calstrs

By Ed Mendel
March 24, 2014

The total spending increase needed to get CalSTRS, brought low by mismanagement, back to full funding may be the biggest-dollar scenarios ever presented to a California legislative committee.

Legislators were told last week an additional $181.7 billion would be needed for full funding in 20 years. If payments are spread out to ease the budget bite, the additional amount needed to reach full funding in 60 years is a staggering $618 billion.

The point made by comparing the large numbers: Delaying a funding increase drives up the total cost, not to mention forcing future generations to pay for the services of workers received by the current generation.

The California State Teachers Retirement System could project full funding over 30 years with an annual contribution increase of about $4.2 billion, a major rate shock for schools, teachers and the state that contributed a combined $5.7 billion last year.

To allow time for planning and budget adjustments, the funding scenarios prepared by CalSTRS staff phase in rate increases over several years, some not reaching the maximum until fiscal 2020.

A built-in problem for pension funds, which expect to get roughly two-thirds of revenue from investment earnings, is that they need a rate hike when employers are least able to afford one, during an economic downturn that hits tax revenue and investments.

The state budget has a surplus now after a decade of deficits. But there is fierce competition to restore deep recession-era cuts in schools, health, welfare, prisons and courts. Gov. Brown, meanwhile, wants to build a reserve to cushion future downturns.

Jason Sisney of the nonpartisan Legislative Analyst’s Office offered some perspective last week as he concluded his remarks to a joint hearing of the Assembly and Senate public retirement committees, the second in a series on CalSTRS funding.

“I think for many people, who are dealing with this in the Legislature and the executive branch right now, this may be one of the most difficult issues you ever face during your careers in public service,” Sisney said. “It’s not going to get easier.”

CalSTRS is projected to run out of money in about 30 years even if average investment earnings hit the current target, 7.5 percent a year, which critics say is too optimistic.

Some worry that another economic downturn like the last one, the deepest since the Great Depression, could drop the funding level, 67 percent last year, so low that full funding becomes impractical, requiring rate hikes too costly for employers to bear.

Part of the management problem is that CalSTRS, unlike other public pension systems, can’t raise employer rates, needing legislation instead. Dealing with deficits, the Legislature ignored repeated CalSTRS pleas for a rate hike, and the funding gap grew.

The CalSTRS investment portfolio, like most pension funds, tanked during the recession and stock market crash in 2008. The portfolio only recently climbed back to the 2007 pre-crash peak, $180 billion, after dropping to $112 billion in 2009.

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