CalSTRS CEO: Avoid drastic change

Criticizes Little Hoover ideas others embrace
By

A response from CalSTRS’ CEO rejecting key recommendations of the Little Hoover Commission serves as a cautionary note to Gov. Jerry Brown and five Republican senators who have been negotiating changes in public pensions as part of an agreement to vote to place tax extensions on the June ballot.

In a letter last week to Daniel Hancock, Little Hoover’s chairman, CalSTRS CEO Jack Ehnes dismissed as “impractical” the watchdog commission’s call for reducing the future benefits of current CalSTRS members and requiring that all public employees join and coordinate their benefits with Social Security.

Both of these ideas have been bandied about in various reform proposals. The five Republican senators are reported to advocate requiring new public employees to switch to a hybrid retirement plan similar to one imposed on federal employees a quarter-century ago. It would include a much smaller pension than what current workers receive, accompanied by a 401(k) match of up to 5 percent of their pay and Social Security benefits. Brown is reported to support much milder measures: capping the maximum amount of pensions and banning some of the pension-boosting tricks that have contributed to higher government costs.

Taking a more radical approach, a citizens group, California Foundation for Fiscal Responsibility, is proposing a constitutional amendment permitting the cutting of future pension benefits of current public workers – another of  Little Hoover’s recommendations.

Ehnes criticized making drastic changes to all pension systems in response to the problems of a few. The Little Hoover report’s “broad generalizations … do not hold up when applied to specific plans,” starting with the opening assertion that underfunding is due primarily to “overly generous benefit promises, wishful thinking and an unwillingness to plan prudently.” Contrary to being overly generous, Ehnes said, CalSTRS provides “a moderate benefit that replaces approximately 60 percent of pre-retirement income for educators.” (The exceptions, which Ehnes doesn’t mention, are the 2 percent of members – administrators and superintendents – who get pensions of more than $100,000. That’s who Brown is targeting.)

CalSTRS, which serves 852,000 current and retired teachers and school administrators, is rarely mentioned directly in the Little Hoover report. Its focus is on CalPERS, the nation’s largest pension plan, which serves most state employees, and independent county and city pension plans, some of which – Los Angeles, San Diego, and San Jose – may consume a third, half, or even more of municipal budgets in coming years. However, the report’s broad recommendations are intended to apply to all public employees, CalSTRS included. (Click here for a Los Angeles Times article today on a report on cronyism and insider trading at CalPERS.)

Although most state public employee unions and some municipal unions over the past year have agreed to higher employee contribution rates and limits on pay for the purpose of determining pensions, governments face legal hurdles to unilaterally reducing the future benefits of current public employees. And in the case of CalSTRS, courts have raised the bar even higher. That’s because, unlike contracts for other state employee unions, only the Legislature can set contribution rates for CalSTRS. A number of court decisions – cited at length by Ehnes – have ruled that current employees have vested rights in guaranteed pensions. They can make changes only in exchange for benefits of equal value, like pay raises. The only exception, Ehnes noted, would be a temporary freeze on accruing pension benefits because of an economic emergency.

The Little Hoover report acknowledges legal obstacles, but says that they may be worth challenging, because changing only the benefits of future employees will not create enough immediate savings. That’s why the California Foundation for Fiscal Responsibility wants to put an initiative to voters. Ehnes calls ignoring clear court rulings on this issue “naïve at best.”

Social Security

California is one of 14 states in which teachers and administrators have elected not to participate in Social Security – a decision that dates back 60 years. Teachers decided that CalSTRS offered a better return for their money. (There are nonetheless adverse effects for some teachers: Those who have contributed separately to Social Security, through summer jobs or jobs before becoming a teacher, face a stiff penalty when they retire. They can lose up to $381 per month in their Social Security entitlement when it’s combined with their CalSTRS pension. So far, Congress has declined to fix the inequity.)

Other public workers (including classified school employees like bus drivers, who are part of CalPERS) do contribute to Social Security. The Little Hoover report recommends having all public employees be part of the federal system and that the two systems be better integrated. Teachers currently pay 8 percent of their pay toward their pension, and districts pay 8.25 percent, with the state kicking in 4.5 percent. Under Social Security, workers and employers each pay 6¼ percent of pay.

Paying into Social Security and paring back the share to CalSTRS would reduce the liability for state and local governments, whose contribution levels to pension systems must rise when the pension systems’ investment income falls below projections. That’s precisely the problem now, because CalPERS and CalSTRS lost 25 percent of their market value in 2008.

However, there would be a tradeoff: Because CalSTRS offers a better retirement benefit than Social Security for every dollar contributed by workers, teachers would lose retirement income under the arrangement.

Forcing current teachers to join Social Security doesn’t pencil out, Ehnes wrote.  “We found that, if CalSTRS benefits were reduced to offset the benefit a member would earn from Social Security, the total cost of this coordinated benefit structure would be $1.8 billion more each year to the member and employer.”

The state and school districts do face substantially higher costs to keep CalSTRS solvent – potentially $3.8 billion more per year, phased in over the next decade. Ehnes is arguing that there are ways to deal with this problem without dragging CalSTRS into the mix of drastic changes to other systems.

At this point, it’s unclear whether Brown and the Republican five have made that distinction – or found any common ground at all.

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6 Comments

  1. Thanks, John, for including some data on how many get pensions > $100,000.  If I understand your figures, that is 2% of  852,000 members = 17,040 getting more than $100K per year retirement = $1,704,000,000.  Nearly $2 Billion/year minimum!  Since there are plenty of admin retiring at over $250K can we say that $150K is a low-ball average for those 2% high-end retirees making it around $2.5B/year.  That is astounding and literally unbelievable.  Perhaps one of us made a mistake?  Did they mean 2% of retirees not 2% of members?  What would really be useful would be to know the exact amount going to those retiring on $100K or more so we don’t have to make guesstimates like the above as to how much it really is. It is going to come out in the public discussion anyway so might as well get it out now in solid figures that don’t sound like someone is trying to avoid the actual numbers because they are too high to be believed.  You can’t hide these kind of numbers under a rug and hope people are distracted by events elsewhere.

    The average teacher needs to decide if they are willing to accept the public fallout from these high end retiree numbers to protect a few former admin staff to retire in luxury.  They also need to decide how to explain to the average parent why 36 other states can have teachers on Soc. Sec. but not Cal.

    I’ve read recently that Detroit public schools are considering declaring bankruptcy and proceeding as the Feds did with GM – offloading debts and pension obligations to a third entity.  No one should stake too much on the protection of the courts.  There are plenty of ways around any legal impediments.

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  2. More people should follow some of your very good links.  I did and it was very informative.
     
    From http://sacramento.cbslocal.com/2011/03/08/on-the-money-calstrs-100000-club/
    “The list of retired teachers and administrators collecting six-figure pensions has grown by 70% in the last year and a half. There are now more than 5200 people in the club”…”Last year, members of the $100,000 club took home a collective $630 million in payouts from the California State Teachers Retirement System, a fund with at least $40 billion in unfunded obligations.”
     
    From http://calpensions.com/2011/03/14/pension-focus-shifts-hybrid-caps-and-the-big-one/
    “…urgent action is needed because pension costs are projected to rise by 40 to 80 percent in the next few years, particularly hitting local pension funds because personnel costs are a large part of their budget.”…”State worker pension and retiree costs have increased from $1.4 billion to $6 billion during the past decade, said the analyst, while their share of the state general fund that pays for most programs increased from 2 percent to 7 percent.”
     
    If the state general fund is about $100B, that current 7% mentioned is $7B and a 60% increase (midway between the 40%-80% mentioned) would bring it to about $11B.
     
    That.Is.A.Lot.Of.Money!

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  3. If the time ever comes that California teachers are denied their pensions, pension reform and its fallout will be the last of society’s worries.
    Some seriously stupid billionares such as Bill Gates, etc have forgotten that without the fabric of the middle class – and middle class professions such as teaching are part of that- there wont be a Society for them to plunder wealth from anymore.

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  4. It is very difficult for school districts to dismiss ineffective tenured teachers.  CalSTRS contributes to this problem.
    A few years ago my colleague Jessica Wang and I created a hypothetical scenario.  Based on Census and ACS data, we created a fictional “typical” 55-year-old teacher in California in 2008, a white woman whose education level was the median of that among teachers.  We then estimated the average salary of all such women across their careers.  Finally, we calculated the present discounted value of that hypothetical teacher’s pension wealth in 2008, assuming she retired at the age of 65 in 2018.  (We realize that the typical teacher would retire earlier than 65, but we chose 65 to make it easier to compare teachers to non-teachers.)
    We then asked, “What would happen if that 55-year-old woman switched from teaching to another profession, a profession covered by Social Security?  What would happen to the present discounted value of that woman’s retirement benefits?  Assume that her earnings as a teacher would have increased at the same rate as they had in the past.  Assume that her earnings in her new profession would be the same as those she would have earned in teaching.  And assume that regardless of her profession, she would retire at age 65.”
    Our back-of-the-envelope estimates suggested that this teacher would lose more than 40% of the total discounted value of her total pension wealth (CalSTRS + Social Security) by changing professions at the age of 55 in 2008.
    There may be many older, burned-out teachers in California public schools who would be eager to move to another profession.  But these teachers may not change professions due to the losses in pension wealth they would incur.
    I would also guess that those who nonchalantly remark, “We need to get rid of these old, ineffective teachers,” may not realize the tremendous financial costs these old, ineffective teachers–teachers who might have been highly effective in their younger years–would bear as a result.
    I’m sure that others using different scenarios or numbers would estimate different losses in pension wealth that would result from individuals changing from teaching to another profession at the age of 55.  Although their quantitative findings might differ, I’m sure their qualitative findings would be the same:
    1.  CalSTRS keeps ineffective teachers in the classroom longer than they should be, and perhaps even longer than they would like to be.
    2.  Advocates for tenure reform may not appreciate the full costs that would be borne by dismissed teachers if it were made easier to dismiss ineffective teachers.

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  5. Here it is again, with better spacing:

    It is very difficult for school districts to dismiss ineffective tenured teachers.  CalSTRS contributes to this problem.
     
    A few years ago my colleague Jessica Wang and I created a hypothetical scenario.  Based on Census and ACS data, we created a fictional “typical” 55-year-old teacher in California in 2008, a white woman whose education level was the median of that among teachers.  We then estimated the average salary of all such women across their careers.  Finally, we calculated the present discounted value of that hypothetical teacher’s pension wealth in 2008, assuming she retired at the age of 65 in 2018.  (We realize that the typical teacher would retire earlier than 65, but we chose 65 to make it easier to compare teachers to non-teachers.)
     
    We then asked, “What would happen if that 55-year-old woman switched from teaching to another profession, a profession covered by Social Security?  What would happen to the present discounted value of that woman’s retirement benefits?  Assume that her earnings as a teacher would have increased at the same rate as they had in the past.  Assume that her earnings in her new profession would be the same as those she would have earned in teaching.  And assume that regardless of her profession, she would retire at age 65.”
     
    Our back-of-the-envelope estimates suggested that this teacher would lose more than 40% of the total discounted value of her total pension wealth (CalSTRS + Social Security) by changing professions at the age of 55 in 2008.
     
    There may be many older, burned-out teachers in California public schools who would be eager to move to another profession.  But these teachers may not change professions due to the losses in pension wealth they would incur.
     
    I would also guess that those who nonchalantly remark, “We need to get rid of these old, ineffective teachers,” may not realize the tremendous financial costs these old, ineffective teachers–teachers who might have been highly effective in their younger years–would bear as a result.
     
    I’m sure that others using different scenarios or numbers would estimate different losses in pension wealth that would result from individuals changing from teaching to another profession at the age of 55.  Although their quantitative findings might differ, I’m sure their qualitative findings would be the same:
     
    1.  CalSTRS keeps ineffective teachers in the classroom longer than they should be, and perhaps even longer than they would like to be.
     
    2.  Advocates for tenure reform may not appreciate the full costs that would be borne by dismissed teachers if it were made easier to dismiss ineffective teachers.
     

     

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  6. Excellent Analysis.
    I am a 54 year old teacher looking to retire in 4.5 years and I find it more difficult each year to put in the 60 plus hours each week that are needed for me to be highly effective in my middle school math classroom. Though I do not have the energy I had at one time, I am not ‘mailing it in’ or teaching on ‘remote control’.
    I looked at changing professions to allow energetic, younger teachers to assume my class but the financial consequences would have been devastating.  When I retire in 4.5 years, after 30 years in public education and 6 in private, I will retain just under 60% of my income for retirement without other benefits such as healthcare. My pension will not begin to compare to other public employees like police officers and firefighters.
    It is frustrating to have dedicated my life to education, working  a second job to supplement my meager teacher salary during the first 15 years, spending over $1500 annually on classroom supplies to supplement the inadequate district budget, quietly working the last five years without a raise in income and now feel like the public wants to discard me.
    The role of a modern teacher is a demanding profession and the public needs to realize that if they are not faithful in supporting teachers, they will have a difficult time recruiting good teachers to educate their children.  I no longer recommend education as a profession when former students come back to seek my advice.

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