Assembly Speaker John Pérez pledged Wednesday to pass legislation this year to fix the huge deficit threatening the long-term stability of the state pension fund for teachers and administrators.
Assemblyman Rob Bonta, D-Oakland, will hold the first hearing on the issue on Feb. 19 in the Assembly Public Employees, Retirement and Social Security Committee, which Bonta chairs. “Ensuring the long term financial security of California’s hardworking and dedicated teachers is a goal we are hopeful we can achieve this year,” Bonta said at a news conference with Pérez.
The California State Teachers Retirement System, CalSTRS, is estimating that an additional $4.5 billion per year in contributions – a staggering 70 percent increase shared among teachers, school districts and the state – is needed to prevent the pension fund from running out of money in 2046. The nation’s largest pension fund for teachers, CalSTRS is funded through a combination of annual contributions and returns on stock and other investments. The current $71 billion unfunded liability developed after CalSTRS’ investments lost nearly 40 percent in value in the stock market crash. And increased employee benefits that the Legislature approved during the dot-com boom compounded the shortfall. CalSTRS’ investment portfolio is now back to where it was at the peak in 2007, but it has lost billions in predicted returns in the interim. CalSTRS says the gap to full funding widens $22 million for every day of inaction. Unlike pension benefits for California public employees, which can be negotiated with employees, only the Legislature can set contribution rates for CalSTRS.
In his budget message, Brown suggested that it would take a year of negotiations to cut a deal determining how an increase in contributions would be split among teachers, districts and the state. But Bonta expressed optimism an agreement would be reached this year. Whether increases would start immediately and how they might be phased in would be issues for deliberation, he said. “All possibilities are on the table except playing an ostrich,” he said in an interview.
State Treasurer Bill Lockyer, State Controller John Chiang and CalSTRS CEO Jack Ehnes issued statements praising the move forward. “It’s a tough assignment. Prompt action is imperative, because the problem grows costlier as time passes,” Lockyer said.
Brown included no extra money toward CalSTRS in his proposed 2014-15 budget; the Legislative Analyst suggested committing some state money toward pension contributions if revenues run higher than Brown projected.
The $70 billion-plus in unfunded liability equals the gap needed to bring the defined benefit fund, now at 67 percent of full funding, to 100 percent in 30 years. But that figure, from 2012, does not account for the 19 percent rate of return on CalSTRS investments in 2013, which could slightly reduce the needed increase in member and employer contributions. Bonta has asked CalSTRS to update legislators at the Feb. 19 hearing.
Contributions into the fund are calculated as a percentage of an employee’s pay. Currently, teachers and administrators contribute 8 percent of pay; districts pay 8.25 percent and the state contributes 5 percent. But half of the state’s contribution goes toward a special account that protects the value of longtime retirees’ benefits from inflation.
Bonta said that all parties agree there must be a “shared responsibility,” but an agreement will undoubtedly be hard to reach. Brown’s budget implied that the state foresees a smaller share of contributions. As the employers, “school districts and community colleges should anticipate absorbing much of any new CalSTRS funding requirement,” it said.
Raising current employees’ contributions also will be difficult. Courts have ruled that existing contribution rates of current teachers and administrators are a vested right and can’t be raised unless the employees are given another benefit, like a raise, of equal value. CalSTRS and the Legislative Analyst’s Office have indicated it still may be possible to raise employees’ contribution rates by as much as 2 percentage points. Unlike classified school employees, such as janitors and teacher’s aides, who pay into the Social Security system and the California Public Employee Retirement System (CalPERS), teachers and administrators contribute only to CalSTRS and don’t receive Social Security benefits upon retirement.
Although school district and state contributions both are funded by state taxes, there is an important distinction. The state’s share has come from the General Fund, while the districts fund their share through Proposition 98, the general source of revenue for K-14 education. Raising the districts’ share by billions of dollars without increasing the level of Prop. 98 funding would divert money otherwise intended for services for children (as well as possible raises for teachers) just when districts were envisioning a bounty of money through the Local Control Funding Formula – a cruel fate after years of cuts.
“We have to consider a gradual increase,” Bonta said in an interview. “The shock of doing something that large without any phase-in would be difficult to absorb without unintended consequences.”
In a report last year to the Legislature, CalSTRS presented several options besides full funding over 30 years – while emphasizing it was not endorsing any of them.
One option included stretching out repayment of the unfunded liability to as much as 75 years, thereby substantially reducing annual increases. The Assembly committee would start with the 30-year benchmark, Bonta said, but a 35- or 40-year time horizon would be discussed, he said.