Taxpayers may face larger costs
Staff and Wire Reports
Created: 02/26/2011 07:05:29 AM PST
As California school districts anticipate possibly the worst budget crisis in a generation, many will try to lighten their burden by enticing older teachers into retirement.
But as more and more teachers retire – with a pension averaging 55 percent to 60 percent of salary – they will be straining a system that already can’t meet its obligations.
The California State Teachers’ Retirement System is sliding down a steep slope toward insolvency.
Taxpayers, who already pick up 23 percent of CalSTRS expenses, will be increasingly burdened as the giant pension system fails to meet its obligations.
“We’re on a path of destruction,” said Marcia Fritz, president of pension-reform group California Foundation for Fiscal Responsibility.
And merely rejiggering formulas for new employees won’t rescue the system, she said.
Simply put: “We overpromised.”
Among those promises, “Californians have typically given their public employees richer retirement benefits” than have other states, according to the nonpartisan Legislative Analyst’s Office.
Despite the looming disaster, CalSTRS is like an ocean liner that’s slow and complicated to change course. Gov. Jerry Brown hasn’t mentioned overhauling the system that benefits one of his major supporters, the teachers union. Nor has the Legislature taken up the issue.
CalSTRS provides the retirement of public-school teachers and administrators. Like its sibling pension system, CalPERS, which provides for nonteaching state employees, CalSTRS’ collections don’t meet its obligations to current and future retirees.
Although CalPERS has imposed higher contributions, reformers say CalSTRS’ formulas can be revised only by legislation, a statewide initiative or possibly a constitutional amendment and litigation – not to mention immense political will. Courts have ruled that retirees are guaranteed the pensions promised them when hired.
But not everyone agrees on how bad things really are. Since March 2009, when global financial markets plunged into a historic worldwide economic recession, the CalSTRS investment portfolio has rebounded by more than $34.8 billion to $146.4 billion, said Pat Mazzulli, president of Fontana Teachers Association.
“It’s easy to make accusations and forget the facts when blaming public pensions and crying `unfunded liabilities,”‘ Mazzulli said. “It was Wall Street and banking fiascoes that created the economic downturn that hammered savings, caused pension funds to lose billions and wipe out 401(k) accounts. Even with all the economic hardships, the CalSTRS benefits were 78 percent funded, as of 2009.”
In a response letter to LAO’s report, CalSTRS’ Chief Executive Officer Jack Ehnes stated that “the average percentage of final compensation paid to CalSTRS members retiring last fiscal year was under 60 percent, hardly an excessive amount.
“Additionally, CalSTRS retired members generally do not receive employer-paid health care benefits after age 65,” Ehnes said.
Twin reports issued earlier this month amplify the alarm. The Legislative Analyst’s Office suggested that the state gradually decrease its share and move toward either cost-sharing with teachers or creating a hybrid retirement system, with reduced pensions and a 403(b) savings program – the public and nonprofit sector’s equivalent to 401(k) retirement accounts.
And actuaries for the state Teachers Retirement Board calculated that contributions would have to increase 77 percent to make the system sound.
But the report added that given the state’s financial distress, those contributions likely can’t be increased for more than a year. By law, each teacher contributes 8 percent of salary to CalSTRS, the school district adds 8.25 percent, and the state puts in about 4 percent.
“State pays several hundred million each year. But given the size of state budget it’s a little drop in the bucket,” said Rick McClure, president of the Ontario-Montclair Teachers Association.
In the private sector, employers and workers each contribute 6.2 percent to Social Security, and may contribute and match more through 401(k) savings. Teachers do not participate in the Social Security system.
Any move to pare benefits or collect more from employees would affect only future teachers, not current employees. That’s why Fritz thinks a constitutional amendment to reduce benefits for current teachers is necessary.
The fund’s shortage is exacerbated by cutbacks in teaching ranks, so fewer teachers are paying into the system. But the core of the problem has roots in the 1990s, when California took a contribution “holiday,” paring back payments to the two big state retirement systems and bumping up benefits, even retroactively fattening retirees’ checks. When the economy tanked, CalSTRS’ portfolio dropped 25 percent. Combined with enhanced benefits, the system now has a ballooning gap between its promises and income, or $40.5 billion in unfunded liabilities.
“That is a complete and utter nonsense,” McClure said. “CalSTRS does have long-term issues, they are fairly easily solved. Its rate of return on its investment pool was 12 percent last year. The emphasis is on long term. We have plenty of time to make minor changes to fix those issues.”
Jason Sisney, the LAO’s director of state finance, sees it differently. In a video posted on the LAO’s website, Sisney likened the state to consumers paying only the minimum balance on their credit cards – the overall balance keeps growing.
Among his office’s recommendations are revising contributions, ending retroactive benefit increases and paying costs as they accrue, rather than deferring them to future generations.
Any proposal to scale back current benefits is sure to raise opposition from teachers and their union. Although many of them say that they’re merely reaping their own contributions toward retirement, systemwide, teachers collectively are drawing out more than not only what they’ve personally put in, but what their school districts have contributed as well.
Many can even take home more in pensions than they netted while teaching.
CalSTRS’ formula, which is based largely on employee salary, age and longevity, tends to reward retirement at age 611/2. For example, a teacher who has worked for 35 years, making $90,000 in her final year, could retire at age 62 and reap a $75,600 annual pension – 84 percent of salary. Teachers can add to their pensions by “buying” additional years.
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