LAO: Solve CalSTRS’ $56B burdenStart now to pay off $56 billion shortfall
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.