Pension reform’s impact on teachers

Brown would raise new teachers' retirement age to 67

Under Gov. Jerry Brown’s plan to rein in pension costs, future teachers would work years longer before they could retire with smaller pensions. Current teachers and administrators would soon pay about 1 percent more out of their paychecks toward their retirement. And both current and future educators would be unable to retire, then turn around and return to the classroom full time.

Brown’s pension reforms would uniformly apply to all public employees, state and local, municipal and school. They would significantly decrease benefits, especially for new workers, and lower the risk for governments, by raising the retirement age from as early as 55 to 67 for all new non-safety employees, and by replacing a significant portion of a defined benefit plan with a defined contribution plan similar to a 401(k).

“This is a decisive step forward,” Brown said at a press conference. “The plan will make the pension system more sustainable and fair to taxpayers and the employee.”

Brown’s plan would reduce the state’s pension costs by billions of dollars over the next 30 years. What it would not do, because it applies primarily to new workers, is solve the current huge unfunded liability facing most pension plans. That  includes CalSTRS, the nation’s largest pension fund for educators, which is currently only 71 percent funded and could run out of money in 30 years unless the state pays in hundreds of millions of dollars more per year. Nothing in the plan would address the unfunded liability issue, and Brown indicated he doesn’t intend to do so next year.

Here’s how Brown’s 12-point plan would appear specifically to affect to CalSTRS members. The governor has presented only an outline; details aren’t clear on a lot of important aspects, such as terms of early retirement. Brown also indicated he favors a cap on defined benefits, affecting higher-paid administrators and superintendents, though he didn’t specify what the level would be.

  • A shift to splitting the contributions of annual normal pension costs between educators and the state/school districts. Current teachers pay 8 percent of their pay toward retirement; districts pay 8.25 percent, and the state 2.017 percent. That adds up to 18.25 percent. (The state pays another 2.5 percent into a cost-of-living fund.) But the key word is normal costs, says Ed Derman, CalSTRS Deputy Chief Executive Officer for Plan Design. That means ­the annual contributions needed to meet actuaries’ assumptions of pension payouts and revenues not funded by investment returns. That, he says, is currently 17.7 percent. A split of that would be 8.85 percent, so CalSTRS members can expect to pay about 1 percentage point more of their pay, phased in. (Update: School employees who pay into CalPERS– non-classified workers like custodians and secretaries – would be affected more, Sheila Vickers, Vice President of School Services of California, reminds me. They current pay 7 percent of their pay to retirement, while the district contributes 13 percent. Under the 50-50 split, which would be phased in, districts would save money, while employees would pay more.)

However, if the CalSTRS board lowers its expected rate of return on investments, now 7.75 percent, as critics have called for, the contribution rate would increase. Again, this doesn’t take into account the additional payments needed to meet a $56 billion unfunded liability. Based on court decisions, that would be entirely the state’s burden and could raise the state’s contribution by 14 percentage points to 32.25 percent of payroll – a whopping extra burden on taxpayers.

  • A new hybrid plan for new teachers that introduces a defined contribution component. Because CalSTRS members do not pay into or receive Social Security, the defined benefit plan would cover two-thirds of the pension benefit and the defined contribution would cover a third. The target pension that teachers/administrators would receive would be 75 percent of their salaries after 35 years of work (with a cap for some higher-paying jobs). That would be less than currently received under CalSTRS. Teachers who retire at age 64 with 35 years in now can retire with 84 percent of final pay, with an additional 2.4 percent for every year beyond that.
  • A higher retirement age for new teachers. Saying, “We have to align retirement ages with actual working years and life expectancy,” Brown’s plan would raise the retirement age to 67, the current age for full benefits under Social Security. Currently, teachers who retire at age 60 after working 35 years  receive 70 percent of full salary (2 percent times 35 years). Under Brown’s  plan, they could not draw full retirement for another seven years, saving the system $364,000 for a teacher who made $70,000 a year.
  • Anti-spiking protections for new employees. To avoid perks thrown in during the final year to boost pensions, pensions would be based on the average of an employee’s final three years. Bonuses, unused vacation, and sick pay would no longer count toward compensation.
  • No more double dipping. Raising the retirement age will discourage a revolving door of having public employees, including teachers and superintendents, retiring one day and returning the next in a new full-time job. Brown would restrict retirees on public pensions to working 960 hours or 120 days per year for a public employer – about two-thirds of a school year.
  • Bans on retroactive pension increases and the purchase of additional retirement service credit for time not actually worked., known as “airtime.” Districts had offered this as a way of encouraging early retirement.

Hurdles, resistance in Legislature

Brown wants to put the uniform changes on the November 2012 ballot as a constitutional amendment. That would require a two-thirds vote of the Legislature – a formidable hurdle, given expected union opposition to the biggest changes, like raising the retirement age, and to circumventing negotiations via the ballot.

“We simply cannot stand for imposing additional retirement rollbacks on millions of workers without bargaining,” Dave Low, representing a coalition of public employee unions, said. The California Teachers Association, still examining the plan, didn’t issue a statement Thursday.

But Sen. Joe Simitian, D-Palo Alto, one of three senators chosen to serve on a new conference committee to deal with pension reforms, called Brown’s plan “substantive and significant” and credited him with making it comprehensive.

Simitian worked for two years, without success, to get an anti-spiking bill passed, and that should have been the easy piece. Now, he said, “with more moving parts, it will be more difficult to develop consensus.” The two-thirds requirement to get it out of the Legislature will be difficult but doable, he said.

Brown will have to thread the needle to win over Democrats who will side with labor and Republicans who will charge he didn’t go far enough with his reforms. Reacting to the proposed hybrid plan, Senate President pro Tem Darrell Steinberg told the Sacramento Bee, “I believe in defined benefit, because I don’t think that retirement should be based on the ups and downs of what occurs on Wall Street.” (Never mind that when Wall Street tanks, and public pension plans don’t make 7.75 percent returns, taxpayers are left holding the bag.)

But Brown cautioned that voters want pension reform, and implied that a failure to put it on the ballot will hurt chances to pass higher taxes. “Legislators would be well advised to take (pensions) seriously, get it all enacted and get it on the ballot when there are things they will be particularly interested in,” he said.

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  1. I would expect that CALSTRS will end up with it own set of rules since unlike other public employees teacher do not participate in Social Security. In addition, CALSTRS is a statewide program that local school board do not have control over. The biggest thing local school boards can do to control expenses on their end is to negotiate the terms of medical coverage for retirees.

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  2. I don’t think the unions realize the effect on the electorate the pension problems are having. Voters just scraping by and wondering if they will lose their house on the next round of layoffs hear about school administrators or police benefiting from the spiking “retiring” on 6 figure incomes  and then turning around and getting a salary on top of that for doing the job they just retired from.  More and more are inclined to say ‘well if you can afford that kind of largesse then I guess you don’t need school bond, sales tax, whatever.’
    Teachers (who cannot benefit from the spiking) are being robbed by administrators who can and suck out much more than they put in.  Teachers are also  betrayed by their union which defends the spiking.  On the record CTA was willing to set a limit at $147K.  But this only benefits administrators since it is way above what any teacher would ever make.  Off the record they had the anti-spiking proposal sent to the ‘roach motel’ of bills to die ensuring a steady supply of pension “horror stories” to turn people against the entire pension plan system, unions in general, and public employee unions in particular.

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  3. Raising the retirement age to 67 would be hugely negative. Unlike a lot of jobs (say Governor or Legislator), teaching is a job that requires a pretty significant degree of physical health. A relatively minor ailment for a lawmaker – say a situation where you needed to go to the bathroom every hour, or to a doctor appointment once a week – would be debilitating for a teacher and for the school employing that teacher.
    The way pensions are structured, it’s incredibly expensive and difficult for an older teacher to leave the profession, because they won’t have enough years left to fully vest in social security. Extending the age to 67 would only make that worse. As it is, an older teacher in failing health has a serious dilemma – and the school system, with a teacher who has served long and honorably – has to cope as well. Counseling an underperforming teacher out at age 60 will probably become impossible if the age is lifted to 67.

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  4. CalPers has a very clear document showing how their retirement plan has done at:
    For the last 10 years they have returned 5.4%.  For the last 3 years 3.3%.  CalSTRS has nothing so clear and easy to read so it is up to the imagination if they have done any better.  If the calculation for how much the various retirement systems are under water were revised to reflect that 5.4% instead of the “in-your-dreams” 7.75% the liability would be not just *big*, but “omg!” big.  If anyone is going to poll people on what they think of state pensions, they should include that unfunded liability under recent performance as background.
    To take a look at what might be California’s future, take a look at Rhode Island:
    Vanity Fair had a horrifying article on California’s rush over the cliff, “California and Bust”, by Michael Lewis (Liar’s Poker”, “Boomerang”) at:
    It describes California as the “Nightmare scenario”.  To see the possible future read far enough to get to the Vallejo part.  Just in time for Halloween!

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  5. The retire and come back part time strategy is another way that districts work with someone who is a valuable employee but is having health issues that make reliable full time work problematic or otherwise needs to slow down. Certainly having people milk the system for hundreds of thousands of dollars is something we can and should end, but it seems to me it is much better to be less specific about the ways one does it and to be more specific about having a cap at some rational standard of living.

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  6. No one is concerned about the teacher who comes back part time at $50K or $60K.  The big “in your face” abuses that garner enormous resentment are police chiefs or school superintendents who retire at a spiked $200K+ and then come back to the same job at $200K or more.  If you don’t put on limits, it will continue to be abused.  Read that NYT article on Rhode Island and the Vanity Fair Michael Lewis article “California And Bust”.  The current system is unsustainable.  People defending the current system are like someone falling off a 100 story building and when asked how he’s doing halfway down says “so far, so good”.  To find out what happens when you land look at “Nightmare Scenario” Vallejo or Rhode Island.

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  7. Should CalSTRS be the definitive source for understanding the GPO and WEP? For those who would like to read an analysis not done by the self-interested (although you’ll fine masses of those at the link I provide in the whole hearing transcript), go read the testimony from the GAO. The testimony from the link John gave was from this hearing but not actually given at the hearing.

    These provision are designed to remove unfair windfalls but, while doing just that, introduce some unfairness of their own. This is due to the lack of information about pension income people receive from employment not covered by Social Security. With that information the adjustments could be made fairer and more precise. But remarkably, or perhaps not, it’s not the removal of unfairness that exists now that these teachers want but rather the return of unfairness that benefits them.

    GPO and WEP: Policies Affecting Pensions from Work Not Covered by Social Security
    United States Senate Committee on Finance
    Subcommittee on Social Security, Pensions, and Family Policy
    Tuesday, November 6, 2007

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  8. The current retirement system (excepting some municipal programs) was not under attack prior to the recession. The recession, of course, was caused by public employee unions issuing credit default swaps and fraudulent investment instruments.

    Oh no, wait. That wasn’t the public emp0loyee unions, it was the investment/banking industry who muttered incantations about the free-market while gambling investors money with the assurance that they, for the most part, had their losses socialized. And then many walked away with huge bonuses for tanking their companies. And now they lobby heavily to keep their wayward system unregulated while  vigorously continuing the obviously  bogus  free-market bloviating.

    Sounds like a defined benefit for Wall Street to me.

    That being said, I believe we will continue to fight for a dignified, defined benefit, retirement system for public employees.

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  9. The current Great Recession is the hangover from the artificial boom in cheap mortgages.  Some were saying the boom was unsustainable and government pensions were getting excessive but try getting heard when it looks like everyone is getting rich and plenty of economic pundits are proclaiming “this time things are different”.
    There is no essential difference between the pension plans of municipal employees and that of teachers pension plans.  The problems with Vallejo are just a preview of what is in store for everyone.  Rhode Island is the first state to have one retirement plan after another declare bankruptcy and whole cities go into receivership.  to confront the inevitable crash from a lot of short term politicians buying votes with unsustainable pensions in return for union support.  “California and Bust” – read it and weep.
    The Dow took nearly 17 years from the top in 1929 to get back to where it had been with a little help from WW-II goosing the economy.  If that happens again, every defined benefit pension plan is going to be in receivership.

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  10. Teachers in retirement have limits on how much they can earn while employed by a school district before they take a hit on their STRS. They do not get benefits typically and are not enhancing their retirement. These are usually teachers who have credentials in content areas where it is difficult to find qualified people (higher math and science). Due to the retirement and benefits they don’t get it really represents a savings to the public to bring these people back.  And it provides for quality instruction.
    There is a principle here too. If a person has fully met the requirements of a retirement system and decides to take advantage of that, whose business is it what they do to earn more doing whatever they like after that? I see some folks who typically bray the libertarian party line suddenly believe that government intervention is necessary to restrict the rights of retired public employees. If the employee has the qualifications to fill a position and does so that is their business and the public is getting the benefits of their continued service.
    Certain municipalities and counties unwisely took advantage of “holidays” granted by the state exempting them from making appropriate PERS contributions. Now it has bought up with them. Some like Orange County some years ago made terrible decisions about how to invest their resources. That was a management issue. The consequences of management incompetence should not land on the shoulders of the employees.
    Both PERS (state) and  STRS have resources adequate for years if not decades. The hysteria is similar to that about Social Security that still has 35 years of adequate funding. There is plenty of time to make necessary adjustments. Making decisions during panic about the economy does not seem prudent. STRS needs to be funded at 80% to do quite nicely in paying benefits. It is about 75% now and has had banner years in investments. It’s time to calm down.

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  11. I agree with Gary that the histories of teachers’ retirement plans are important.  It would be interesting to compare those histories with the history of financial machinations on Wall Street, including both the inflating and bursting of the bubble.

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  12. “Nothing in the plan would address the unfunded liability issue, and Brown indicated he doesn’t intend to do so next year.”
    I am sorry to read that this is the limit Brown believes California can achieve reform to.
    Folks, WE DON”T HAVE THE MONEY. Social progressives hope to hunker down for NO governemnt changes and wait for the good old free-spending good times to return. Not a chance! Our majority party in Sacramento has been and STILL is neglectfully derelict, if not actually regulation-hostile to California business promotion. Out-of-state business owners and  potential employees will not locate to this state because of its’ hienous cost of living/operating. The weather just ISN’T THAT GOOD! The California legislature is used to habitually abusing the eigth largest economy in the world to a state of 20 million in debt, with a vagrant’s credit rating (we recently were AAA). They are in it for the social agenda and its spending, NOT representation. Money talks, and it is shouting that all bureaucracy infrastructure, including our well-paid emergancy response heros better get used to the idea of being in it “for personal fulfillment”.  The end of lucrative compensation for service is in sight. Ultimately, the state environment that nurishes social welfare participants will drive away these folks along with the unfortunate habits and secondary-effects. But we who love this beautiful state and loathe how it is being mass-groped by the entitlement creatures,  progressives and other political freaks of nature must endure. These aberrants do not self-sustain, and will wither in the light of reason and time. Thank heavens!

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    The is a wealth of information available about the myth of CA’s negative “business climate.” Peter Schrag wrote an excellent article about this several months ago. Businesses are not bailing out of the state at a high rate, at least not any more than they are any other state, and when they do move out it is to off-shore jobs.
    The CA Legislative Analyst’s Office, in their CalFacts report, notes that even in the midst of the recession CA remains the wealthiest of states and remains the seventh or eighth largest economy in the world. CA has plenty of wealth available. The wealth, like in the rest of the nation, is not distributed equitably. (See the recent CBO report.)
    The key problem in CA is that it is a state that collects revenue at a rate that is just above average (that’s a high personal income tax linked to a low property tax) and also has a cost-of-living that is second only to Hawaii of the 50 states. When politicians yammer on about their helplessness in the face of the “structural deficit” that is the structural deficit. Low relative tax revenue and high relative costs of providing services.
    We are caught in a bind of a public who demands high quality public services and simultaneously demands low taxes. A bad mixture that.
    We are also burdened by a political system that demands a 2/3rds majority to raise revenue and a simple majority to lower revenues. Add to that a legislature with a minority party, whose participation is demanded for fair and reasonable governance, that feels more loyalty to a Washington DC lobbyist than it does to the state that elected them.
    The result is we are cutting the school year and valuable programs like Career Academies. The result is, CA is becoming the land Ayn Rand fantasized about. A “free market” with limited government intervention. Kind of like Somalia, should we continue down this path.

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