May 8, 2017
Long-delayed legislation is more than doubling the CalSTRS rates paid by school districts and the state. But even if the all-important pension fund investment earnings are on target, the huge CalSTRS debt is expected to continue to grow for another decade.
The Legislature left CalSTRS rates frozen for nearly three decades before enacting the massive rate increase three years ago. Now there are signs that the Legislature may be assuming more responsibility for CalSTRS funding.
The 2014 legislation freezes rates paid by school districts at 20.5 percent of pay, after they more than double to 19.1 percent by the end of this decade. But under new power given the CalSTRS board, the state rate can continue to increase up to 0.5 percent of pay each year.
Last week, an update on California State Teachers Retirement System funding from the nonpartisan Legislative Analyst’s Office said prior to the legislation the “responsibility for funding CalSTRS was not defined in law.”
CalSTRS has been unusual in at least two ways: powerless to raise employer rates, and receiving state funding. Most California public pension systems, including CalPERS, can raise employer rates and only get annual payments from employers and employees, not the state.
The Analyst’s report said the CalSTRS funding legislation gives the state a larger share of the debt or “unfunded liabilities” that increased to $97 billion in the fiscal year ending last June, up $21 billion from $76 billion the previous year.
Most of the debt increase was due to the CalSTRS decision to lower its investment earnings forecast (used to discount future pension obligations) from an annual average of 7.5 percent to 7 percent and to increase the expected average life span of retirees.
Actuaries said CalSTRS, only 64 percent funded last June, is still on track to reach 100 percent funding by 2046. Whether CalSTRS remains on the path to full funding, said the Analyst, will largely depend on whether the state pays enough under the new plan.
“If the Legislature wants to increase the likelihood that the funding plan succeeds in achieving this goal, it probably needs to ramp up state contributions faster,” said the Analyst’s report.
The Analyst suggested raising the 0.5 percent of pay cap on state contributions, using some of the Proposition 2 “rainy day” debt payment fund approved by voters in 2014, or combining the two.
Last month, the CalSTRS board was told that a Senate budget subcommittee asked for an analysis of the effect on CalSTRS funding from a “capital infusion,” as of next January, of $250 million, $500 million, and $1 billion.
Robin Madsen, CalSTRS chief finance officer, told the board her understanding is “this would be like a curtailment of principal in terms of the unfunded actuarial liability and not have an impact on current contribution rates from either the state or the employer community.”
A new risk report given to the CalSTRS board last November explained that when payments into the pension fund are not large enough to cover the interest on the unfunded liability, the unfunded liability will continue to grow.
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