By Ed Mendel
Monday, January 13, 2014

A new state budget Gov. Brown proposed last week does not have a long-sought rate hike for CalSTRS, which is projected to run out of money in three decades. But the budget does call for talks with teachers, schools and others to work out a rate-hike plan.

Most California public pension funds have the power to raise annual employer rates when they need more money. The California State Teachers Retirement System, a century old this year, is an outlier that needs legislation to raise rates.

As lawmakers at the Capitol struggled with budget cuts during a deep economic recession, pleas for a CalSTRS rate increase were not acknowledged with a legislative hearing until last year.

Now the rate hike needed to project full CalSTRS funding in 30 years has ballooned to an additional $4.5 billion a year, nearly doubling the $6 billion received from current rates and a big bite from the $107 billion proposed state general fund.

The budget calls for a CalSTRS plan that would not be enacted until fiscal 2015-16 and then phased in over several years. Among the issues is whether the rate hike would be part of the Proposition 98 school-funding guarantee.

Another issue is how the rate hike would be split among the three CalSTRS contributors. The state currently contributes 5 percent of pay, school districts and community colleges 8.25 percent of pay, and teachers 8 percent of pay.

The governor’s proposed budget said the long-term role of the state as a CalSTRS contributor “should be evaluated.” An end to direct state funding might open a discussion about whether CalSTRS should be given the power to raise employer rates.

“I’ve set forth a period of time to meet with all the stakeholders and work it through,” Brown said at a news conference. “It’s going to be daunting. It has to be done, and sometimes it’s hard to get things done until people really see the disaster ahead.”

“If the Legislature can do it this year, fine,” he said. “I think it’s going to take a little longer. But I am fully committed to it. I certainly want to reserve the fiscal capacity in our budget, so that we are able to pay it when we can afford the agreement.”

Hit hard by the recession like other pension funds, the CalSTRS investment portfolio dropped to $112 billion in 2009 and only recently climbed back to about $180 billion, the pre-crash peak reached more than six years ago in 2007.

To read entire column, click here.