Reforms > Local Control Funding Formula

In revised budget, Gov. Brown details costly 30-year plan to fix teacher pensions


Gov. Brown points to a chart showing the possible insolvency of the CalSTRS pension fund for teachers and administrators in 30 years unless the state, teachers and school districts contribute more money to wipe out the $73 billion deficit. Source: webcast of Brown's press conference.

Gov. Brown points to a chart showing the possible insolvency of the CalSTRS pension fund for teachers and administrators in 30 years unless the state, teachers and school districts contribute more money to wipe out the $74 billion deficit. Source: Webcast of Brown’s press conference.

Gov. Jerry Brown is predicting that the state will take in $2.4 billion more in revenue in 2014-15 than initially estimated, but highly expectant education leaders won’t get a piece of it to implement the Common Core state standards or make a down payment for universal preschool. They can count on the double-digit spending increase that the governor proposed in January  – but not much more.

Instead, consistent with his philosophy of fiscal restraint and a commitment to pay down long-term debts, Brown is proposing in the revised May budget to make a down payment on the $74 billion shortfall in the pension program for teachers and administrators, the California State Teachers Retirement System, or CalSTRS. His proposed 30-year payment plan, subject to negotiation with the Legislature, would cost an additional $5 billion per year by the time it’s fully phased in over seven years. The bulk of it – $3.7 billion annually – would be the burden of school districts, potentially eating away between one-seventh or more of the increased funding they had expected under the Local Control Funding Formula (see Department of Finance summary of budget revision, starting on page 66).

In a press conference Tuesday, Brown made clear the state cannot duck this responsibility. Meeting pension obligations to teachers is part of what it costs to educate kids, Brown said, and must be paid for.

“The key point that is sometimes hard to grasp is that this is what it takes to educate our kids,” he said. “To get what they need, they need teachers. Teachers get what they need by having a pension. The pension has to be paid for.”

In January, Brown proposed that his administration and the Legislature spend next year negotiating a CalSTRS deal and then start funding it. But now he is proposing to start with the fiscal year that begins July 1, with an initial $450 million toward the unfunded liability. The state’s portion would be $73 million, with teachers paying $40 million more out of their salaries and districts kicking in about $337 million ­– equal to about a half of 1 percent of the projected $61 billion in Proposition 98 funding next year. Proposition 98, the primary source of funding for K-12 schools and community colleges, determines annual funding based on increases in enrollment and per capita state income or state revenue.

Jack Ehnes, chief executive officer of CalSTRS, said that closing the funding gap “can be resolved through gradual and predictable contribution increases, and the sooner those increases begin, the less risk to the state. Clearly, state policymakers understand this urgency, and … we are encouraged that a funding plan will be enacted this year.”

CalSTRS’ defined benefit program for its 860,000 members is funded through contributions from the state, employers (school districts) and employees, and returns on investments. CalSTRS lost about 40 percent of the value of its investments when the stock market plunged in 2008. Though the $183 billion value has now returned to where it was, the pension program is only about two-thirds funded to meet projected pension payouts over the next 30 years.

Contributions are determined as a percentage of employees’ pay. Teachers and administrators currently pay 8 percent of their salaries into the defined benefit program; the state pays 3 percent and districts 8.25 percent. Once fully phased in over three years, teachers would pay 10.25 percent of salaries and the state would pay 6.3 percent. Districts’ share, under Brown’s plan, would soar to 19.1 percent of employees’ pay, paid for out of Proposition 98 funding. The phase-in for districts would be seven years.

Assemblyman Rob Bonta, D-Oakland, chair of the Assembly Public Employees, Retirement and Social Security Committee, which is tackling the pension fund issue, called Brown’s proposal “a reasonable plan and a strong sign of progress” that is consistent with his committee’s principles of shared responsibility among contributors. “No one said it would be easy,” said Bonta, who plans a hearing soon to review the plan.

Dennis Meyers, Assistant Executive Director of the California School Boards Association, agreed with Bonta, calling the proposed pension contribution increases “daunting” at a time when school districts are recovering from the recession and phasing in the new funding system. He said his organization would take a hard look at Brown’s pension cost-sharing formula.

Little change in Prop. 98 funding

In January, Brown proposed a near-record increase in Proposition 98 spending. That won’t change much, even with an additional surge in overall state revenue, because of the complex way that Proposition 98 funding is calculated and retroactively adjusted. More than half of the new state revenue will fund a rush in enrollment in Medi-Cal, the federal and state subsidized health care program for low-income families that was expanded under the federal Affordable Care Act.

For K-12 schools and community colleges, there will be $242 million more available under Prop. 98 than in January, but nearly all of that will be eaten up by increased enrollments (see Department of Finance summary of budget revision, starting on page 15).

The January state budget included a $10.5 billion increase in K-12 and community college spending. Brown is proposing to split the new money between one-time expenditures and more dollars for ongoing spending.

Brown would use the bulk of the money to pay off the remaining $6 billion in late payments to school districts, known as deferrals. Paying that off will clear the decks of that portion of what Brown calls the state’s “wall of debt.” It will also free up cash for districts while eliminating loans that some districts – disproportionately those serving low-income students – had to take out.

The remaining $4.5 billion would fund districts’ operating budgets under the Local Control Funding Formula – more than double the $2.1 billion increase this year. In a January analysis, the non-partisan Legislative Analyst’s Office estimated that overall per-student spending would rise about 10 percent, from $7,936 per student in the current fiscal year to $8,724 in 2014-15. Under the formula, which distributes extra money based on enrollments of English learners, foster youth and low-income students, the percentage increases would vary significantly among districts, however.

Josephine Lucey, a school board member from Cupertino and president of the California School Boards Association, said,“We are pleased with the continued commitment and investment in the Local Control Funding Formula … so school district and county leaders and board members can invest in programs to achieve academic success.”

Other education leaders vowed to take the case to the Legislature for additional money for Common Core and an expansion of transitional kindergarten, an extra year of kindergarten for some 4-year-olds.

“While we are pleased to see progress toward implementing the Local Control Funding Formula, we are disappointed to see the governor did not include additional funding for implementation of new content standards, and will urge him and the Legislature to reconsider,” Valerie Cuevas, interim executive director of The Education Trust-West, said in a statement.

Senate President Pro Tem Darrell Steinberg, D-Sacramento, had made a $1 billion expansion of preschool his top priority but, so far, has come away empty-handed. Brown, in a press conference, said that the state has increased Proposition 98 funding substantially for kindergarten through community college. Adding a 16th year of education, he said, would require shifting money from the other 15 years.

Noting that the state has not restored $1 billion in cuts to child-care and development programs since 2008, Deborah Kong, president of Early Edge California, a nonprofit that supports an expansion of the state’s early childhood services, said, “The governor and Legislature have a historic opportunity to make California a leader in education in these crucial weeks of the budget discussions. We urge them to make the wise investment in our future by making early learning a top priority.”

The May revision does include some new and expanded education programs:

  • $27 million to expand the capacity of the K‑12 High Speed Network, which provides Internet service to county offices of education and school districts. There will be grants for districts that need the most help preparing for the computer-based Common Core tests next spring.
  • $50 million to boost career-training programs at community colleges to help expand course offerings and purchase new equipment. The money comes on the heels of $250 million provided this year for the Career Pathways Trust, a state grant program that will fund partnerships between K-12 and community colleges for career technical education. Community college officials cheered the funding proposal, which they said would restore past cuts. Yet other advocates were disappointed there wasn’t additional funding for career technical programs at the K-12 level.

 

John Fensterwald covers education policy. Contact him at jfensterwald@edsource.org and follow him on Twitter @jfenster. Sign up here for a no-cost online subscription to EdSource Today for reports from the largest education reporting team in California.

Filed under: Local Control Funding Formula, Pay and Tenure, School Finance, State Education Policy, Teaching

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16 Responses to “In revised budget, Gov. Brown details costly 30-year plan to fix teacher pensions”

  1. SD Parent said

    on May 14, 2014 at 11:40 am

    I understand the benefits to funding the CalSTRS pension liability sooner rather than later. However, placing the burden of financing decades of procrastination (and overly optimistic return expectations) on the backs of children in school today is unconscionable.

    Students today by-and-large have lost instructional days due to teacher furlough days and have experienced larger class sizes and the loss of numerous programs and services since 2007-08. Base funding for education is still well behind where it was back then, so very little has been restored for students, as their programs and services vie with increases in employee costs (due largely to deferred raises and powerful lobbying by collective bargaining units). In addition, we are throwing new curricula (Common Core) and testing (SBAC) at students without sufficient funding for teacher professional development, new textbooks/resources, and technology infrastructure/upgrades.

    The reality is that education funding in California is still so tight that 49 school districts–including the two largest–were in negative or qualified status for their second interim reports. [For the layperson, this means that based upon current projections, the school district may not--for qualified--or will not--for negative--meet its financial obligations for fiscal year 2013–14, 2014–15, or 2015–16.]

    How, then, does the Governor expect school districts to take on the bulk of the responsibility for CalSTRS’ deferred pension payments? There is no school district slush fund to pay for this. Cutting into school district budgets just cuts into what students receive in the classroom and/or what teachers and other school employees take home. The bean-counting pencil-pushers in Sacramento should come sit in a classroom to see the results of their actions and look our children in the eye and say how they are providing for their futures.

    Remember, these kids are the future workforce of your state. Invest now, or pay later.

    • tom mccloskey replied

      on May 14, 2014 at 11:57 am

      Great write up on that issue, SD Parent. No way our cash-strapped District in Norcal (San Ramon Valley Unified) can just increase pension payments from about 8% to 19% without hurting staffing and the students. I doubt the teachers will take want to take home less money and the Districts would just have to pay more. After threatening cuts for Proposition 30, Brown continues to show his disregard for our students. Maybe it’s because our State is performed so well compared to the rest of the USA and the World that classes and personnel can be cut.

      • John Fensterwald replied

        on May 14, 2014 at 12:17 pm

        Tom: My back-of-the-envelope estimate of the impact of increased pension costs to districts – at least 1/7th of the money districts had expected from the Local Control Funding Formula – assumes that LCFF will be funded on time, as the governor has projected, by 2020-21. If full funding is delayed, pension costs would eat up a bigger portion of new funding.
        My estimate also is the average. For districts like San Ramon Valley, which get less than average supplemental and concentration dollars, pension costs would consume a bigger piece of their Prop. 98 funding.

        I assume that the debate in the Legislature will focus on two issues: Should the state’s share of the unfunded liability be bigger? Should some of the districts’ portion be funded outside of Prop. 98?

        • tom replied

          on May 19, 2014 at 11:32 am

          Thanks John for your comment, and thanks for doing a great job reporting on education issues. Keep up the good work.

          I looked up some of the numbers, and the SRVUSD current spends $115m on salaries and 8.25% of that is paid into Calstrs, I think, which is $12.8m. If the District contribution increases to 19.1% that pencils out to an additional $16.8m in Calstrs contribution. Our District will get very little in supplemental and concentration money, e.g. next year only @$2m, so does not come close to meeting the $16.8m in additional contribution. If nothing is done by the Legislature to get schools a lot more money, then teachers and programs will get cut at least at some school Districts.

          Dan Borenstein wrote a piece in the San Ramon Valley Times on Sunday pointing out that even Brown’s proposal does not fix the under funding problem, because among other things, the assumed rate of return of 7.5% is too high based on the governments own evaluation!

          One could argue that something needs to change with the pension system in place. Plenty of other government entities across the USA have faced this and made changes, e.g. a different retirement program for new hires, etc. etc. In this State, would need to get the Unions on board which is not an easy task.

          • Gary Ravani replied

            on May 19, 2014 at 1:19 pm

            There is a “different” pension program for new hires now in place based on Brown’s pension “reforms” of several years ago.

          • tom replied

            on May 21, 2014 at 2:58 pm

            True, but if the plan apparently needs more changes (and money) to make it fully funded. There are a number of possible changes, e.g. on the national level, both medicare and social security are underfunded and there is discussion of raising the retirement age. If something not done, ultimately we are taking money from the students who are the future.

  2. Jeff said

    on May 14, 2014 at 3:34 pm

    If CalStrs were fully funded and its assets earned the assumed rate of return of 7.5%, it could pay the actuarial pension liabilities that have been incurred to date. But I think that 7.5% applies to its unfunded actuarial liabilities as well. Since assets that aren’t there can earn anything, that return has to be paid with contributions to the pension fund. I figure a $74 billion shortfall requires around $5.5 billion in interest payments to keep it from growing. So Browns “commitment to pay down long-term debts” is certainly not being realized in this year’s budget proposal, which I believe would add another $5 billion in unfunded liabilities, assuming CalStrs existing assets earn the benchmark rate of return. CalStrs unfunded pension liabilities have grown during Brown’s term even though financial markets have soared. I believe recovering the 40% lost in 2008 amounts to 60% growth from that point.

    All this points to the problematic nature of defined pension benefits instead of defined contribution pension benefits, which are paid concurrently with the employment from which they are generated. Instead were facing a plan to pay down the unfunded liabilities that would have payments extending 30 years into the future for the pension compensation of employment that is already in the past. That will be money removed from the opportunity to pay for education costs (or other things) going forward. And the longer we wait, and the slower the debt is paid off, the more the future pays for the failure to have paid for past employment costs.

    • navigio replied

      on May 14, 2014 at 4:00 pm

      As you point out, money that doesn’t exist can’t get a return. The nonexistent nature of much of these funds comes from the legislature’s unwillingness to hold to its contribution responsibility. That fact cannot be ignored.
      Nor can the fact that the distinction between defined contribution and defined benefit is independent of that problem.
      A defined contribution retirement ‘plan’ is no retirement plan at all. So it really does not make any sense to try to make such a distinction.

      • Jeff replied

        on May 14, 2014 at 7:48 pm

        Navigio- The problem is that not paying for things people want or are promised by taking money from other people is inherently politically expedient and widely in evidence. The consequences of such behavior falls on future politicians and their constituents, while the current ones and their constituents get what they want. Defined pension contributions are paid concurrently with the employment when they are earned. So to pay that to your employees, you have to take the money from other people at the same time. That sets up the proper competing political interests to offset each other instead of fobbing the burden off on people in the future who couldn’t object. That’s obviously not true with defined benefit pensions where promises can be made and not paid for. And contrary to your assertion, defined contribution systems can indeed provide for people’s retirement, if done properly.

        • navigio replied

          on May 14, 2014 at 10:06 pm

          well, i disagree that a defined contribution plan sets up the ‘proper’ competing interests. what it does is leave the burden undefined, forcing the program to be ‘funded’ with no planning whatsoever. normally a ‘plan’ would consist of ‘this is what we believe should be earned and here is how we’ll pay for it’. not, ‘here is what we happen to be able to afford, split it amongst yourselves’ and too bad if its not enough.
          and if you dont like the concept of leveraging investments to fund future burdens well then maybe we could apply the same limitations to the rest of our economic system. in fact, i’d argue that one of the primary reasons we are in this position in the first place is pension plans were ‘forced’ to dabble in equities (we had to pass a law (ballot initiative?) to allow that btw) just to be able to ‘keep up’ with the economy. so much for the rest of society being more responsible than the pension system.

          • Jeff replied

            on May 15, 2014 at 1:04 pm

            You can decide what you want in retirement and plan according with defined contributions, setting aside enough money from present consumption to make your goals reasonably likely. You may not get exactly what you want but assuring that with defined benefits pensions is just shifting the risk burden is put to other people. Furthermore the decisions people make, like whether enough is being set aside to meet future goals, tends to be quite different when it’s other people’s money that is at stake, as we’ve seen.

            Government has created a privileged pension class out of its employees, paid for by the relatively pension poor in the private sector. I’m against that. I think pension opportunities ought to consistent throughout the population.

            I don’t think people should save for retirement in individual accounts. Most people are ill-equipped and the transaction costs, both in time and money, are too great. People should be part of collective pension investment pools where the risk of return is smoothed and shared. I think annuitizing pension savings, at least a substantial basic amount of that, is also wise. And teachers should also be part of the Social Security system, which offers a lifetime retirement annuity.

    • John Fensterwald replied

      on May 14, 2014 at 4:14 pm

      Jeff: I believe the governor’s plan includes the phase-in period, so that the $5 billion cost is based on a 32- or 33-year funding plan. If the full funding started this year, the eventual cost would be less than an additional $5 billion.

      • Jeff replied

        on May 14, 2014 at 8:00 pm

        John- I may well not understand the pension math. I don’t see how any shortfall to fully-funded assets that would otherwise be sufficient earning the applicable discount rate wouldn’t need to have the same growth as the assets that are there. I’d love to have someone explain why that’s wrong. The only thing that I can guess might be going on is that the payments made to get rid of the debt are not fixed but instead grow over time, being a fixed percentage of a growing payroll.

  3. Gary Ravani said

    on May 15, 2014 at 4:40 pm

    STRS started approaching stakeholders before the economy tanked to begin discussions of relatively slight increases needed from all participants-employees-employers-the state-to be phased in over time to keep STRS healthy.

    Then the economy did tank. It was not the employees who caused this. The cause was a combination of misfeasance and malfeasance in the financial sector. A finical sector that was bailed out on the backs of the employees and other taxpayers while tens of thousands of homeowners were not bailed out. Then those who committed the acts took bonuses.

    It was the situation caused by the finical sector that put the pension funds in real distress. Then there was the manipulation of the LIBOR. Shall I go on?

    When adjusted for regional cost-of-living CA’s school spending ranks near last in the nation. That spending is around 40% of the state budget. When adjusted for regional cost-of-living where does that rank the other 60% of CA’s budget? Not high. CA has a revenue shortfall.

    In “income devoted to state and local taxes” CA is slightly above the national average. Because of Prop 13 CA property taxes, the most stable revenue source, ranks below those of 45 other states. CA ranks 39th in business taxes as a “percentage of economic activity.” (9th largest economy in the world.)

    A “comprehensive” view shows CA to be a moderately taxed state.

    CA ranks 2nd, behind Hawaii, in cost-of-living.

    It is true that, in the very long term, pensions are underfunded. That is not the same as saying pension costs are excessive.

    The costs of tax breaks and loopholes in CA is close to $10 billion, with off-shore tax havens alone costing $4.2 billion annually.

    Retiree spending generates about $34.5 billion annually in economic output, or the equivalent of 61,000 jobs.

    There is a real pension crisis in this nation, and that is that too many people don’t have one, leaving them dependent on Social Security alone. When the workforce had unions they also had pensions.

  4. Lloyd Lofthouse said

    on May 25, 2014 at 3:05 pm

    California must abandon Obama’s Machiavellian Common Core testing regime and follow the lead of other states that are already doing it.

    • FloydThursby replied

      on May 25, 2014 at 7:59 pm

      Everyone always acts like they just object to some aspect of the way Common Core or NCLB reforms, to much testing, and that if they’d stayed out, they would have reformed another way. No, they wouldn’t have, no one wanted to change LIFO or find a way to guarantee that people didn’t graduate illiterate before. In fact there was an initiative from the state level to make a diploma meaningful and it was passed by the voters, that students pass the Exit Exam, and the same people saying we should have not done this but trust the union and establishment to do the same thing another way were right there whining that too many people would fail and it was making them look bad, and kids look bad. We need to shine a light on our failures and work to improve them.

      Obama’s best quotes are that poverty is no excuse for failure. “You are never so poor that the only possible choice you can make is to watch TV with your kids instead of teaching them or making sure they’re doing their homework.”

      The establishment feels it is inevitable that those in poverty fail, even when many ethnicities in poverty do quite well, or majorities of many such groups. Poor Asians do better than upper middle class whites. Any suggestion that failure among the poor is inevitable is one I find deeply hurtful and offensive.

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