CalSTRS down to 69 percent funded

A 23 percent return on investments last year offered welcome relief, but it did not significantly alter this reality: The Legislature and school districts should start paying about $3.25 billion more annually – the sooner the better ­– to keep the defined benefit pension fund for California teachers and administrators solvent.

This week, the California State Teachers’ Retirement System released the actuary report by the consulting firm Milliman for the year ending June 30, 2011. It showed that the unfunded liability for CalSTRS’ defined benefit program actually increased from $56 billion to $64.5 billion – an obligation that will all but certainly fall on the backs of taxpayers. It jumped even though, with a rebound in the stock market last year,  the market value of CalSTRS’ assets  grew 19 percent, to $147 billion.

In 2000, the defined benefit program was overfunded. As of last June, it was 69 percent funded. Source: CalSTRS actuarial valuation, June 30, 2011. (Click to enlarge.(

In 2000, the defined benefit program was more than 100 percent funded. As of last June, it was 69 percent funded. Source: CalSTRS actuarial valuation report for the year ending June 30, 2011. (Click to enlarge.)

The defined benefit program is now only 69 percent funded, down from 71.4 percent a year ago. If nothing is done – a cut in future benefits or an increase in contributions ­– the fund will run out of money in 35 years.

This news – really just another stark reminder for those with cotton in their ears – comes as the Legislature prepares to deal with Gov. Jerry Brown’s proposed 12-point plan for pension reform. It or the lawmakers’ variation may include raising the retirement age for all public workers and capping pension payouts up to a certain salary level, combined with a 401K-type program. But nearly all of the reforms would apply only to future employees, not to current retirees and employees, thus making a minor dent near-term to the $64 billion problem.

CalSTRS serves only certificated employees – teachers and administrators – not hourly or classified employees, who pay into the larger state pension fund, CalPERS. The benefits for CalSTRS’ 253,000 retirees and beneficiaries (9,000 more than a year ago) are financed through a combination of investment income and annual contributions from employees, employers (districts and county offices of education), and the state, through the General Fund. For more than a decade, the CalSTRS board had assumed an 8 percent gain on investments; it lowered that to 7.75 percent two years ago, and earlier this year dropped it another notch to 7.5 percent. But over the past decade, the return averaged only 5.5 percent, creating an unfunded liability – the amount needed to cover pension costs – starting in 2003 and soaring in 2009. That has left contributors holding the bag.

With additional contributions of $3.25 billion per year, the unfunded liability would be paid off in 30 years. If nothing is done, the defined benefit fund would be wiped out in 35 years. Source: CalSTRS actuarial valuation, 6/30/12 (Click to enlarge.)

With additional contributions of $3.25 billion per year, the unfunded liability would be paid off in 30 years. If nothing is done, the defined benefit fund would be wiped out in 35 years. Source: CalSTRS actuarial valuation report for the year ending June 30, 2011. (Click to enlarge.)

“There is a need for additional contributions to fund the program,” Deputy CalSTRS CEO Ed Derman told a press briefing Tuesday. “We cannot invest our way out of the problem.”

CalSTRS contributions currently amount to 18.25 percent of current employees’ $25.6 billion payroll; 8 percent of that comes from employees’ pay, 8.25 percent from districts, and 2.5 percent from the state. (The state must also contribute an additional .25 percent each year until it reaches about 4 percent in 2015.) Actuaries are saying that wiping out the unfunded liability over the next 30 years will take raising the contributions to 32 percent of payroll, an additional 13 percentage points. The “good” news is that it would be 14 percent, were it not for last year’s big gains on investments.

The additional 13 percent equals $3.25 billion per year. CalSTRS isn’t recommending how the increase should be divided among contributors; unlike CalPERS benefits, which are subject to negotiations, only the Legislature can set contribution rates for CalSTRS. However, CalSTRS points to state court rulings that pension benefits are vested rights, which means that unless these decisions are overturned, the contribution rates of current employees are frozen. The Legislature and districts will divert more money to pensions that could have gone to rehire teachers and lower class sizes, restore programs, or buy textbooks.

If no action is taken, the need for extra contributions will grow from an additional 13 percent of payroll to nearly 40 percent by 2026. Source: CalSTRS actuarial valuation, 6/30/2011. (Click to enlarge.)

If no action is taken, the need for extra contributions will grow from an additional 13 percent of payroll to nearly 40 percent by 2026. Source: CalSTRS actuarial valuation report for the year ending June 30, 2011. (Click to enlarge.)

Given the state’s already precarious finances, Brown’s not proposing  further contributions in next year’s budget, and the Legislature’s not likely to include any in its reform package. But the actuaries’ report cautions that time is money; the longer the Legislature puts off raising contributions, assuming other variables don’t change, the more costly it will  become to stave off insolvency. Initially, add a half percentage point for each year’s delay – about $112 million extra each year, but it will grow. If nothing is done by 2026, contributions will consume 40 percent of payroll costs.

Other points about the valuation report:

  • The unfunded liability for the year ending June 30 increased even though the market value of assets grew handily because CalSTRS smooths losses and gains over three years. This was the final year that CalSTRS built in the 25 percent drop in market value of its assets in 2008-09.
  • Don’t expect CalSTRS to have another 23 percent gain this year. With three-quarters of the next fiscal year over, the gain is about 2 percent.
  • Reflecting teacher layoffs and cutbacks, the number of CalSTRS active members dropped from 441,544 to 429,600, and the total salary pot fell 2.7 percent from $26.3 billion in fiscal year 2010. This has a mixed impact on the pension fund. Fewer members reduce future pension obligations but also generate less in contributions.
This entry was posted in Pensions on by .

About John Fensterwald - Educated Guess

John Fensterwald, a journalist at the Silicon Valley Education Foundation, edits and co-writes "Thoughts on Public Education in California" (www.TOPed.org), one of the leading sources of California education policy reporting and opinion, which he founded in 2009. For 11 years before that, John wrote editorials for the Mercury News in San Jose, with a focus on education. He worked as a reporter, news editor and opinion editor for three newspapers in New Hampshire for two decades before receiving a Knight Fellowship at Stanford University in 1997 and heading West shortly thereafter. His wife is an elementary school teacher and his daughter attends the University California at Davis.

18 thoughts on “CalSTRS down to 69 percent funded

  1. Doug Lasken

    I appreciate John’s emphasis on facts in this discussion of CalSTRS’ underfunding.  In particular, John does not go in for polemics, as many do, such as suggesting that the funding problems of CalSTRS derive from greedy teachers.  Having said that, I’d like to go out on a limb with my colleagues and say that when I retired from LA Unified in 2009 at age 63 (after 25 years with the district, and in pursuit of a rare retirement incentive) I found that, given my health and energy, I had retired too early.  I now teach for a private school, and I feel I could easily teach until 70, and maybe beyond.  I think a raise in the retirement age would be entirely appropriate, especially considering that a proposed extension would be more like 67 than 70+.

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  2. Michael G.

    The actual situation isn’t as bad as it looks.  It is actually much, much worse.  I could write a book on the unsustainability of this situation but one big problem here is the assumption of 7.5% returns.  That is what the “69% of funding liability” is based on.  If you assume a lower return the funding level drops – a lot.  Due to the power of compounding interest, a drop to a more realistic 6.1% (the average total return for 1900-1999, dividends reinvested) the unfunded $ liability more than doubles.  Drop further to the 5.5% the retirement funds have been getting the last 10 years and it almost triples.  69% is based on garbage assumptions so “garbage in-garbage out”.  The various govt. pension boards around the country refuse to face the reality of the situation and will not let their actuaries go with the 6.1% assumptions most people are realistically looking at.
     
    There will be cries of “sacred contract”.  If you grant that contracts are sacred under law, then you have to grant that bankruptcy is how you legally get out of those contracts.  Federal bankruptcy law trumps state laws so don’t rely on CA provisions.  There is also the myth that states can’t go bankrupt.  There is no current legal provision for it but a NY Times article last year highlighted a move in congress to fix that omission.  Nothing in the US constitution prohibits CA from declaring bankruptcy and giving creditors (including CalSTRS) 50% (or less) of what they owe.
    http://www.nytimes.com/2011/01/21/business/economy/21bankruptcy.html?pagewanted=2&_r=1
     
    If you want to look at the future, consider Michigan:
    From the March 27, 2012 Christian Science Monitor
    “Governor Snyder now has 10 days to deliver a “consent agreement,” according to a new law that allows the state to take financial control of any municipality facing bankruptcy. Since the law passed in March 2011, Michigan has placed four cities and two school districts under emergency management.
     
    “The law allows the state to break collective bargaining agreements, privatize city assets, fire local officials, and force a restructuring to keep basic city services flowing.”
     
    If it is any consolation, California is not in the worst situation.  It is an international problem.  Not only other states like Rhode Island and Illinois, or countries like Greece, but even the heavily taxed, well run states like the northern European countries are having to rethink their pension promises.  Demographics and bad economies hit everyone the same.
     
    I say this with no joy, just a (probably futile) attempt to get people to do something sooner rather than (too) late, and a caution to everyone to have a plan B.  I don’t see defined benefit plans like CalSTRS  (other than social security) being around in 10-15 years.
     
    “Hate the statistics, not the statistician.”

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  3. navigio

    Both great comments. Every time I think about this (which is almost daily) I cannot get over the fact that this is really the entire state’s problem (and fault). I cannot fail to mention that oft forgotten prop 21 from 1984 that is quite likely the thing that set the ball rolling (though the greater economic context at that point is probably just as important). The subsequent changes that seemed oh so obviously accurate, as everything does when viewed with stars in your eyes from inside a bubble. And the simple fact that virtually everything that happened is a function of either direct voter approval, or legislative (indirect voter) approval. But perhaps the greatest point of all is that we forget that we simply stopped contributing to these things. Why should we expect that they would not be underfunded? One of Brown’s twelve points is the elimination of contribution holidays. That cant come soon enough, but of course requires funding. Meanwhile we are arguing over whether taxpayers are willing to fund keeping class sizes and programs intact, let alone funding ‘squishy’ things like future compensation from a bygone era. Unfortunately, I believe there are those who would rather it does collapse than be fixed because they consider ‘the system’ the problem rather than its implementation. And when you have society with such a large portion without any real vested stake, you run the risk of having them not care one way or another. One thing’s for certain, sitting around and watching wont keep the train from crashing.

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  4. Gary Ravani

    Let’s see…the economy has tanked in an unprecedented way reducing  investment earnings to (near) historic lows. Teachers have been laid off and furloughed reducing contributions to STRS from them and districts for several years. The state reduced its contributions-giving itself a “pension holiday” -a number of years ago, even prior to the recession.
     
    So that makes this the perfect time to take a snap-shot of  STRS’s “unfunded liabilities”– realizing that the system chugs along quite nicely at around 80% of full funding–and its projected fiscal health in 35 years.
     
    That may make sense to some.
     
    This is comparable to those who assert Social Security is going to evaporate in 30 years. When that was last asserted-around thirty years ago-funding was adjusted to make it whole. That will need to be done again.
     
    Likewise,  STRS, contributions will have to be adjusted. STRS was saying that before the recession. That’s hardly “breaking news.” Those adjustments can be made reasonably and phased in over time. That must include the state’s part too. There is no need to posture in full “chicken little” mode here.

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  5. Michael G.

    I am gratified that people are paying attention before it gets worse.  Here’s a little tidbit from the NY Times:
     
    “Robert G. Flanders Jr., the state-appointed receiver for Central Falls, R.I., said his city’s declaration of bankruptcy had proved invaluable in helping it cut costs. Before the city declared bankruptcy, he said, he had found it impossible to wring meaningful concessions out of the city’s unions and retirees — who were being asked to give up roughly half of the pensions they had earned as the city ran out of cash.
    “The municipality is on bended knee asking the retirees and unions to come to the table and give up their contract rights,” he recalled. “All of that leverage shifts once you have the gumption to pull the Chapter 9 trigger. And guess what? That produces agreements quicker and more effectively than otherwise.””
     
    http://www.nytimes.com/2012/04/01/us/cities-swap-bold-strategies-for-a-new-fiscal-era.html?_r=1

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  6. el

    Although I applaud Mr. Lasken for his good fortune and good health teaching into his late 60′s, I think he should consider that not everyone will be so fortunate. Teaching is such a physical job, and the last thing we want is to have people cobbling together ways to stay in the classroom when they are struggling with frequent doctor appointments and failing health so that they will be able to retire.
     
    One of my concerns about the system is the way it locks people into teaching in those last years of a career, even though they might prefer to move into a different kind of work. Developing some way to trade credits with Social Security so that people don’t end up with split pension credits would make a higher retirement age much more viable.
     
    Though frankly, I’d prefer if we’re going to limit benefits that way that we set up a maximum number of years of payout than a minimum age. I’d rather be penniless and without health care at age 80 than at age 64.

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