Administrators and the California School Boards Association.

“The governor’s proposed increases in CalSTRS alone will phase in higher employer contribution rates for the next years, going from 8 percent (of pay) to 19 percent,” the management groups said in a joint statement before passage of the budget.

“This is more than the increased level of funding many districts will receive via the new funding formula and will have major implications as boards are finalizing budgets,” the two groups said.

A Brown school funding formula enacted last year gives more money to schools with the neediest students. After deep cuts during the recession, school districts are receiving more money from an improving economy and a voter-approved tax increase.

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

CalSTRS has been trying for about a decade to get a rate increase. Unlike most California public pension systems, CalSTRS lacks the power to increase annual rates paid by employers, needing legislation instead.

Much of the CalSTRS funding gap, now being painfully closed by squeezing school funding, is due to state and teacher contribution cuts and benefit increases enacted around 2000, when a booming stock market gave CalSTRS a brief funding surplus.

The state contribution was cut from 4.6 percent of pay to 2 percent. For 10 years, a quarter of the teacher contribution, 2 percent of pay, was diverted to a new individual investment plan. A half dozen small benefit increases included a longevity bonus.

CalSTRS would have 88 percent of the projected assets needed to pay future pension obligations if it had had continued to operate under the contribution and benefit structure in place in 1990, a Milliman actuarial report said last year.

Now CalSTRS is only 67 percent funded. A Milliman actuarial report in April showed CalSTRS received $5.8 billion from the state, school districts and teachers last year, while spending $11.3 billion on pensions and administrative costs.

Nearly half of CalSTRS costs were paid from investment earnings. Without a rate increase, CalSTRS was expected to burn through its $184 billion portfolio in 30 years, even if earnings average what critics say is an overly optimistic target, 7.5 percent a year.

It was not clear whether the big new pension debt would be reported by the state or the school districts or both. But there was concern that school district credit ratings might be lowered, increasing borrowing costs.

Prompt action by the Legislature on the funding plan proposed by Brown last month is expected to ease or avoid the problem of reporting a huge CalSTRS debt under new accounting rules.

The CalSTRS board was told last September that under the new rules a $71 billion debt or “unfunded liability” (now $74 billion) could soar to a $166.9 billion “net pension liability,” an estimate now outdated by earnings and other factors.

It was not clear whether the big new pension debt would be reported by the state or the school districts or both. But there was concern that school district credit ratings might be lowered, increasing borrowing costs.

Under the new Governmental Accounting Standards Board rules, if projected assets using the expected return on investments fall short of covering pension obligations, a lower risk-free bond rate is used for the remainder, driving up the total reported debt.

The new legislation is a major shift of CalSTRS costs to school districts, community colleges and other employers, more than doubling their contribution while the state and teachers get much smaller rate increases.

The CalSTRS contribution from school districts and other employers increases, in seven annual steps, from the current 8.25 percent of pay to 19.1 percent of pay by July 2020.

The legislation reduces the initial school district rate increase proposed by Brown and some of the following step increases, but not the seven-year total. The change eases the impact on districts that already have budgets for the new fiscal year beginning July 1.

Teachers, currently contributing 8 percent of pay, get the smallest CalSTRS rate increase. In three-steps, the rate for most teachers will reach 10.25 in July 2016. For new hires with lower pensions under a Brown reform, the rate peaks at 9.205 percent in 2016.

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 legislation provides a new benefit to offset the rate increase by declaring that an annual cost-of-living adjustment of 2 percent, now a routine practice that could be suspended, is vested in years when the rate increase is paid.

The state contribution to CalSTRS, currently a combined total of 5.5 percent of pay to two separate funds, increases in three annual steps to a total of 8.8 percent of pay in July 2016.

The state contribution to an inflation-protection account, which has a large surplus and keeps the pensions of retirees from falling below 85 percent of their original purchasing power, remains unchanged at 2.5 percent of pay.

But the state contribution to the main CalSTRS pension fund with the huge shortfall, now about 3 percent of pay, will increase in three steps to bring the total state contribution to 8.8 percent of pay.

The non-partisan Legislative Analyst’s Office has suggested that CalSTRS be given the power to set employer rates, like other public pension funds. The new legislation does give CalSTRS some rate-setting power, but it’s tightly limited.

CalSTRS can increase the employer rate after 2020 if needed for full funding by 2046, but only by a little more than 1 percent of pay. CalSTRS can increase the state rate after 2016, but only to eliminate debt for benefits in effect prior to 1990.
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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 Calpensions.com.