LAO: Solve CalSTRS’ $56B burden

Start now to pay off $56 billion shortfall
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The Legislative Analyst’s Office generally praised Gov. Jerry Brown’s 12-point proposal for pension reform in an analysis released Tuesday, save for one gaping omission: CalSTRS’ unfunded liability. A failure to face up to it when suggesting big changes to public pension programs, like raising the retirement age, “doesn’t make sense to us,” wrote LAO analyst Jason Sisney.

What to do about it, though, is far from clear.

CalSTRS, the nation’s largest public pension program for educators, with 852,000 members, hasn’t recovered from a 30 percent drop in its investment portfolio in 2008 that has left it 71 percent funded, with a $56 billion liability in the latest annual report. Brown isn’t recommending cutting benefits of current workers or asking them to pony up more money to make the system whole. On this point, the LAO agrees. Court decisions have made it “very difficult – perhaps impossible” to mandate such changes for current public workers and retirees, the analysis said. So that leaves it to taxpayers to shoulder the burden. (Others have called for challenging past court rulings; California Pension Reform, which is gathering signatures for a November 2012 referendum, would alter benefits and limit defined benefits for current and future public workers.)

The LAO report notes that restoring full funding to CalSTRS would require additional contributions of  $3.9 billion per year for at least the next three decades. That alone would equal about an eighth of the $33 billion in the state’s General Fund spending under Proposition 98 for K-12 schools and community colleges this year. In other words, paying  off the pension obligations to current teachers and administrators could gobble up new money for education – if there were any around.

Rather than cut school spending further, Brown’s not proposing to immediately increase state contributions to CalSTRS. But the longer the state puts off dealing with the liability, the bigger the $4 billion tab will tend to increase, LAO said.

Unlike other public pension contributions, which can be renegotiated with workers, CalSTRS contribution levels are set in the Education Code and can only be altered by the Legislature. Brown recommends raising the minimum retirement age for new teachers from 60 to 67 and requiring a 401(k) type plan as part a benefits package. That would limit future liability to taxpayers.

Phase out state’s share

As for current obligations, the LAO recommends that the Legislature increase payments in coming years while at the same time pursuing a goal of phasing out the state’s share of CalSTRS payments. Under the current split, the employee pays 8 percent of salary to retirement; districts kick in 8.25 percent, and the state, through two separate funds, adds 4.5 percent. The LAO wants to shift to the employees and districts splitting the normal costs of funding CalSTRS.

Doing so, the LAO said, would reduce the likelihood of future unfunded liabilities.

“In this new structure, we believe that school districts, their employee and retiree groups, and CalSTRS itself would have a much greater incentive to establish prudent, rather than optimistic, investment return assumptions, given that they and they alone will be responsible for keeping the system well-funded for future teachers.”

Pension reformers and financial analysts have criticized CalSTRS for continuing to assume a 7.75 percent rate of return on investments. That keeps employee contributions down, but the state has to make up the difference when investments come up short.

CalSTRS’ troubles notwithstanding, the LAO notes that “several reports have indicated that teachers enrolled in CalSTRS receive less generous benefits than other kinds of public employees in California.” Many local governments continue to offer employees 3 percent at 60, meaning workers can retire at age 60 receiving 3 percent of their final year’s salary times the number of years they worked (3 percent at 55 for public safety workers). For teachers, it’s 2 percent at age 60, rising to 2.4 percent at age 64.

7 Comments

  1. I think raising the retirement age is very much the wrong way to go. Teaching is a physically demanding job, and it does not go well with any kind of regular health problems. A lawyer, a legislator, a governor can all have substantial control over their schedule to do weekly doctor appointments, to use the bathroom when needed, to take medications, to deal with all kinds of special needs as one’s body gets older. A teacher cannot without creating substantial disruption to her class and her duties.
     
    Currently, a teacher in this situation may choose to (or be counseled to, by an administrator) retire at 60. The proposal says she’d have to hold on 7 more years to get her pension.
     
    So these would be the options:
    1. Hang on until the pension is high enough to afford retirement, likely to the detriment of students and to the teacher’s quality of life.
    2. Disability… comes out of a different pocket, but not necessarily saving the state money.
    3. Move into administration.
    4. Find a new job at 60 that will make enough money to save directly for retirement, neglecting the fact that unemployment is very high for this age range, and that you’d have to make quite a lot of money, because you won’t have time to vest in Social Security or another employer pension system.
    5. Marry well.
     
    After 30 years of working for fairly low wages, this is not a great ending. And it’s not about being greedy, it’s about survival in many cases for people . It removes a tool from districts who have an employee that is no longer serving well (and likely expensive), often an employee who has served the community well and ably for many years.
     
    Frankly, it would probably be better to have a maximum age cap on the pension, or a maximum number of years to draw, than to raise the retirement age.
     

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  2. You need to look at the details of how the pension formulae work. x% at (age) is not the same everywhere. Example:

    PERS (presumably similar to teachers) formula sets a “knee” point on a curve, which continues to increase after that at a slower rate until the maximum is hit. So “2% at 55″ which is typical for non-safety employees tops out at about 2.5% somewhere near 63. “2% at 60″ tops out at 2.5% around 65.

    Many county systems use a different meaning: their “3% at 60″ is a cap – the curve is flat after that.

    Pushing the minimum retirement age to 67 is nuts – even Social Security doesn’t do that (you can retire at 62 with a substantially reduced allowance). Most current pension systems allow you to retire at 50, with a very small pension. Social Security says that your “full” allowance happens at 66-67, but you can get more if you work to 70 (equivalent to the “cap” in a %@age setup). If you want to redefine the formula so the % cap or the standard % (full retirement) is at 67 rather than 60 or 63 or 65), that’s a different argument and gets to the shape of the curve and where on it the standard % is.

    Either Jerry didn’t think it completely through in his proposal or it’s being disinterpreted in the press. Probably both.

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  3. For a primer on how pensions work for teachers in California, see http://ed100.org/pensions.  This primer includes a graph that shows some of the oddities of how the system pays out.  Do you expect a smooth, logical connection between contribution and payout?  Think again…

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  4. Rearranging the deck chairs.  CALStrs and the others will go bankrupt.  According to the LAO,  CA’s retirement system is “very generous” and looks on track to consume 1/2 the entire state budget.  They have a very nice easy to understand slide show with solutions over at:
     
    http://lao.ca.gov/presentations/2011/pub_retirement_bens/pub_retirement_bens_021011.pdf
     
    First, get everyone on Social Security.  As the LAO points out that is a major barrier stopping people from exiting or entering teaching.  So bad teachers stay on because they feel locked in and those already with a SS account don’t want to enter.
     

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  5. el, I’d just like to compliment you on your participation here, and the thoughtful comments you make.  While we’d hope that teachers are better protected from “what ifs” than police and fire, teaching is a physically demanding job every day, and should a serious natural disaster or public safety threat affect a school and it’s children, we want teachers to be able to do what needs to be done, above and beyond the daily demands.  And you’re right about the effect that a career where when you may or may not go the bathroom is dictated by a schedule and even more restrictive than it is for students, thanks to yard duty and other responsibilities.  UTIs and IBS are much more common in teachers than the general population, bodily functions aren’t sexy to talk about in any context but they are dehabilitating problems that last or get worse as people get older.
    According to the above, at age 60 with 30 years, teachers might get 40K in retirement, and at 64, 48K.  This is not the 6-figures many police and fire are receiving.  While I agree that projections should be more pragmatic, I am disappointed in the notion that teachers and districts haven’t been doing their part.  With a mandatory 8% contribution, required professional development to pay for and perpetually low salaries, it’s pretty tough for young teachers to be squirreling away a bunch more for their retirement because the system might break by the time they get to that point, but I’d be nervous if I was still in the system.

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  6. “Doing so, the LAO said, would reduce the likelihood of future unfunded liabilities.”

    It might reduce the likelihood of future PENSION-related unfunded liabilities, however, it will increase the likelihood of other poverty-related unfunded liabilities.

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