CalSTRS, the pension system for teachers and school administrators, had a good year in 2010, with a 12.7 percent return on investments. But that’s far from enough to make up for the huge hit the system took during the recession two years ago. As a result, the state, school districts, and teachers themselves can expect to pay billions of dollars more annually into the system to keep it solvent for the next three decades.
Those added costs, coming at a time of severe budget cuts for education, will add to the arguments of those calling for pension system reform, like a switch to a 401(k) instead of a defined benefit program for new members. Gov. Brown has yet to reveal his ideas for pension changes, but some Republicans are saying that reform will be a precondition for them to vote to place any increased taxes on the June ballot.
The increases in pension contributions will be huge – as big as 80 percent more over the next several years – though the Legislature will have to decide who will bear the brunt: workers or taxpayers.
Currently, CalSTRS receives contributions based on 18.25 percent of a teacher’s or administrator’s pay. Teachers pay 8 percent, the employer (district) pays 8.25 percent, and the state’s general fund kicks in 2 percent. The state also pays an additional 2.5 percent for a supplemental benefit that protects retirees from the effects of inflation.
CalSTRS contributions from the state totaled $1.257 billion out of an $84.6 billion state budget this year.
As a rule of thumb, salaries of certificated employees make up roughly 50 percent of a school district’s general fund budget. So pension contributions currently make up about 4 percent of a district’s budget. In San Jose Unified, for example, CalSTRS contributions cost $10.8 million out of the $285 million budget – 3.8 percent. (Contributions for pensions of classified employees, including secretaries, custodians, and aides, are in the larger CalPERS system for state workers, and constitute roughly another 1 percent of district expenses.)
The CalSTRS board is **recommending that the contribution be raised 15 percentage points, to 33 percent of an employee’s pay – a steep hike. Unlike CalPERS, CalSTRS cannot impose the additional contributions. Only the Legislature can decide how much and who pays.
Most of the increase will make up for a shortfall in investments. In 2008, the value of CalSTRS’ portfolio fell more than 25 percent from its historic high in October 2007 of $180 billion. By the end of calendar year 2010, it was back to $146 billion. That still leaves it more than $30 billion short of meeting obligations over 30 years.
But an additional factor, accounting for 1 percentage point, is the decision of the CalSTRS board to lower the predicted rate of return on investments from 8 to 7.75 percent (CalPERS also has done so). Public employee pension programs nationwide have been under pressure to lower overly optimistic rates of return. The CalSTRS staff and actuarial consultants had urged lowering projections by a half-percentage point, to 7.5 percent. Even at 7.5 percent, consultants predicted only a 50 percent chance that the system would meet its investment target. But this would have meant even larger annual contributions from employees and taxpayers, so the board rejected the recommendation.
CalPERS and CalSTRS expect that investments will cover two-thirds of their income, with a third from contributions. Some economists say that the rate of return should be more conservative – 6 percent, as in many private pension plans, or lower.
CalSTRS provides retirement and disability benefits for 852,000 educators at 1,600 school districts, community colleges, and county offices of education. Salaries of members this year are projected to be $29.5 billion. So raising contributions 15 percentage points would require an additional $4.42 billion, split three ways. If the Legislature kept the same proportions, teachers would pay $1.9 billion, districts $2 billion, and the state about an additional $442 million. But, with the state facing a $25 billion deficit this year and many teachers facing salary cuts through deferrals, the Legislature is not expected to make any significant change this year.
But the longer it takes to phase in the increase, the bigger the adjustments must be in future years.
Enough numbers for one post: I’ll take a look at teachers’ pensions and one proposed reform later this week. The journalist who follows the pension system closely – and who helped me with this piece – is Ed Mendel. He writes an informative blog, Calpensions.com.
** Clarification: The CalSTRS board has identified the cost of full funding but has not made a recommendation on what action to take.