By Ed Mendel
Monday, November 26, 2012

More money for the underfunded California State Teachers Retirement System may be considered by the Legislature next year, thanks to new attention from lawmakers and a state budget deficit narrowed by a voter-approved tax increase this month.

After years of ignoring pleas for a rate hike, the Legislature approved a resolution last August, SCR 105, that asks CalSTRS to meet with “affected stakeholders” and present three options for a long-term funding solution by next Feb. 15.

A phased-in rate increase would not begin for several years, if it follows scenarios suggested earlier this year. And splitting a rate hike between teachers and employers may be a difficult legal and political task, complicated by new pension reform legislation.

But after years of spending cuts to close big deficits, the state budget picture has sharply improved, brightened by a slowly recovering economy and a major tax increase approved by voters this month, Proposition 30 sponsored by Gov. Brown.

“Assuming steady economic growth and restraints in augmenting current program funding levels, there is a strong possibility of multibillion-dollar operating surpluses within a few years,” Legislative Analyst Mac Taylor said in his recent fiscal outlook.

The forecast fits the timing of a half dozen funding scenarios CalSTRS gave the Legislature early this year. Small rate increases would not begin until 2016. Only one scenario is expected to get CalSTRS to full funding, but not until 2085.

Given competing demands for state funds, the additional money needed to project a fully funded CalSTRS in the 30 years prescribed by government accounting standards seems unlikely to be available, even with a windfall surplus.

The shortfall is about $3 billion a year.

The CalSTRS pension fund, valued at $155 billion Oct. 31, is currently projected to run out of money in a little more than 30 years. The goal of the rate-hike examples is to keep the pension fund from running out for at least another 75 years.

Another sign that the time may be arriving for action on a CalSTRS rate increase is the apparent interest of the California Teachers Association, a powerful voice in education funding at the Capitol.

At a CalSTRS board meeting this month, a lobbyist for the teachers union in the audience urged the board to act when some members balked at setting the “normal cost” for new-hire pension rates needed under the pension reform legislation.

“I can tell you we are not going to be able to do any work on the unfunded (liability), and I know you want to have discussions in December,” Jennifer Baker told the board. “That’s all going to be put on hold with you if we are going to have to focus on the normal cost.”

Unlike the California Public Employees Retirement System and most public pension systems in California, CalSTRS lacks the power to set annual rates that must be paid by employers, needing legislation instead.

The new pension reform, AB 340, calls for an equal split between employers and employees of the “normal cost,” the payment needed to cover pensions earned during a year that does not include the debt or “unfunded liability” from previous years.

What troubled some CalSTRS board members is that by adopting a normal cost for new hires the board seems to be setting the employer rate, which under the new law signed by Brown in August is half the normal cost.

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