Gov. Newsom proposes to chip away at mountain of pension liability and ease school districts’ burden

The California State Teachers' Retirement System headquarters in Sacramento.

Credit: CALSTRS

In his freshman budget, Gov. Gavin Newsom heartened beleaguered school districts and community colleges by offering pension-cost relief.

Districts had been bracing for a big increase in payments to CalSTRS, the pension fund for California teachers and administrators. Instead, under the proposed budget, they’ll pay about half the raise in rates they had anticipated next year and in 2020-21. Newsom is proposing to use some of an expected state budget surplus to pay roughly the other half — $700 million divided over two years.

School leaders are expressing gratitude for the help — not as much for the amount, which is modest compared with the overall pension burden, as for Newsom’s recognition that districts are struggling. Pension payments are a big factor in districts’ rising costs.

“The crisis is not over but this is a major step in the right direction,” said Dennis Meyers, assistant executive director, government affairs, for the California School Boards Association. “Districts have been asking for assistance since 2013.”

The relief equals about $50 to $60 per student per year. For Los Angeles Unified, that works out to about $30 million each year, which, together with state increases in special education funding, helped Superintendent Austin Beutner cut a deal Tuesday with United Teachers Los Angeles to end a seven-day strike.

But for many other districts, especially those forecasting a drop in student enrollment, the extra funding will only slightly ease cuts already anticipated in programming and staff.

Denise Jaramillo, superintendent of Alhambra Unified, a 16,800-student district in Los Angeles County, said the combination of a loss in state revenue from gradually declining enrollment and unabated increases in pension contributions to CalPERS, the pension fund for secretaries, bus drivers and other employees without teaching credentials, will offset the estimated $800,000 in CalSTRS relief. “The impact will be minimal and will likely just delay our necessity to initiate cuts to our budget,” she wrote in an email.

Sacramento City Unified, with 40,000 students, has been struggling to avoid bankruptcy due to a combination of challenges, including financial mismanagement. The latest enrollment forecast, predicting $3.5 million less state revenue from a 1 percent drop in enrollment next year, negated the good news of about a $2 million gain from a lower CalSTRS payment.

“Assistance from the governor in bringing down this cost is certainly welcome. However, it will not generate enough savings to prevent our district from running out of cash this year, or to balance our budget in future years,” the district wrote in a budget update on Wednesday. Included was a graph that showed that CalSTRS payments by the district, as in all districts, have gone up 250 percent since 2013-14.

That was the year that the Legislature acted to avert the insolvency of CalSTRS. CalSTRS assets plunged during the 2008 recession, which was compounded by assuming an overly optimistic rate of return on investments. With the aim of fully restoring CalSTRS’ financial health over three decades, lawmakers raised the contribution rates of districts and community colleges, the state and to a lesser extent, of teachers and principals, starting in 2014-15.

By 2020-21, districts’ and community colleges’ share, as employers and the largest contributors, would have risen from $2.3 billion to $7.2 billion per year. But with Newsom’s subsidy, their share would top out at $6.5 billion instead.

Expressing that another way, districts will contribute 18.1 percent of teachers’ salaries to CalSTRS, instead of 19.1 percent as originally scheduled. A drop of 1 percentage point is still 10 percentage points more than they paid in 2013-14.

In addition to the $700 million, Newsom is proposing to use an additional $2.3 billion from the budget surplus to further pay down the districts’ obligation — the equivalent of an early payment on a mortgage. Doing so will reduce districts’ liability by $6.9 billion long-term, according to the California Department of Finance.

David Crane, a frequent critic of CalSTRS who former Gov. Arnold Schwarzenegger appointed to its board of directors, commended this strategy. It’s difficult politically to apply surplus dollars to a “legacy debt,” he said, and difficult to appreciably make a difference “because the problem is so large.”

“I’m impressed they did it,” he said of the Newsom administration. “It will help schools a bit.”

Newsom also is proposing to chip away at unfunded liability for CalPERS, which also covers state workers, with an early $3 billion contribution.

Cory Koedel, an associate professor of economic and public policy at the University of Missouri, said Newsom’s proposal risks “a false sense of having done something, like not using plastic straws to save the environment.”

“It’s a nice gesture with short-term relief, but it does not change the fundamental nature of the problem that got us here,” said Koedel, co-author of the study “Pensions and California Public Schools,” which is part of Getting Down to Facts, three dozen reports on California education organized by Stanford University that were published last fall.

CalSTRS had an unfunded liability of $107 billion as of May 2017, the most recent calculation by the pension system. And it will grow if the pension fund cannot meet a 7 percent annual rate of return on its investments, the amount needed to meet future pension obligations. If it doesn’t meet that rate of return, the Legislature could raise districts’ contribution rates again, starting in 2021-22.

Koedel and Crane are among the experts who argue that assuming a 7 percent annual rate of return is too risky.

Meyers said that school districts will ask Newsom to continue providing pension relief to them. That might prove difficult, however, since the state already is facing increases in its share to CalSTRS of about $300 million annually for several years, if not longer.

“We need help to pay CalSTRS’ unfunded liability. The Legislature handed us the higher rates; we didn’t negotiate them,” Meyers said.