New teachers would be among public employees whose state-financed retirement benefits would shrink under a proposal that the non-partisan Legislative Analyst’s Office outlined last week to limit taxpayers’ future liability. Stating that the current pension system is “too expensive and inflexible,” Jason Sisney, the LAO’s director of state finance, said that the goal should be to “preserve a robust retirement system that more closely resembles that of other Californians.”
Sisney outlined two retirement models for future public employees. One would be a hybrid system, combining a smaller guaranteed pension with an employee-employer matching 401(k)-type investment plan like those found in private industry. The other would be to continue the current defined benefit pension, but with employees bearing a bigger share of risks and costs. Those aren’t spelled out in Sisney’s 14-minute online presentation and accompanying slide presentation. (Update: CalSTRS CEO Jack Ehlers took issue with some assertions in the LAO presentation in a Feb. 23 letter to the LAO. Read it here.)
Retroactive additional benefits – one cause for current problems facing public pension systems – would be banned. And new employees would be told from day one that pension benefits could change in the future; they would no longer be an iron-clad guarantee that puts taxpayers on the hook when investments turn sour. Public employees pension costs have risen over the past decade from 2 percent of the state budget to 7 percent – and are facing sharp increases.
The LAO also recommends that the pension system for teachers and administrators – CalSTRS – be weaned from state government subsidies. The state general fund currently funds 23 percent of annual payments (non-investment income) to CalSTRS – about $1.3 billion this year – with teachers and school districts roughly splitting the rest. (One way or the other – through the general fund or Proposition 98 funding to districts, it’s still house money.)
There have been rumblings, particularly among Republicans, that public pensions must be reformed this year as a price for their support of putting Gov. Jerry Brown’s $12 billion in tax extensions and revenues on the ballot in June. With its framework, the LAO’s proposal has now launched what’s expected to be an intense debate.
The LAO presentation coincided with a report last week to the CalSTRS’ Teachers’ Retirement Board confirming alarming liabilities for taxpayers and rising burdens for school districts. Because CalSTRS investments took a 25 percent hit in the stock market downturn two years ago, CalSTRS staff is saying that an additional $3.8 billion in annual contributions is needed to make the system sound over the next 30 years. Contributions as a portion of total teachers’ and administrators’ payroll would have to rise 14 percentage points above the current level of 20.75 percent, to nearly 35 percent (currently split 8 percent contributed by the employee, 8.25 percent by the district, and 4.5 percent by the state).
The CalSTRS report acknowledges that the additional contributions will have to be phased in over a number of years, because the state is broke. But it also assumes that school districts, not teachers or administrators, would pick up the total additional cost. The impact on districts, already reeling from budget cuts, could be substantial. As a rule of thumb, teachers’ and administrators’ pension costs now comprise about 4 percent of a school district’s budget. That could easily rise to 10 percent in coming years, based on current assumptions.
That’s because the state’s liability to meet CalSTRS’ pension obligations is distinct among the state’s public pension systems. Before he left, Gov. Schwarzenegger renegotiated with several state employees’ unions to raise their share of pension contributions to CalPERS, the state’s largest pension system. The state and its unions can do that. But only the Legislature can set contribution levels for CalSTRS, and, according to Sisney and others, courts have broadly interpreted employees’ vested pension rights. From the day they start, their pension contributions and promised benefits are locked in; employers and taxpayers bear the full risk. They can be modified only in exchange for something of equal value, the courts have said. Only the benefit levels of future employees can be altered.
It’s not a foregone conclusion that the Legislature couldn’t also change the future benefit levels of current employees. There’s a legal argument that this can be done in an economic emergency. But it would face “significant legal hurdles,” Sisney said.
That’s probably worth testing, because otherwise, new teachers will bear all of the burden for past investment problems and unwise pension bonuses given during the market’s go-go years. The more the Legislature can tinker with current benefits – raising the retirement age, restricting unused sick days in pension calculations or putting a top limit on pensions for administrators among options – the less new teachers will have to take it in the shorts.
Changing pension benefits of future teachers wouldn’t help solve the state’s immediate pension problems. But over time, the savings would help to offset districts’ higher obligations as they’re phased in over the next decade. But the longer the state waits to address the issue, the more it will to have to eventually kick in.