More CalSTRS pressure
Lower rate of return, higher tax burden
What a difference a quarter of 1 percent makes.
The decision last week by the board of the California State Teachers Retirement System to lower the expected rate of return on investments from 7.75 percent to 7.50 percent equates to an additional $475 million that school districts and the State Legislature must eventually contribute annually to make up for the shortfall and keep the pension fund healthy. That’s on top of the $4 billion extra per year that CalSTRS says contributors should already start paying to compensate for the big hit that investments took when the market tanked in 2008. The Legislature, facing a General Fund shortfall of its own, hasn’t acted on CalSTRS’ recommendation, and it’s also not expected to act this year on the latest change. But the increased liability will add pressure on lawmakers to deal with Gov. Jerry Brown’s proposed reforms to reduce pension costs. Last week, Brown provided a conference committee on pension reform the details that he had promised on his 12-point proposal.
The CalSTRS board’s action marks the second time in a year and a half that it has lowered the investment forecast by a quarter percent – and reflects a new realization that CalSTRS can’t rely on the high annual return that the pension fund has assumed. Certainly the last volatile decade should temper its optimism. In the 2011 calendar year, CalSTRS earned only 2.3 percent on investments. It was 0.7 percent over the last five years, 5.4 percent over the last decade, and 7.2 percent over the last 20 years.
CalSTRS depends on strong returns on its investment portfolio for the bulk of income for the projected pension payouts of its 856,000 teachers and administrators. The rest must come from annual contributions from members, school districts, and the state. If investment income falters, as it has over the past decade, then the difference must come from higher annual contributions.
Critics are saying that CalSTRS’ 7.5 percent return is still too high. (CalPERS, the worlds’s largest public pension fund, serving state and municipal workers, is still projecting 7.75 percent.)
“It’s a step in the right direction, but not enough of a step,” says Joe Nation, a professor of the Practice of Public Policy at Stanford University, leading critic of the state’s public pension funds, and author, in December 2011, of “Pension Math: How California’s Retirement Spending is Squeezing the State Budget” (see press release; the report was too large to link in this post).
Based on projections of savvy investors like Warren Buffett, Nation said a reasonable rate of return on investments, also called a discount rate, would be 6.2 percent. That assumption, in turn, would require districts and the state to ante up about a sobering $2.5 billion per year more – money that otherwise could go to fund classroom programs.
CalSTRS presently collects $5.6 billion in contributions. That works out to 18.25 percent of current payroll, with teachers and administrators kicking in 8 percent of their pay, districts paying 8.25 percent, and the state, through the General Fund, adding 2.01 percent. (The state contributes another 2 percent through a separate fund to minimize the impact of inflation on employees’ pensions.) Because CalSTRS currently has an unfunded liability of $56 billion, CalSTRS staff recommended that the Legislature increase the contribution rate 14 percentage points to 32.25 percent of payroll, requiring collecting an additional $4 billion annually. In addition, they suggested adding an additional 1.8 percent of payroll, to 34 percent, to compensate for the CalSTRS board’s latest decision to lower the investment rate to 7.5 percent.
But here’s the catch: As opposed to laws dealing with private employers’ pension programs, California courts have ruled that public employees’ contributions cannot be unilaterally raised. Teachers and administrators have a vested right to the pension benefits in effect when they were hired. The only way to raise the rates that members pay is to give them a comparable benefit, such as higher pay. As a result, all of the additional liability for investment shortfalls or higher contributions must be borne by school districts and the state, in the case of CalSTRS. Because taxpayers ultimately bear all of the burden, Nation argues that CalSTRS should adopt a more conservative discount rate – under 5 percent – and then adjust contributions or benefits if, as historically has been the case, the investment returns come in higher. The current system is “an asymmetric risk for taxpayers, who must pay the whole freight,” Nation says.
In his reform proposals, Brown would raise the retirement age for most public employees to 67, substantially reducing the payout over time, and convert part of employees’ pensions to a 401 (k) type program, in which employees would bear more of the risk. But, consistent with court decisions, Brown proposes to impose these changes only on new public employees. As a result, the savings in the first decade would be modest.
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‘The current system is “an asymmetric risk for taxpayers, who must pay the whole freight,” Nation says.’
I’m sorry, but who else is supposed to pay for the services our society believes it should provide?
Obviously this story will get a lot of comments saying get rid of defined pensions etc, however, I would like for people to want that to explain how much it will cost us to do that. The assumption seems to be that we will only save money. But how much will the resulting increased teacher turnover cost us? What will the impact on instructional quality be when we have a teaching ‘profession’ that looks like private industry (people not staying in one job more than a handful of years or even failing to treat it like a profession at all).
It feels like one of the solutions to reducing pension benefits is to raise base salaries and perhaps not provide as many salary increases over the years. Interestingly, this seems to be exactly the opposite direction of some ‘reform’ suggestions to pay starters very low and then pay them very well once they’ve ‘proven’ their quality.
Also, out of curiosity, lets say these pension funds actually turn around and start to produce positive cash flow (like they were doing a decade or so ago). Where does that money go? Does it stay in teaching? Or does it get siphoned off to pay for the rest of society (like essentially happened before?). Should the answer to that question play a role in what teachers are willing to give up now to help out our legislators and taxpayers?
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I realize this is completely the opposite of the way anyone else thinks, but if you really want to change the system to limit the number of years a person draws from CalSTRS, if it were me, I’d prefer capping the total years to requiring that people wait until age 67. I’d rather be destitute and unable to access health care at 80 rather than 60… but then your mileage may vary.
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The average taxpayer would much rather pay teachers more and let them handle their own retirement. As it stands, it is impossible to really tell how much a teacher is paid because so much of it is deferred until retirement. So if we find that we can’t get teachers for less than $100K/year once retirement plans are simple 401Ks then that’s what it costs and at least we know what we’re paying. Anyone think it will be hard to recruit teachers at a starting salary of $100K/yr? The reality is that people don’t go into teaching for the retirement benefits but only when they are getting close to retirement does it become a big issue because they haven’t really saved much.
What always happens with a govt. DB plan dependent on the stock market is that when you get the good years, governments say they don’t need to contribute because the stock market will go up like this forever. At the same time, beneficiaries will say since things are so good (and will always be good) they should get more benefits. Then, when the inevitable lean years come, everyone is just shocked, SHOCKED!, that trees don’t grow to the sky, and that markets that go up can also go down. Then the blame game starts which does nothing to solve the problem.
This has been covered here before and it is very clear that the average taxpayer is not going to fund any more taxes to pay for anything unless this pension thing is resolved. Layoffs will continue and class sizes will increase as school budgets shrink because more and more money goes into retirement plans that are simply not sustainable. There is not an infinite amount of money. Money going to retirement benefits (and we’re talking many $billions/year out of the general funds just for CalSTRS – CalPERS is even worse) is not available for the class room. Teachers in CA also need to get on Social Security as in 34 other states so they can have a safety net when pensions are retroactively cut as is currently happening in Rhode Island.
Some people seem to want it both ways. They want to be able to whine about low teacher pay (as if they didn’t know what the pay was before choosing teaching) by not counting retirement benefits as part of pay. Then turn around and complain that retirement benefits are all that is keeping them in this profession. So it is part of the pay. Teachers are no more deserving of special retirement benefits than anyone else. The resentment bred by this DB plan liability and abuses like spiking (only for administrators) is growing exponentially along with the bill.
There is also a great deal of unfairness in CalSTRS (and the other Ca DB plans) as the many people that leave teaching after 10 years or less contribute without getting any benefit.
This is no longer a conservative-liberal issue. It is a math issue. Lib-Dem governors Brown of CA and Cuomo of NY are saying the same thing as their Republican counterparts.
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hey michael, thats a nice argument but unfortunately I think it makes a couple of assumptions that are unlikely to pan out. first it assumes taxpayers/voters actually understand the issue. second it assumes they understand how to fix the issue. third it assumes that teacher pensions are the primary cause of this thing called ‘unfunded liability’.
Also, I dont think its helpful to use the argument that there is not ‘unlimited money’. That is always true. Its only useful as a basis if your argument is to get rid of the public sector altogether, ala grover norquist.
Some people want it both ways, I agree with you on that. They dont way to pay any taxes but expect services to continue regardless. Almost everything that led up to this crisis was ‘voter approved’.
I also dont believe its helpful to treat this simply as a ‘math issue’. As long as we must have a balanced budget and/or deficit spending, nothing is simply a math issue. Rather, everything is actually a prioritization (ie political) issue. Until we admit that, its going to be very difficult to even grasp what it will take to convince teachers of such measures. Sure it can be shoved down their throats (and surely will because the proper discussion wont happen), but thats going to have some real tradeoffs.
I also agree with you that the eventual outcome may in fact be retroactive cuts. In fact, some municipalities already simply stopped sending out pension payments. Of course, retirees started dying as a result. El’s point may not be all that far of base..
I also think that if voters really want teachers to get 401ks, then voters dont understand 401ks. It is estimated that 90% of people with 401ks will retire into poverty, and that could very well be a generous estimate. Who does taxpayers think will support those retirees when the time comes (not having planned for that either)? And what of their loss as a tax and consumer base on our economy? Growing demographic and all. 401ks exist to make the financial sector money and to reduce the amount of responsibility private companies need to take for their employees’ futures. They have their place, and could even work in the right environment, but our current society is not that one. It may feel good right now to kick the retirement can down that road, but as long as we still allow retirees to vote, we’re going to be in for quite a shock if we think that will somehow ‘fix’ things.
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Let’s keep it real simple:
1. What is wrong with paying teachers *more up front* and letting all these smart teachers take care of their own retirement like virtually everyone else in the US? How are teachers and govt employees different?
2. Why can’t CA teachers be on Social Security like everyone else and like teachers in 34 other states as a safety net if they don’t save enough for their own retirement?
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Frankly, I’m on board for paying teachers $100k and putting them into Social Security… but if you think that’s saving the schools money, I think you’re mistaken.
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Hi Michael, the state is not even willing to fund education what it’s obligated, as even that we’re sufficient. I think this year’s deficit factor is 18%. Special Ed encroachment is somewhere around 15% of the general fund for districts. States can’t even be convinced to fully contribute to pension and retirement health funds as it is. In some states even the employees contributions were taken from them and used for other things. Should we trust policymalers who feel that it’s worth punishing kids to teach the adults a lesson?
And which part of *pay them more up front* do you think the taxpayers would really on board with? m Rhee had to get private funding guarantees even to propose the idea. I wish the goal truly were to try to be responsible, but IMHO it’s not. Id it we’re people wouldn’t simply ignore the real problems with 401ks. I expect the next step would be to argue that 401ks make more sense than social security.
Regardless, wouldn’t you at least agree that the actual pension benefits are actually only one small part of the problem? Should we bother with the other things? Or is it solely opportunistic teachers that are bankrupting our state and country?
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It is obvious the problem here is “investment income.” Only the symptom is the obligation of STRS, And it should be recalled that the symptom doesn’t really result in real time problems until some 30 years in the future.
Solve the problem, not the symptom.
Dealing with the problem of the banking /investment industries taking investor money and throwing it down on double zero on the roulette table (credit default swaps, etc) is the first issue. The banking/investment industry is doing everything in its considerable (lobbying/$$$) power to insure they are not held accountable and are not regulated. To this point the federal government has been incredibly, if very predictably, limp-wristed in efforts to curb even the most outrageous behaviors of frauds and criminals, the very embodiment of “greed is good” Gordon Gekko, on Wall Street. Obama, late to the party on these issues, has now delegated some kind of task force to try and rein in the hucksters.
Solve the problem, not the symptom.
The bottom line is the bottom line is not the responsibility of public employees. It is the responsibility of the banking/financial industry. There are some issues of “spiking” that are in the province of highly paid school administration.
Solve the problem, not the symptom.
Educators have been paying 8% contributions to STRS for over 40 years. Schools districts have been paying 8.25% contributions for over 20 years. The State has had a “pension holiday” for over 10 years saving the state $3 billion. The State’s contribution rate is now 2.5% which is lower that the 4.6% it was paying a decade ago.
Solve the problem, not the symptom.
As a teachers’ union officer I would not be responsible, nor would I be providing “fair representation” to the members if I condoned a “hybrid” system (more than the current hybrid system) as a pension alternative. If you are in the private sector and stuck with nothing more than a retirement tied to Wall Street shenanigans then start putting pressure on your Congressional representatives quickly. Don’t expect public employees to go over the cliff with you. As much as misery loves company I (and the members I represent) will pass, thank you.
Solve the problem, not the symptom.
We are in the economic doldrums because unions and the middle class in general have been undermined since the mid 1980s. Eventually the chickens came home to roost when the Wall Street speculators went the bridge too far and, in an economy 70% dependent on consumption, tanked the whole thing in an orgy of greed driven manipulations. The loss of jobs in education and other state functions have only exacerbated that consumption based gap in economic activity. Further cuts to consuming retired people, as some are suggesting, will just put us in the tank ever more deeply. We don’t suffer with too many people with dignified retirements and decently paying jobs.
Solve the problem, not the symptom.
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Gary, throw all the hedge fund managers and mortgage security manipulators in jail, and that won’t address the core issue: Many investment advisers agree that CalSTRS’ forecast for an 7.5 percent annual return (8 percent until recently) is too high and the current pension structure, with early retirements and retirees living longer, is sustainable only if pension costs are allowed to encroach more on the General Fund and district budgets. California schools will be doomed to have huge classes and scarce resources.
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btw, sorry for the typos and grammar mistakes.. i was trying to type on a cell phone..
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Hi John, two things:
- can you explain why teacher benefits and class sizes are assumed to be an either/or proposition? is that codified somewhere? or is that simply a value judgement?
- i do have to admit that the term ’sustainable’ now seems to have about as much value/meaning as the term ’socialism’ does today. to me it feels merely like a dysphemism for ‘i disagree with your priorities’. not only has our society virtually never used ’sustainability’ as a metric for decision-making (especially the private sector), but assessing ’sustainability’ requires making guesses about the future. but perhaps more importantly, why dont we ever consider whether our psuedo-democratic society is ’sustainable’ without an educated populace?
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“why teacher benefits and class sizes are assumed to be an either/or proposition? ”
They aren’t actually.
But, all taxpayers with (at best) a 401K are looking at the the CalSTRS pension funds needing at LEAST $3.8 billion more annually from the general fund over and above the scheduled amount because the [investment returns + employer contributions + state contributions + employee contributions (which are often paid by the employer)] don’t support the retirement plan.
Then they wonder why teacher and administrators get such nice pensions when the fund’s investments go awry while no one helps the average taxpayer when their pension investments go awry. It must be nice to have no risk investments – heads you win, tails everyone else loses.
Then they wonder why they have to pay into social security while CA teachers (and most govt employees) don’t.
Then they look at the 5,259 in the CalSTRS $100K Club getting pensions of up to $300K – adjusted for inflation. The average of the top – $300K – and the bottom of that list – $100K – is $200K. Times $200K by 5,000 and you get $1 Billion.
http://www.californiapensionreform.com/database.asp?vttable=calstrs
Do the same with the 9,111 in the CalPERS $100K club and you get $1.8 Billion. There are about a dozen other much smaller funds in similar situations.
http://www.californiapensionreform.com/database.asp?vttable=calpers
So the average voter says ‘well if they can afford to pay that sort of pension then I guess they don’t need any more money’.
So that’s why it’s one or the other.
A teacher’s union that was truly interested in the welfare of it’s members (other than the administrators) would have strongly backed reforming the top end for the benefit of the vast majority of its membership. Instead, the teachers union and the other public employee unions effectively killed pension reform so now everyone thinks that teachers and others are retiring high on the hog. In fact, teachers aren’t but they clearly don’t control the CTA, the administrators do, and union leaders kinda just sweep all that spiking and stuff under the rug as if it were some minor thing not worth going into. It is a LOT of money and annoying beyond belief.
Of course teacher’s don’t help the issue by arguing that simply because they are teachers they are somehow more deserving – particularly of pensions that most taxpayers can’t even dream about. Telling someone “you are less worthy than I – now give me $billions” isn’t the best sales tactic.
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Teachers pay a higher percentage to CalSTRS than ordinary workers pay into Social Security.
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John:
The event horizon for correcting the STRS funding situation is around 30 years. Basing corrections on the current economic situation makes no sense. There may be a need for a slight increase in employee contributions and employer contributions. So be it. There is time, as there is for Social Security, to adjust things. Social Security can be fixed by increasing payroll taxes to the wealthy. STRS can be fixed by those slight adjustments mentioned above and having the state, first meet its current obligations which it hasn’t done in years, and then a slight increase there too.
You put the fund managers and other frauds in jail as a warning to the next generation of vipers that they must not gamble the fundamentals of the economy away and again endanger the investments and retirements of the general population.
Having the state meet its obligations to its own employees, at least on the education side, is a matter of bringing CA’s spending per child up from the dregs it is in currently. For the wealthiest state in the wealthiest nation to be 47th in funding per child can only be described as shameful. Sure the recession has driven CA’s economy down. WE have sunk to the 9th largest economy in the world, just ahead of the entire GDP of the nation of India. And please, none of the “age of limits”/austerity cliches. Austerity is driving the economies of Europe ever deeper into economic doldrums according to several Nobel winning economists.
There’s more than enough wealth in CA to provide for adequate support of the schools, equitable compensation for state employees, and dignified pensions for the retired. The calling is to put that wealth in the service of the public good and to “promote the general welfare” as the US Constitution calls for. The popular Millionaires Tax will begin that process. Then a split roll for Prop 13 and a return to a democratic, majority driven, process for adjusting revenues in the hands of the legislature should just about complete the revenue side.
There is no need to choose between class size and adequate compensation for employees
And Mr “G.”
I don’t know where you get your information. neither CTA nor CFT, the state’s two teachers’ unions have administrators in them. Some administrators have locally based “bargaining units” but they are not members, nor do they “control” the unions.
And, as you note, it is administrators who get the $100K plus retirements. But that is somewhere south of 2% of school employees. The regular teacher averages something more than $35K per year in retirement after thirty years of service and being 60+. No one is buying a beach house in Hawaii on that.
And, as I was saying, solve the problem not the symptom. The problem isn’t that public sector retirements are so good, the problem is private sector retirements are so bad. It was quite common, not that long ago (about the time of Reagan), for regular private sector working people to have defined benefit retirements just like public sector workers. Corporations conned the public into doing away with those benefits because their bottom line was suffering. Look around. Could the corporations afford to support retirements for their employees? They are sitting on hundreds of billions. there has also been an ongoing (since the time of Reagan) attack on unions. Unions protected the compensation of their members and pressured non-union companies to provide for their employees. As the unions have disappeared so has the middle-class. As the unions disappeared inequity and poverty increased. Morning in America has become a cold, dark, midnight for the country’s working people. Solve the problem Now the hucksters are attempting to destroy the last vestiges of the middle-class with attacks on the public sector unions and some poor dupes (or minions) are buying into it.
Thankfully we have the Occupy Movement to remind people of the real problems.
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School administrators aren’t in the CTA but they are drawing pensions from the same CalSTRS as teachers. The recent attempt in the CA legislature to limit pensions to under $100K (which would have covered 100% of all teachers) was opposed by the CTA. The CTA proposed a limit of $150K which is so absurdly beyond what any teacher could expect that it has to be at the behest of administrators. Unless every CTA union leader is expecting to ascend to some high paying administration job 18 months before retirement so they can double their income and their retirement. A practice I have seen repeatedly in our local districts.
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