Pension reform: top-paid administrators to take biggest hit

The retirement age for new teachers will be pushed back two years; they’ll have to fork over about another 1 percent of their pay into the retirement system. And their bosses – principals and administrators ­– will see a ceiling of $132,120 as the portion of their pay used to calculate retirement pay. Those in the highest-paid jobs, earning $200,000 plus, may see pensions reduced by tens of thousands of dollars.

These are the primary changes specifically to members of the California State Teachers’ Retirement System, or CalSTRS, from pension reforms negotiated between Gov. Jerry Brown and Democratic leaders. The package, which will affect every state and local public employee to various degrees, was unloaded on lawmakers Tuesday, four days before the end of the legislative session.

Union leaders uniformly condemned the plan (most without having read the details), including California Teachers Assn.President Dean Vogel, who said “it will make it more difficult to attract and retain experienced educators to our classrooms.” Republican legislators  condemned the secrecy behind the Democrats’ deal and said it didn’t go far enough to cut back on public pensions.

What’s not yet known is how much the combination of decreased benefits and higher contributions for public workers would chip away at the huge unfunded liability in state and municipal pension systems: $65 billion alone for CalSTRS, the nation’s second-largest pension system, behind only CalPERS, the California Public Employee Retirement System.

Gov. Jerry Brown said Tuesday that the proposals would save state public systems between $18 billion and $30 billion over the next 30 years, but there’s no documentation yet to prove it. CalPERS, whose members include classified school employees such as bus drivers and custodians, and CalSTRS will do rough estimates of impacts before the full Legislature votes on the deal Friday. Last night, a conference committee hastily passed the package, which will become AB 340.

Because of a 25 percent drop in its value in 2008, CalSTRS is currently only about 70 percent funded to fully meet obligations to members over the next 30 years. Click to enlarge.

Because of a 25 percent drop in its value in 2008, CalSTRS is currently only about 70 percent funded to fully meet pension obligations to members over the next 30 years. Click to enlarge.

The immediate impact will be small, because Brown is proposing that the changes affect only future public employees. However, the governor is hoping that voters will view the pension reforms as an important step toward tightening government costs – and pass his proposed tax increase in  November. But, as Republican Sen. Mimi Walters, a conference committee member, observed, all of the pension reforms will be statutory, which future legislatures can undo, and not constitutional amendments.

Brown proposed a 12-point pension program last fall. The package includes most of what he requested, including reining in practices and abuses that won’t save a huge amount of money but that infuriate the public. These practices, many of which CalSTRS already has  cracked down on, include:

  • Spiking, the practice of larding the last year on the job with overtime and phony promotions with pay raises to boost calculations of pensionable income;
  • Pension “holidays” – employees’ reprieves from contributing to pensions during years with a “surplus” return on investments. The proposal calls for the opposite: In years with unexpectedly great rates of return (if there are any more), “excess” money will pay down a fund’s unfunded liability, not increase benefits.
  • Double-dipping, the practice of retiring with full benefits, then returning to work to the same or a similar job at full pay (that will be allowed in only a few specialized cases, with a public vote of the governing board; part-time work will be permitted).
  • Padding the final year of compensation with the value of unused vacation or sick time, overtime, vehicle allowances, and other non-salary benefits. These weren’t available to classroom teachers.

What is not included is Brown’s proposal for a hybrid retirement plan. It would have been a combination of a defined benefit program, in which employees receive a guaranteed monthly benefit, and a defined contribution plan, like a 401(k), in which an employee and the employer make contributions and the employee bears the risk, but with no guaranteed return.

Cap on benefits: Instead of a hybrid plan, which would have created the most savings for CalPERS and CalSTRS, Democratic leaders agreed to cap the amount of pay that will count toward a pension. For future public employees who also pay into Social Security – including classified school employees – the cap will be $110,100; for public employees who don’t pay into Social Security – including most safety workers and CalSTRS members – the initial cap will be $132,120. That ceiling is way above what nearly all teachers make, and will limit pensions of superintendents and some administrators. CalSTRS said Tuesday it didn’t know how many of its 856,000 members would be affected, though some estimates are 1 to 2 percent of members.

Later retirement age: Retirement age will be pushed back two years for public employees. The age and impact will vary, however, from union to union.

The benefit formula for future CalSTRS members will be 2 percent of the average compensation of three highest years on the job, starting at age 62, instead of currently age 60. New employees who retire at 62 after working 35 years will receive 70 percent of pay.

The maximum rate of 2.4 percent of yearly pay will kick in at age 65 for future employees, instead of age 63. (A person retiring in the future at age 65 having put in 40 years will receive 96 percent of pay.)

Currently, teachers can retire as early as 50 at the rate of 1.1 percent of pay, which works out to 27.5 percent of pay for teachers who have worked for 25 years; the new earliest retirement will be age 55 for the same amount.

Bigger contributions: Defined benefit pension payouts rely on contributions from employees and employers, plus income from investments. Under the proposal, all new public employees will pay half of the “normal” costs – the portion after the predicted return on investments is calculated.

Since 1972, CalSTRS members have paid 8 percent of their pay into the system, which amounts to 44 percent of the current normal costs of 18.299 percent of pay. Future members would pay 9.15 percent, or an additional 1.15 percent. This would reduce the school district’s share, currently  8.25 percent of employee pay, and the state’s share, 2.5 percent.

Pension benefits and contributions for teachers and administrators aren’t bargained locally; they can only be set by the Legislature. If the Legislature wanted to raise the contributions of current CalSTRS members, it would have to give them something of equal value in return. At least that’s been the operating assumption, based on court decisions that have ruled that pension promises for public employees are a vested right that can’t be taken away.


San Jose voters have challenged that assumption, by voting in June to change the pension benefits of current city workers. A court ruling in that case will determine how far the Legislature and cities can go in changing the rules.

New teachers constitute only about 3 percent of the workforce, so any changes in benefits will take years to reduce CalSTRS’ unfunded liability, stemming from the recession in 2008.

CalSTRS’ annual rate of return during the past 20 years has averaged 7.5 percent – about on target — but only 6.5 percent during the past 10 years and 0.3 percent during the past five years, which is why CalSTRS is only 70 percent funded as of July, 2011 (the last formal calculation).

In April, CalSTRS recommended that the Legislature increase the contributions of districts and the state by a combined $3.25 billion per year to move toward full funding in 30 years.

That’s money that school districts would prefer to spend in other ways.

Filed under: Pay and Tenure, Teaching

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13 Responses to “Pension reform: top-paid administrators to take biggest hit”

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  1. navigio on Aug 30, 2012 at 7:55 am08/30/2012 7:55 am

    • 000

    Arent pension benefits already reduced by the amount of any social security payment? Or is that just for teachers?

    The biggest deal in here seems to be the cap. Even though it will only impact a small number of people (and thus not save much money), the difference from current situations is potentially extreme. That has to impact candidates. I wonder if we should think about implementing a CEO compensation cap… since money doesnt determine quality anyway..

    Also, for someone who works over 40 years, the cap can end up being the same as the benefit, right?


    • John Fensterwald on Aug 30, 2012 at 8:16 am08/30/2012 8:16 am

      • 000

      Navigio: I believe the Windfall Elimination Provision , which reduces pension benefits, applies not just to teachers but also to other public workers who don’t pay into Social Security (some safety officers) but earned enough from previous jobs where they did pay into Social Security to make a difference. The so-called windfall provision is an inequity, especially for those who made a mid-career change to teaching (disclaimer: my wife is one of those).
      It is true that administrators who work 40 years will earn the cap (nearly all could have been at lesser paying jobs, like teaching; it’s the average of the three highest years). I suppose nothing would prevent a school board from contributing to a superintendent’s 401 (k) type program for income beyond $132K, as a separately negotiated benefit, as long as CalSTRS is not involved.

  2. John Fensterwald on Aug 30, 2012 at 12:00 am08/30/2012 12:00 am

    • 000

    Just to be clear, el, the $132,120 is the cap on the income to be considered for a pension, not a cap on the pension per se. A superintendent who retires at 62 with 30 years on the job would receive 60 percent of $132,000 or $79,000.


    • el on Aug 30, 2012 at 7:10 am08/30/2012 7:10 am

      • 000

      Thank you, John. I obviously misunderstood that.

  3. Alice on Aug 29, 2012 at 11:25 pm08/29/2012 11:25 pm

    • 000

    Sorry, but I have just one more thought for Chris. This job is far too difficult that people would keep doing it for 30+ years just to earn the “great retirement money.” That is probably why half of new teachers leave within the first five years of their careers. For the most part, those that remain are dedicated to their profession and their students. If you knew the teachers I know, you would not be writing the comments you did.

  4. Hugh Carter on Aug 29, 2012 at 4:33 pm08/29/2012 4:33 pm

    • 000

    For far too long the pension system has been underfunded by the public and it’s participants. The combination of elected representatives who don’t have the background to properly understand the financials, finance staff who obscure the emerging blunt reality, powerful public service unions, and an inattentive public has placed us in a situation where our promises exceed the available resources.

    Gov. Brown’s proposal is a first step in tackling this large and growing problem. Capping the maximum salary upon which a pension is based is a good first step, so is the delay of retirement age, and a host of the other features. I look forward to reading the full text and Legislative Analyst’s comments in the near future.

  5. el on Aug 29, 2012 at 12:54 pm08/29/2012 12:54 pm

    • 000

    To be honest, I’m fine with not being able to attract talent who can’t get by with only a $132,120 pension.

  6. Shakti on Aug 29, 2012 at 12:25 pm08/29/2012 12:25 pm

    • 000

    Punishing new hires is not the way to go.

    Through California’s Tax Expenditure Programs the cost of medical insurance reduces the amount of income subject to pension contributions. Rescinding these TEPs along with payroll holidays will go a long way to strengthening our pension system.



  7. Rory Livingston on Aug 29, 2012 at 11:54 am08/29/2012 11:54 am

    • 000

    Think a little broader with the comment about only some top administrators will be affected. This cap will an impact on the ability to attract, recruit top business and support service personnel in school districts. These positions are classified, subject to the lower cap, and in most instances in the state, their salaries are above the cap currently. Qualified personnel to fill these positions are presently in short supply, most individuals who enter into these fields do not come from the classroom, but come from private industry.


    • Chris on Aug 29, 2012 at 2:08 pm08/29/2012 2:08 pm

      • 000

      Are you serious?
      Money has zero to do with the quality of teachers. Personally, I think the great retirement money actually attracts people who only want the entitlements and care little about teaching and the kids.

      The proof is in the numbers and nation wide tests.

      California has the highest teacher salary average and one of the highest Colas –

      Our teachers rank about the WORST in the USA –

      Give them zero raises and colas unless students start doing good test scores and results. Cut salaries if test scores go down! Do a reset on everything. My old school in OC now looks like a country club parking lot. BMWs, Lexus, Audis and Mercedes parked everywhere. This is nuts!

      • el on Aug 29, 2012 at 6:14 pm08/29/2012 6:14 pm

        • 000

        This is ridiculous given the cost of living in California.

        Money is a factor… not so much linear, but people with professional degrees, like teachers, expect to be able to buy a house in the neighborhood where they work. Often teachers do not make enough money to do that, though of course it depends on the school district. Compensation packages vary quite a bit across the state, as does the cost of housing.

      • navigio on Aug 29, 2012 at 11:32 pm08/29/2012 11:32 pm

        • 000

        Sheesh! …and people wonder why we have unions. Why is everything (including, ostensibly, ‘data’ and research) so partisan and agendised? Thats the thing thats nuts.

        Chris, that study is about POLICY. It has NOTHING to do with teacher quality. It is coming at the issue making assumptions about which policies are good and which are bad and then grading states based on whether they agree by virtue of what they have implemented. There is not a single measure of teacher quality in those 232 pages. Rather, things like whether states have done away with tenure, or seniority, or created shortcuts to make it easier to higher temporary teachers.. etc, etc..

        In fact, in glancing over 2005 NAEP scores, I happened to notice that a number of the states that scored the highest on NAEP actually had some of the lowest grades according to this study, and vice versa. Whats up with that?

        And even more amazingly, there is even a slight inverse correlation between the overall state grades and the 2005 NAEP results (all 4 series were inverse). At worst, there is no correlation whatsoever, which should be more than sufficient to question the real ‘goals’ of such a ‘study’.

        What irony it would be if this study accidentally proved which policies were failures! Whoops!

  8. Navigio on Aug 29, 2012 at 9:44 am08/29/2012 9:44 am

    • 000

    So I was looking for that last sentence the whole time. Where is the ‘reform’ that actually forces states to fund these things in the first place? Even lower rates of return can’t be had when nothing is invested.

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