Calstrs

By Ed Mendel
May 14, 2014

Gov. Brown yesterday made a long-delayed proposal to get CalSTRS to full funding over the next three decades, giving the biggest rate hike to schools and smaller increases to the state and teachers.

The nation’s largest teacher pension fund, which received $5.8 billion from the three sources last fiscal year, needs an additional contribution of about $4.2 billion a year to project full funding in 30 years.

The plan proposed by the governor is roughly similar to a CalSTRS scenario presented to a legislative committee in March, which would have cost an estimated $236 billion over the three decades.

The massive rate hike, proposed in a revised state budget plan for the new fiscal year beginning July 1, would be phased in over three years for the state and for teachers and seven years for school districts.

Brown’s plan stakes out a position on the major issues: allocating the rate hike among the three contributors, not raising the Proposition 98 school-funding guarantee to cover the cost, and full funding rather than a less costly target like 80 percent funding.

The phase in of the rates would begin with a $450 million increase in the new fiscal year. The state general fund would contribute $73.2 million, teachers $40 million and the remainder would come from schools.

At a Capitol news conference, Brown was asked if a $450 million increase in the first year is sufficient.

“Well, I would say if you can get more from the Legislature be my guest,” the governor replied. “But we are going to have a hard time getting what we are proposing.”

Unlike most California public pension funds, the California State Teachers Retirement system lacks the power to set annual rates that must be paid by employers, needing legislation instead.

CalSTRS has been unsuccessfully seeking a rate increase for about a decade. Now after years of deficits and deep budget cuts, the state budget is showing a modest surplus due to an improving economy and a voter-approved tax increase.

Without a rate increase, CalSTRS is projected to run out of money in 32 years, burning through an investment fund valued at $183 billion at the end of March, even if earnings hit what critics say is an overly optimistic target, 7.5 percent a year.

CalSTRS had a debt or “unfunded liability” of $73.7 billion as of June 30 last year, according to a Milliman actuarial report, and 66.9 percent of the projected assets needed to cover future pension obligations.

Brown said in January, when presenting his original budget plan, that he expected to propose a CalSTRS funding plan next year. He invited the Legislature to act this year if an agreement could be reached.

The governor said yesterday that each year of delay on a CalSTRS funding solution adds “hundreds of million” to the cost. He said the state is in effect paying 7.5 percent interest on pension debt.

“I believe in what’s practical, and my program is what I believe the Legislature can live with,” Brown said, “and that’s why I propose it the way it is.”

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