Historic maneuvers haunt CalSTRS

Some still have hard feelings about what happened when CalSTRS, now deep in the red, had a brief funding surplus more than a decade ago: Teacher and state payments into the fund were cut, and retirement benefits were raised.

At a CalSTRS board meeting last week, Lois Shive, a representative of a retiree group, zeroed in on legislation in 2000 that for 10 years diverted a quarter of the annual teacher contribution from the pension fund, a total of $4.9 billion over the decade.

The legislation shifted 2 percent of teacher pay (from the total teacher contribution of 8 percent of pay) into a new individual investment plan, the Defined Benefit Supplement, with a guaranteed minimum return based on the 30-year Treasury bond.

“We didn’t see the side car rolling through the Legislature of a rogue member, who went to a legislator and asked that legislator to please pass a bill that would give that member his own private bag of money,” said Shive.

“That was our 2 percent side car that established the DBS fund,” she said, “and short-funded this wonderful pension fund by a huge amount, building on to what we have now is a snowballing effect.”

Shive represents the California Teachers Association-National Education Association Retirees. As vice chair of the CTA retirement committee in 2000, she “lobbied tirelessly” for pension improvements, a CTA newsletter said.

“I pretty much said what I needed to say there,” Shive said this week, declining to identify the “rogue” member. She said the diversion was a small part of the current funding problem and the focus should be on the rest of her remarks.

A lobbyist, a CalSTRS staff member and others at the Capitol said the bill emerged from negotiations, but they did not recall a push from a “rogue” member. The author of AB 1509, former Sen. Mike Machado, D-Linden, was unavailable for comment.

The bill that made a major change in CalSTRS structure, converting it to a “hybrid” plan combining a pension and 401(k)-style individual investment plan, apparently was never heard by a legislative committee.

The subject of AB 1509 was credit card disclosure when the bill moved through the Assembly and a Senate committee in 1999. In June 2000 the credit card bill was removed from the inactive file and amended on the Senate floor with the DBS language.

A “gut-and-amend” was not uncommon at the end of a legislative session, when a deal was struck with little time for committee hearings. But both houses approved AB 1509 early in the year on June 22, the Assembly voting 62-to-9 and the Senate 34-to-1.

The floor analyses were unusually brief and misleading for a bill that would divert nearly $5 billion from a historically underfunded pension system.

The Assembly analysis said: “fiscal effect : No General Fund effect and no effect to the solvency of STRS; the STRS surplus will absorb the cost of DBSP.” (Defined Benefit Supplement Program)

The Senate analysis said: “According to the Assembly Third Reading analysis, no General Fund effect and no effect to the solvency of STRS, the STRS surplus will absorb the cost of the Defined Benefit Supplement Program.”

A half dozen other bills in 2000 that increased CalSTRS retirement benefits were sent to the governor in late August and early September, the end of the session. The CTA sponsored three of those bills, but not AB 1509.

After being about 30 percent funded during the 1970s, CalSTRS funding slowly improved with an increase in state funding in 1990 and then large investment fund earnings during a high-tech boom later that decade.

As funding peaked at about 110 percent around 2000, the “surplus” was not regarded as a cushion to offset future investment earnings shortfalls. As often happens with public pensions, the surplus was viewed as a windfall that should be spent.

Legislation began divvying up the windfall in 1998 when the surplus was still a projection. A cut began in the state contribution, 4.3 percent of pay, that would reduce the rate by half, a drop in pension funding of 2 percent of pay similar to the teacher diversion.

The cut in the state rate (AB 2804) was linked to pension boosts for unused sick leave for members hired before 1980 (AB 1102) and an increase in the pension formula (AB 1150) from 2 percent of final pay for each year served at age 60 to 2.4 percent at 63.

What happened to the California State Teachers Retirement System during the boom years around 2000 is not as well-known as the California Public Employees Retirement System sponsoring a trendsetting pension increase for state workers, SB 400.

CalPERS, which unlike CalSTRS has the power to set employer rates, gave the state a contribution “holiday” and dropped the state payment to its pension fund from $1.2 billion in 1997 to $157 million in 2000.

Another similarity is that CalPERS told legislators in 1999 the SB 400 pension increase would be paid for by a surplus and “superior” investment returns without costing taxpayers “a dime.”

One of the half dozen CalSTRS benefit increases in 2000 was said to be “equitable with CalPERS.” As in SB 400 for state workers, retired CalSTRS members were given (AB 429) a 1 to 6 percent increase in their pensions.

Some of the CalSTRS benefit increases in 2000 were intended to encourage teachers to stay on the job longer, a move to retain valuable experience and ease a teacher shortage.

Teachers with 25 years of service can base pensions on one year of highest pay (AB 821) rather than a three-year average. A longevity bonus (AB 1933) added $2,400 a year to pensions for 30 years of service, $3,600 for 31 years and $4,800 for 32 years.

Pay earned beyond the regular school year (summer school, overtime, etc.) goes into the new Defined Benefit Supplement (AB 2700), viewed by some as a curb on improperly boosting or “spiking” pensions.

A previous increase for pensions of less than $15,000 a year was extended (SB 1505) to more members. Medicare Part A hospitalization was provided (SB 1435) for those without it, many hired before 1986 when districts were required to pay Medicare taxes.

Unlike the CalPERS SB 400 pension increase, two of the big CalSTRS changes were temporary and lasted a decade. The diversion of a quarter of the teacher contribution into the DBS automatically ended Jan. 1, 2011, along with the longevity bonus.

The teacher pension formula “2 at 60” is less generous than most CalPERS formulas, “2 at 55” for state workers and as much as “3 at 60” for some local government employees. Gov. Brown’s pension reform, AB 340, gives non-safety new hires “2 at 62.”

Teachers do not receive Social Security in addition to their pensions, unlike most CalPERS members. And most teachers, depending on the school district, do not receive retiree health care.

“Pension package will restore dignity,” said a CTA newsletter headline in 2000 as the Legislature approved the benefit package. Shive was quoted: “I’m more than a happy camper. I’m elated! It’s a glorious day for all of us.”

The CTA newsletter said the benefit package was “worth approximately $12.1 billion and funded from excess earnings of the CalSTRS fund.” No current estimate of the cost of the changes was available from CalSTRS.

The brief apparition of “excess earnings” vanished like a mirage when the high-tech bubble burst around 2000, beginning a long decline in the pension fund investment earnings expected to provide about two-thirds of CalSTRS revenue.

The CalSTRS investment fund peaked at $180 billion in 2007, dropped to $112 billion in 2009 and was back up to $161 billion as of Jan. 31, still well below the high water mark set more than five years ago.

Actuaries said that if investment earnings since 2000 had hit the current assumed rate of return, 7.5 percent, CalSTRS would have been 103 percent funded as of the last valuation, June 30, 2011.

But earnings were well below the target. A new estimate from Milliman actuaries puts the CalSTRS funding level last June at 66 percent with an “unfunded actuarial obligation” of $73 billion.

Last week, the CalSTRS board sent the Legislature several options for reversing or slowing a projected decline in funding expected to empty the investment fund by 2047.

Full funding would cost $4.5 billion more a year, a 75 percent increase in the $6 billion total annual payments now being made by teachers, school districts and the state. The cheapest option, $1.5 billion a year, would delay depletion of the fund until 2058.

The author of legislation in 1990 that increased the state contribution to CalSTRS, former state Assemblyman Dave Elder, D-Long Beach, was asked for a comment about the current funding shortfall.

“They lowered the contribution from the teachers, they lowered the contribution from the state, and they increased the benefits,” said Elder. “So it was a perfect storm for a huge and unfunded liability.”

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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/