CalSTRS CEO: Avoid drastic changeCriticizes Little Hoover ideas others embrace
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.”
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.