By Ed Mendel
Thursday, March 29, 2012

After a decade of similar below-target investment earnings, punctuated by huge losses during the stock market crash in 2008, the nation’s two largest public pension funds are looking at different futures.

The California Public Employees Retirement System, putting a new focus on risk, worries about another recession dropping pension funding levels to 40 percent or below, a “warning track” zone that could make it difficult to get back to full funding in the future.

The California State Teachers Retirement System, no longer aiming for full funding, has developed several limited funding scenarios for legislative consideration that would keep the system from running out of money three decades from now.

The views emerged as CalPERS and CalSTRS lowered their earnings forecasts from 7.75 to 7.5 percent. The small drop raises employer pension costs to offset lower investment earnings, which are expected to provide two-thirds of future pension revenue.

The reason the two retirement systems are looking at different funding scenarios is that the CalPERS board, like most public pension boards in California, has the power to set annual contribution rates that must be paid by government employers.

But CalSTRS, the nation’s second largest public pension system, also is one of the oldest, formed in 1913. As if trapped by time, CalSTRS is an outlier unable to raise employer contribution rates, needing legislation instead.

For more than five years, CalSTRS has been trying to get the Legislature to raise contribution rates. It has explored getting the power to raise contribution rates, pursued more aggressive lobbying and even issued a $600,000 public relations contract.

Teacher unions, one of the most powerful groups at the Capitol, are consumed by historic cuts in school funding and teacher layoffs. School districts are said to have had more than $20 billion in reductions in the last four years.

Now the annual increase in contributions needed to get CalSTRS to full funding in 30 years, more than $4 billion, is approaching the total amount of contributions CalSTRS received from all sources last fiscal year, $5.3 billion.

A breakdown of the contributions, little changed from the previous year: teachers $2.4 billion, employers $2.3 billion and state $600 million. The state contributes another $600 million to a separate inflation-adjustment fund.

Meanwhile, pension payments going out to CalSTRS retirees last year increased to $10.1 billion, up 7.8 percent. Spending nearly twice as much on pensions as received in contributions eats up an investment fund valued at $150 billion earlier this year.

Even if investment earnings hit the target, 7.5 percent (which critics say is overly optimistic), the CalSTRS investment fund is expected to run out of money in about 30 years.

In an era of deep cuts in funding for current school operations, future teacher retirement costs have not been a priority. Gov. Brown’s 12-point pension reform plan does not specifically address the CalSTRS funding gap.

Part of the governor’s plan would put new state and local government hires in a “hybrid” plan combining a lower pension with a 401(k)-style individual investment plan. Phasing in a hybrid, opposed by unions, could take decades to yield significant savings.

“It would have some impact — nothing nearly enough to address the problem,” Ed Derman, CalSTRS deputy chief executive, told the board last month, referring to an analysis of the governor’s concepts done before bill language was introduced.

A two-house legislative committee is working on pension reform. Unions support curbs on excessive pensions and other abuses, but are skeptical or opposed to cost-cutting structural changes such as a hybrid, delayed retirement and higher worker contributions.

At the request of legislators, CalSTRS gave the committee a half dozen easily altered funding scenarios to consider. Only one, which puts new members in Social Security, is projected to get CalSTRS to full funding.

But under that scenario CalSTRS would not be 100 percent funded until 2085, with a 47 percent chance of running out of money at some point before then.

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