By Ed Mendel
Wednesday, June 18, 2014

Full funding of the troubled California State Teachers Retirement System was approved by the Legislature last weekend, with most of the additional $5 billion coming from school districts that get no offsetting money from the state.

With only one “no“ vote, lawmakers approved Gov. Brown’s plan to phase in a massive rate increase over seven years, nearly doubling the $5.8 billion CalSTRS currently receives each year from school districts, teachers and the state.

A California Teachers Association lobbyist told a two-house legislative committee in February the politically powerful union wanted additional school funding from the state to cover the cost of the rate increase.

But the legislation, AB 1469, does not raise the Proposition 98 school-funding guarantee to help school districts pay the new CalSTRS rates. And a “poison pill” repeals the rate increase if a court ruling requires the state to reimburse districts.

The only apparent relief in the state budget package that might make more money available for teacher salaries is a cap on school district reserves linked to passage of Brown’s “rainy day” state budget reserve on the November ballot.

The reserve cap was backed by the California Teachers Association but opposed by management groups on the other side of the labor bargaining table, the Association of California School Administrators and the California School Boards Association.

“The governor’s proposed increases in CalSTRS alone will phase in higher employer contribution rates for the next years, going from 8 percent (of pay) to 19 percent,” the management groups said in a joint statement before passage of the budget.

“This is more than the increased level of funding many districts will receive via the new funding formula and will have major implications as boards are finalizing budgets,” the two groups said.

A Brown school funding formula enacted last year gives more money to schools with the neediest students. After deep cuts during the recession, school districts are receiving more money from an improving economy and a voter-approved tax increase.

CalSTRS has been trying for about a decade to get a rate increase. Unlike most California public pension systems, CalSTRS lacks the power to increase annual rates paid by employers, needing legislation instead.

Much of the CalSTRS funding gap, now being painfully closed by squeezing school funding, is due to state and teacher contribution cuts and benefit increases enacted around 2000, when a booming stock market gave CalSTRS a brief funding surplus.

The state contribution was cut from 4.6 percent of pay to 2 percent. For 10 years, a quarter of the teacher contribution, 2 percent of pay, was diverted to a new individual investment plan. A half dozen small benefit increases included a longevity bonus.

CalSTRS would have 88 percent of the projected assets needed to pay future pension obligations if it had had continued to operate under the contribution and benefit structure in place in 1990, a Milliman actuarial report said last year.

Now CalSTRS is only 67 percent funded. A Milliman actuarial report in April showed CalSTRS received $5.8 billion from the state, school districts and teachers last year, while spending $11.3 billion on pensions and administrative costs.

Nearly half of CalSTRS costs were paid from investment earnings. Without a rate increase, CalSTRS was expected to burn through its $184 billion portfolio in 30 years, even if earnings average what critics say is an overly optimistic target, 7.5 percent a year.

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