By Ed Mendel
Monday, September 17, 2012

What CalSTRS regards as its “most significant reform issue” was not in the pension reform bill signed by Gov. Brown last week. But a long-sought first step toward closing a huge gap in the teachers’ pension fund is in a companion measure.

Most of the 44,000 employees on the 23 campuses of the CSU system will continue to make a low pension contribution, 5 percent of pay. The state Finance department lost another round with labor-backed educators.

The largest group in CalPERS, non-teaching school employees, were untouched by cost-cutting reforms bargained by state workers and some local governments. Now schools can impose a contribution increase after five years if bargaining fails.

How the pension reform bill affects public education varies with the different operational laws covering the parts of the system. A notable example: The semi-independent University of California is excluded from the bill.

Pension reform was driven by the view that voters, who are being asked to approve tax increases in November, need to see that lawmakers are trying to control spending and that new revenue will not be eaten up by soaring pension costs.

Avoiding devastating cuts in school funding is one of the main arguments for Brown’s Proposition 30 and a competing tax initiative, Proposition 38, backed by the personal wealth of Molly Munger.

The pension reform bill, AB 340, gives new hires a lower pension that the California State Teachers Retirement System expects to save $22.7 billion over the next 30 years, about $12 billion if adjusted for inflation at 3 percent a year.

New hires will have to work two years longer to get the same pension earned by current CalSTRS members. The new formula, “2 at 62,” provides 2 percent of final pay for each year served at age 62, down from the current “2 at 60.”

Like current members, new hires are expected to contribute 8 percent of their pay to pensions. Employers and employees will equally share the pension “normal” cost, but only employers pay for the large “unfunded liability” from investment earning shortfalls.

An inflation-adjusted cap on salary used to set pensions for new hires, currently $132,000, will along with other changes help curb “spiking,” the improper boosting of CalSTRS pensions recently reported by state Controller John Chiang.

About 4,500 CalSTRS members have salaries of more than $132,000 a year. The cap will eventually eliminate annual pensions large enough to make the “$100,000 club,” now joined by 6,609 CalSTRS retirees according to a pension reform group.

A CalSTRS summary said the pension bill “validates” the CalSTRS plan design, an unusual “hybrid” created in 2000 as a stock market boom helped give many pensions funds a surplus.

Pensions are supplemented by a “cash balance” investment plan guaranteeing a minimum return based on 10-year U.S. bonds. For a decade ending last year, a quarter of the teacher pension contribution, 2 percent of pay, was diverted into the supplement.

The reform bill is said to roll back new-hire pensions to the “pre-SB 400” level, a major trendsetting pension increase sponsored in 1999 by CalPERS, which famously told legislators it would not cost taxpayers a dime.

But the bill does not change the CalSTRS supplement, even though it can add to CalSTRS debt when earnings fall below the guaranteed return.

Since the diversion of a quarter of the teacher pension contribution ended, the supplement gets employee pay (bonuses, summer school, etc.) not credited toward pensions. Pay for new hires above the $132,000 cap cannot go into the supplement.

Employers can offer a 401(k)-style individual investment plan for salary above the cap, making an employer contribution that does not exceed the employer pension contribution, currently 8.25 percent of pay.

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