Pension reform: top-paid administrators to take biggest hit

August 29, 2012

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 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:

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.

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