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.
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.
“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.
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.