Category: Pensions

Battle over pension spiking bill

The California Teachers Association and the state teachers retirement system are pushing for significant changes to SB 27, Sen. Joe Simitian’s bill that would prevent “spiking,” the practice of larding on compensation near retirement to boost a public employee’s pension – a practice that is drawing increasing scrutiny. It also would limit the types of compensation that would be used in calculating a standard pension.

The late-in-coming amendments pose a new challenge to the bill, which raced through the Senate without opposition, and could spur a larger discussion on pension changes. A similar bill by Simitian passed the Legislature last year but was vetoed by Gov. Arnold Schwarzenegger because it was tied to another pension bill that troubled him.

Simitian’s bill would apply to all current and future public workers. Any employee who received a pay increase of 25 percent or larger over the final five years of employment would automatically have the raise audited by the public pension system: CalSTRS in the case of educators. (Educators whose pay rose more than 25 percent in taking a job in another district would be excluded from an audit.)

Another provision, to thwart double-dipping – receiving a public paycheck and a pension simultaneously – would ban an employee from returning to work as a contract or full-time worker for 180 days after retirement.

The board of CalSTRS and the CTA want to limit SB 27 to future employees arguing that current workers have inviolable vested rights to benefits that have already been negotiated. Doing so, however, would substantially reduce immediate savings to the system at a time that CalSTRS is looking to the Legislature for a sizable boost in taxpayer subsidies because it has yet to recover from the stock market meltdown in 2008.

Proposed cap on pension benefits

CalSTRS and the teachers union are calling for a simpler – and more encompassing – way to deal with spiking: capping the amount of compensation that can be counted toward a defined benefit pension at $147,000 instead of requiring reviews. CalSTRS reports that, statewide, 1,600 administrators not covered by bargaining agreements earn more than $147,000; their compensation above that would be credited toward their individual defined benefit supplement accounts, which work like a 401(k) with a lower guaranteed rate of return, thus saving taxpayers money.

Doing it this way would exclude teachers, who rarely make as much as $147,000 and don’t get the kinds of perks that have led to spiking. SB 27 is aimed, in part, at school boards that have boosted the salaries of superintendents and high-ranking administrators through short-term promotions. A report in the Sacramento Bee found that nearly half of the 225 Sacramento retired educators with pensions above $100,000 got at least a 10 percent pay raise in one of their last three years. Depending on how long they’ve worked, employees’ pensions are based on either their highest-paying year or the average pay in their final three years.

Spiking has been an issue in municipal and county governments as well. In Contra Costa County, for example, two fire chiefs, ages 50 and 51, retired with pensions greater than their highest salaries.

Restrictions on qualifying compensation

Under Simitian’s bill, the value of non-salary income, like car allowances, life insurance, and unused vacation pay, would not count in determining a standard pension. This money would, however, be credited toward the supplemental program. To no surprise, the administrators’ lobby, the Association of California School Administrators, opposes the bill.

The only significant change for teachers is that unused sick pay would no longer boost years of sevice in pension calculations. It too would now be credited in the supplemental program. (Some readers will no doubt argue that, as in most private companies, unused sick pay shouldn’t count toward retirement benefits at all.)

The Pacific Research Institute estimated four years ago that pension spiking cost California taxpayers $100 million each year. CalSTRS estimates that SB 27 would yield savings of $10 million annually, but it also said that it would have to hire a dozen people to do the audits and spend $5 million to update a system to flag potential violations.

CalSTRS has been criticized recently for its failure to crack down on alleged spiking. This issue became public after CalSTRS executives fired Scott Thompson, a whistle blower whom they claimed lowered a pension without authorization and refused to restore it. Pension administrators recently told the CalSTRS board they planned to establish a new unit to review questionable compensation cases,  regardless of SB 27’s fate.

Simitian, a Palo Alto Democrat, told me that the existing system that permits padding “isn’t fair to taxpayers and to most employees who aren’t in a position to have their incomes spiked and rely on pension systems to be solvent. The status quo undermines public support for appropriate pensions that retirees rely on.”

A newly retired teacher last year earned an average pension of $49,000. Educators receiving six-figure pensions remain a small proportion of the 852,000 teachers and administrators served by CalSTRS, but the focus of public ire – or envy.

CalSTRS this month reported an impressive 23 percent return on investments for the year ending June 30, the best  in a quarter century. And it followed a 2010 return of 12.7 percent. But even so, CalSTRS, with $154 billion in assets, remains $25 billion below its peak in October 2007 – and only 70 percent funded. To become fully funded could require more than $2 billion in taxpayer subsidies, between additional school districts’ benefits contributions and the state general fund’s portion of retirement contributions.

Anti-spiking legislation, Simitian notes, “is the low-hanging fruit of pension reform. It should be easy.” He said he has not taken a position on the CalSTRS amendments.

Update: Education Week reports that other Legislatures are also curbing “double-dipping.”

Retirement oversight in budget bill

Collective bargaining usually involves some give and take. Even in times of extreme financial pain, labor can find something to grasp, like… well, saving their jobs. Finding the good may be more challenging for teachers if California’s projected revenues aren’t met and the state imposes midyear budget cuts on schools.

Currently, districts can’t fall below 175 days of school in an academic year or they lose some state funding.

What AB 114, the state budget bill, means for the teacher retirement system. (click on image to enlarge)
What AB 114, the state budget bill, means for the teacher retirement system. (click on image to enlarge)

When lawmakers passed California’s new budget bill, AB 114, they created a one-time suspension of that limit of up to seven days if projected revenues fall $2 billion short and the state needs to make mid-year cuts to education.  Of course, the teachers’ union must agree to this reduction.

What the legislature failed to do in AB 114 is approve a concurrent fix to another section of the Education Code, which requires teachers to work 175 days in order to receive a full year service credit with CalSTRS, the California State Teachers’ Retirement System.

Whoops.

That’s a significant omission for teachers, explained Suzanne Speck with School Services of California, Inc. “I will tell you that teachers are just not going to agree to work a full year and not a get a full year service credit.”

While seven days may not seem like too many, the way that CalSTRS works it could put a teachers’ retirement plans into turmoil.  According to CalSTRS, there are three primary groups of teachers that would affected at various stages of their careers.

  • A member approaching her five-year vesting date could be delayed in reaching it due to potential service credit cuts. If she becomes disabled before her vesting date, she would not receive disability coverage under CalSTRS.
  • A member approaching the 25-year mark in her career, at which time she would be eligible for the one-year final compensation for the defined benefit pension, would be delayed in reaching that milestone.
  • A member approaching the 30-year mark in her career could be delayed in reaching it for the purposes of achieving the career factor, a 0.2 percent increase in the age factor calculation if a member retires with 30 years or more years of earned service credit up to the maximum age factor of 2.4 percent. [Example: if you are 61 years 3 months old at retirement without the career factor, your age factor is 2.167 percent. If you have the career factor (30-years or more) your age factor is 2.367 percent.]

That scenario puts local bargaining units in the position of pushing their districts closer to the financial abyss or accepting a reduction in school days. In the latter case, they’d be giving up both salary and service credits in CalSTRS.

“This is what happens when you pass bills in the middle of the night and don’t make phone calls and ask people, ‘If we do this, what are the consequences?'” said Speck,  referring to the legislature’s eleventh-hour vote on the state budget bill. “That’s just an assumption on my part; I’m trying to give the legislature credit that it was an unintended consequence.”

Teachers already gave at the office

While Speck wants to give lawmakers the benefit of the doubt, William Habermehl, Superintendent of the Orange County Office of Education, is too angry to be munificent.

“This the stupidest piece of legislation I’ve seen come out of Sacramento,” said Habermehl, suggesting that it was an easy way for lawmakers to put a balanced budget bill on the table so they could get paid.

He said with all that teachers have already agreed to, including furlough days, reduced medical benefits, and increased premiums, no cost-of-living increases, and larger class sizes, expecting them to approve shortening the school year is probably non-negotiable. So if the state does withhold up to seven days of school funding, districts will have to borrow, dip into reserves, or go bankrupt.

“When they called it a trigger they did the right thing,” said Habermehl, “because we have a gun to our head with this legislation.”

CTA supports AB 114 despite CalSTRS

In an odd twist, however, the California Teachers Association (CTA) is giving its full support to AB 114 because it prohibits teacher layoffs in August, which the union says is of more immediate concern.

In addition, says CTA spokesman Mike Myslinsksi, the situation is too hypothetical at this point. “We’re aware of this concern about service credits,” he said, “but this would only come into play if projected revenues do not materialize. That’s speculation; we believe the revenues will be sufficient.”

Try telling that to Superintendent Gary Thomas of the San Bernardino County Office of Education. He’s cautiously optimistic, as they say, but also realistic. “The economy right now has not been bouncing back. I don’t know whether or not we can count on these projections,” he said.

Thomas said the legislature can help by passing legislation to change the CalSTRS service credit law so it conforms to any changes in the instructional days in the school year.

Using the CalPERS law as an example for creating similar legislation for teachers. (Click on image to enlarge)
Using the CalPERS law as an example for creating similar legislation for teachers. (Click on image to enlarge)

CalSTRS officials say they’ve already written some language for a bill to address the discrepancy.  The legislature approved similar legislation last year for CalPERS, the state employee pension system. AB 1651 gives teachers aides, janitors, cafeteria workers and other classified school employees their full service credits if the school year is cut.

In order to provide similar protection for teachers, lawmakers will have to act on a CalSTRS bill as urgency legislation or it will be too late to help teachers before the next school year is over.

Brown’s CalSTRS problem

Gov. Jerry Brown last week made a down payment on pension reform in the form of seven specific recommendations to slow the growth in pensions for public employees, including teachers. It’s the obvious steps to curb abuse, like banning retroactive pension increases, the purchase of additional pension credits, and the spiking of income in the final year to boost pension payouts.

But the release of CalSTRS’ annual report and the Legislative Analyst Office’s readable summary of it** last week shows why Brown is taking his time on dealing with the bigger issue: CalSTRS’ large unfunded liability. The remedy for straightening out the retirement system will be painful for taxpayers and for future teachers and administrators.

The reason, the LAO said, is unequivocal: “CalSTRS’ current fiscal model is unsustainable. … There is no realistic way for CalSTRS to ‘grow its way’ out of this problem through favorable investment returns over the long term, as the system’s own officials have acknowledged clearly.”

Though CalSTRS rebounded nicely with a 12 percent return in the past year, the loss of a quarter of its portfolio value in 2008 created too big a hole to count on the growth of  investments to keep up with obligations to current teachers and administrators and those already retired. As a result, payments into the system must be raised.

The current yearly contribution to CalSTRS is $5.2 billion: $2.3 billion from educators who pay 8 percent of their pay into the retirement fund, plus a match of $2.3 billion from school districts and county offices, plus  $688 million from the state. (The state also contributes  about $700 million more into a cost-of-living account.) CalSTRS actuaries are saying it will take an additional $3.9 billion annually for a fully funded system over the next 30 years – an increase in the contribution level of 75 percent.

Given the state’s precarious financial condition, no one is predicting the state will raise contributions this year. They could be phased in gradually, starting in a few years. But the longer the delay and the slower the phase-in, the higher the contribution level ultimately will have to be. Pay now or pay more later.

Unlike other public pension systems in California, in which employees can negotiate contribution levels, only the Legislature can set contributions for CalSTRS. A long line of court decisions has held that lawmakers cannot raise the contribution level of current employees or cut their benefits.

Brown may still choose to challenge those rulings – and raise the retirement age or put a cap on the level of income on which retirement benefits are paid, as some are urging. But it’s a dicey strategy. So over the next decade, billions of dollars in retirement obligations may have first dibs on new revenue that could have gone toward restoring programs and teaching positions cut over the past three years.

The only other way to gradually cut into the state’s liability is to whack the pension benefits of new teachers. That’s unfortunate, since the state needs to make teaching a more attractive profession, but it’s also all but certain, in one form or another.

Beside raising new teachers’ contributions and lowering the state’s and districts’ share, one option is a hybrid plan that combines a smaller defined benefit with a 401(k)-type matching program – technically, 403(b) – in which the risk of investment decisions is shifted to teachers.

An alternative pushed by the bipartisan Little Hoover Commission is to require future teachers and principals to pay into Social Security (currently requiring workers and employers each to contribute 6.2 percent of pay). Teachers, along with some fire and safety workers, opted long ago not to enroll in Social Security – and, for the most part, for good reason: A teacher with 35 years of experience retiring at 65 will receive more than twice what a worker making the same pay will get from Social Security.

But most young teachers don’t think about pensions; they worry about pay. Especially if cutting retirement benefits of new teachers is coupled with a long-term commitment to raise the pay of new teachers, converting to Social Security does have some advantages:

  • Social Security is portable, while CalSTRS is not. Teachers who don’t work five years in the profession – a huge percentage – aren’t vested and lose the districts’ and state’s contribution to their retirement. With Social Security, they’d get full credit for their work.
  • An alternative to CalSTRS would reduce pressure on middle-aged teachers, especially the low performers, to stay in a profession they may have tired of. As Merrill Vargo, executive director of Pivot Learning Partners, noted in a recent column, “Most people aren’t gluttons for that much punishment … so what is the incentive that keeps teachers hanging on when an employee in the private sector would be polishing her resume and scouring Craigslist for the next opportunity? Once we ask the question, one part of the answer is pretty obvious: it’s the pension.”
  • Participating in Social Security would eliminate a penalty that discourages people who have paid into Social Security from making a mid-career switch into teaching. They currently lose about $4,300 per year in retirement benefits under something called the windfall elimination provision, which deducts part of what they’re entitled to under Social Security. Congress shows no inclination to fix the problem.

CalSTRS’ challenges are real, and the unfunded liability to taxpayers is large. Those who dismiss the call for pension reform as merely another attack on teachers and the middle class should read the LAO summary.

** The LAO report was written by Jason Sisney, the LAO director of state finance.

CalSTRS CEO: Avoid drastic change

A response from CalSTRS’ CEO rejecting key recommendations of the Little Hoover Commission serves as a cautionary note to Gov. Jerry Brown and five Republican senators who have been negotiating changes in public pensions as part of an agreement to vote to place tax extensions on the June ballot.

In a letter last week to Daniel Hancock, Little Hoover’s chairman, CalSTRS CEO Jack Ehnes dismissed as “impractical” the watchdog commission’s call for reducing the future benefits of current CalSTRS members and requiring that all public employees join and coordinate their benefits with Social Security.

Both of these ideas have been bandied about in various reform proposals. The five Republican senators are reported to advocate requiring new public employees to switch to a hybrid retirement plan similar to one imposed on federal employees a quarter-century ago. It would include a much smaller pension than what current workers receive, accompanied by a 401(k) match of up to 5 percent of their pay and Social Security benefits. Brown is reported to support much milder measures: capping the maximum amount of pensions and banning some of the pension-boosting tricks that have contributed to higher government costs.

Taking a more radical approach, a citizens group, California Foundation for Fiscal Responsibility, is proposing a constitutional amendment permitting the cutting of future pension benefits of current public workers – another of  Little Hoover’s recommendations.

Ehnes criticized making drastic changes to all pension systems in response to the problems of a few. The Little Hoover report’s “broad generalizations … do not hold up when applied to specific plans,” starting with the opening assertion that underfunding is due primarily to “overly generous benefit promises, wishful thinking and an unwillingness to plan prudently.” Contrary to being overly generous, Ehnes said, CalSTRS provides “a moderate benefit that replaces approximately 60 percent of pre-retirement income for educators.” (The exceptions, which Ehnes doesn’t mention, are the 2 percent of members – administrators and superintendents – who get pensions of more than $100,000. That’s who Brown is targeting.)

CalSTRS, which serves 852,000 current and retired teachers and school administrators, is rarely mentioned directly in the Little Hoover report. Its focus is on CalPERS, the nation’s largest pension plan, which serves most state employees, and independent county and city pension plans, some of which – Los Angeles, San Diego, and San Jose – may consume a third, half, or even more of municipal budgets in coming years. However, the report’s broad recommendations are intended to apply to all public employees, CalSTRS included. (Click here for a Los Angeles Times article today on a report on cronyism and insider trading at CalPERS.)

Although most state public employee unions and some municipal unions over the past year have agreed to higher employee contribution rates and limits on pay for the purpose of determining pensions, governments face legal hurdles to unilaterally reducing the future benefits of current public employees. And in the case of CalSTRS, courts have raised the bar even higher. That’s because, unlike contracts for other state employee unions, only the Legislature can set contribution rates for CalSTRS. A number of court decisions – cited at length by Ehnes – have ruled that current employees have vested rights in guaranteed pensions. They can make changes only in exchange for benefits of equal value, like pay raises. The only exception, Ehnes noted, would be a temporary freeze on accruing pension benefits because of an economic emergency.

The Little Hoover report acknowledges legal obstacles, but says that they may be worth challenging, because changing only the benefits of future employees will not create enough immediate savings. That’s why the California Foundation for Fiscal Responsibility wants to put an initiative to voters. Ehnes calls ignoring clear court rulings on this issue “naïve at best.”

Social Security

California is one of 14 states in which teachers and administrators have elected not to participate in Social Security – a decision that dates back 60 years. Teachers decided that CalSTRS offered a better return for their money. (There are nonetheless adverse effects for some teachers: Those who have contributed separately to Social Security, through summer jobs or jobs before becoming a teacher, face a stiff penalty when they retire. They can lose up to $381 per month in their Social Security entitlement when it’s combined with their CalSTRS pension. So far, Congress has declined to fix the inequity.)

Other public workers (including classified school employees like bus drivers, who are part of CalPERS) do contribute to Social Security. The Little Hoover report recommends having all public employees be part of the federal system and that the two systems be better integrated. Teachers currently pay 8 percent of their pay toward their pension, and districts pay 8.25 percent, with the state kicking in 4.5 percent. Under Social Security, workers and employers each pay 6¼ percent of pay.

Paying into Social Security and paring back the share to CalSTRS would reduce the liability for state and local governments, whose contribution levels to pension systems must rise when the pension systems’ investment income falls below projections. That’s precisely the problem now, because CalPERS and CalSTRS lost 25 percent of their market value in 2008.

However, there would be a tradeoff: Because CalSTRS offers a better retirement benefit than Social Security for every dollar contributed by workers, teachers would lose retirement income under the arrangement.

Forcing current teachers to join Social Security doesn’t pencil out, Ehnes wrote.  “We found that, if CalSTRS benefits were reduced to offset the benefit a member would earn from Social Security, the total cost of this coordinated benefit structure would be $1.8 billion more each year to the member and employer.”

The state and school districts do face substantially higher costs to keep CalSTRS solvent – potentially $3.8 billion more per year, phased in over the next decade. Ehnes is arguing that there are ways to deal with this problem without dragging CalSTRS into the mix of drastic changes to other systems.

At this point, it’s unclear whether Brown and the Republican five have made that distinction – or found any common ground at all.

Little Hoover: Cut current pensions

The Little Hoover Commission is urging that the Legislature substantially cut future benefits of current public employees, including teachers and other unionized school employees, as the centerpiece of pension reform – an option that it says is financially critical though tenuously legal.

It’s also recommending that state and local pension programs covering half of public workers not now paying into Social Security consider joining the federal systems as a way to reduce pension obligations – a move that CalSTRS, serving 852,000 teachers and school administrators, has rejected.

With the release Thursday of its report on public pension system reform, the bipartisan Commission is assured maximum impact. Pension reform could dominate debate in the Legislature in coming weeks, as some Republicans thrust the issue into the mix of possible tradeoffs for their votes to put tax extensions on the June ballot. They should like much of what they see with the Commission’s call for benefit reductions for current employees and a shift to a risk-managed 401(k)-style plan, especially for higher-income workers.

“Public agencies must have the flexibility and authority to freeze accrued pension benefits for current workers, and make changes to pension formulas going forward to protect state and local public employees and the public good,” the Commission concluded.

Most of the 106-page report focuses on CalPERS, the largest pension system, covering all of state workers and classified school district employees, and on separate pension programs serving cities and counties. Combined with its retiree health care commitments, CalPERS is among the nation’s most generous pension programs, the report says. CalSTRS offers retirement benefits only slightly above the national average among those states not tied into Social Security, the report says. Its maximum retirement payout for teachers who retire at age 63 is 2.4 percent benefit per year of service, compared with a national average of 2.3 percent – although California’s teachers’ salaries are also among nation’s highest.

That said, all of California’s public pension programs, including CalSTRS, are seriously underfunded, and will be gradually seeking large increases in taxpayer contributions over the next decade – an increase of nearly 80 percent in the case of CalSTRS, according to its projections. CalSTRS lost 25 percent of the value of its investments in the stock market two years ago and is now 78 percent funded, according to the latest CalSTRS report. (A Little Hoover graph puts it is only 58 percent funded.) CalPERS and municipal systems unwisely expanded benefits significantly, especially for fire and safety workers, preceding the plunge in investments.

Although CalSTRS is mentioned infrequently in the report, Little Hoover Commission Executive Director Stuart Drown said that the recommendations in the report also apply to it.

These include:

  • Freezing earned pension benefits and resetting pension formulas at a “more realistic level going forward for current employees” to allow governments to reduce their overall liabilities;
  • Capping the salary that can be used to determine pension allowances “at a level that is reasonable and fair” – most likely between $80,000 and $90,000. This would fully cover most teachers, though not principals and district administrators. Once they exceed the threshold, they and school districts could make could make additional retirement contributions into a  401(k)-type defined-contribution plan.
  • Setting pension eligibility ages to discourage early retirement of “productive and valuable employees.”
  • Tightly defining final compensation, computed on base pay only – excluding sick pay, which is currently allowed –  over a five-year average to prevent pension “spiking.” In CalSTRS, compensation is now determined based on the highest year of pay for teachers with more than 25 years of service and the highest three-year average for teachers with less than 25 years.
  • Prohibiting retroactive pension increases.
  • Requiring  employees and employers to annually adjust pension contributions based on an equal sharing of the normal costs of the plan.
  • Exploring options of coordinating pension benefits with Social Security.

Model based on federal system

The Commission said the model would be the three-tiered system that the federal government adopted a quarter-century ago: a defined-benefit formula up to 1.1 percent of final compensation for every year of service; a 401(k) plan with an employer match of up to 5 percent of salary (the first 1 percent is automatic); and Social Security benefits to augment the workers’ retirement income.

The Commission acknowledged that courts have held that “only under extreme” conditions can future obligations to current employees be changed ­– basically a fiscal emergency. This would be difficult to prove in any case, but especially for CalSTRS. It is unique among California public pension programs in that benefit levels are set exclusively by the Legislature and are not subject to negotiation between local teachers and districts. In its package of pension reforms for CalSTRS, the  non-partisan Legislative Analyst assumed the legal barrier would be insurmountable and recommended changes only for new employees.

The Commission concluded that taxpayer savings could not be achieved quickly unless benefits for current employees were thrown into the mix.

Drown said the Commission realized that CalSTRS is “a separate animal really bound by the will of the Legislature in terms of how much money it decides to give it.” However, like other public pension systems, it is underfunded and will need a massive infusion of taxpayer money to keep it solvent in coming decades.

Update: Ricardo Duran, spokesman for CalSTRS, issued this statement on the Little Hoover Commission report: “Any recommendation that weakens the financial security of our members, who are entirely reliant on CalSTRS for their retirement income, will not advance the discussion of constructive solutions. This includes recommendations that suggest breaking long-held legal decisions protecting vested pension rights.”

LAO: Alter new teachers’ pensions

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.

CalSTRS is not in crisis; do not begrudge the teacher’s pension that I earned

As a public school teacher, I am often gratified by the show of support that parents and others throughout California show for members of my profession. Everyone I talk with says they value education and the need to inspire and engage our youth to lead our nation’s future.

But I’m offended when I hear grumblings over teacher salaries and pensions. News reports of rich public pensions paid to local government officials lead many to reason that CalSTRS and its members are also to blame.

I take those criticisms personally. After all, given my education, training, and service, I’ve earned the pension I’ve spent a career in building.

Most CalSTRS members do not retire into a life of luxury. Ours is a modest pension, secured over nearly three decades of service. The median CalSTRS pension replaces about 60 percent of our working income. Unlike most workers, teachers in California do not earn any Social Security benefits for their classroom service. As such, the CalSTRS pension represents the only source of reliable monthly income a retired teacher receives. Moreover, most public school educators in the state retire without employer-sponsored health care after age 65.

Nor is it a taxpayer giveaway. Over the life of their careers, CalSTRS members contribute 8 percent of their monthly pay to help finance their retirement. Employers kick in another 8.25 percent of monthly pay (75 percent of which is offset by not having to pay Social Security taxes), the state contributes a little more than 2 percent, and the returns garnered by CalSTRS investments do the rest. These taxpayer contributions represented less than 28 percent of the resources used in the past 15 years to pay benefits.

In the past decade, the financial health of public pension funds, including CalSTRS, has been undermined by the dot-com bust and global recession. However, our situation is not as dire as many would have you think. As of June 2009, CalSTRS benefits were 78 percent funded and the system had sufficient assets and projected contributions to pay benefits until 2044.

Public pension funds like CalSTRS are not in crisis. Our long-term rate investment return of 8.2 percent for the past 20 years exceeds our assumptions. Our benefits are paid for and funded over decades.

Local and state governments, including California, must make hard decisions to ensure the solvency of their public pension systems. CalSTRS acknowledges that changes must be made to its system and is working with affected stakeholders to develop a responsible strategy to address the system’s projected long-term funding shortfall. While a fix is not immediately needed, the longer we wait to address funding issues, the costlier a solution will be.

We can manage our funding problems without eliminating the Defined Benefit pensions that California’s public educators have worked for and deserve.

Dana Dillon is an intermediate grade school teacher from Weed. She has served on the Teachers Retirement Board of CalSTRS since her election in 2003, including stints as chair and vice-chair. Dillon has been active in the California Teachers Association for more than 26 years, serving as state council representative, and was recently elected to the board of directors.

No easy way to cut CalSTRS benefits

Call it pension envy, matched by frustration over higher pension contributions that taxpayers will eventually be asked to fork over. The clamor for cutting public employees’ pension benefits has grown louder. And that includes calls to change CalSTRS, the pension system serving 852,000 teachers and administrators in California.

The Legislature approved bonus benefits in the fat years of Wall Street when it looked like pension systems would forever be fully funded. (See excellent post by Ed Mendel of Calpensions.com.) Then the recession hit, and, amid mortgage and bank fraud on Wall Street, stocks tumbled. The downturn on Wall Street in 2008 has left CalSTRS and CalPERS, which serves state employees and some school district employees, needing higher taxpayer and employee contributions to make up for problem investments. (See earlier post.)

But those who see cutting pensions as a way out of the current state budget deficit and school districts’ cuts should think again. Analysts say the state cannot legally renege on payments to retirees or promises to current employees. Courts have been protective of guarantees made to public employees, and the Legislature, which sets the pension benefits and contribution rates for CalSTRS, will have to provide some other comparable benefit, like higher pay, if tries to cut CalSTRS’ obligations to workers.

“This means that pension contracts for existing and past employees are uncommonly difficult – or expensive – to change,” said Jason Sisney, director of State Finance Policy for the non-partisan Legislative Analyst’s Office.

That’s not to say legislators or groups pushing reform by initiative may not try. Some argue that local governments and the state have the right to change future benefits for current employees after crediting them for what they’ve already earned. Courts will likely be skeptical, Sisney said.

What the Legislature could do is change the system for new employees: switch from a defined benefit to a matched contribution 401(k) plan, raise the retirement age, or alter the formula, based on a person’s age and years of teaching, used to determine the retirement benefit. But that wouldn’t help the state’s immediate budget crisis, and, if done punitively, could be one more factor to discourage potential teachers from entering the profession.

CalSTRS versus Social Security

CalSTRS  is a much better deal than Social Security, where the full retirement age is later (66 or 67 for baby boomers, depending the year of birth) and the payout is less, calculated on a lifetime of yearly earnings, not the final – and usually the highest paying – year of work.

A teacher, principal, or superintendent who retires at the age of 60 after, say, 35 years of teaching and managing, will receive 70 percent of her final year’s salary. If she waits three more years, retiring after 38 years at age 63, she’ll get 91 percent of her last year’s salary. And if she works about 42 years and retires after 63, she can expect to receive her full final year’s pay every year for the rest of her life.

The average Social Security benefit – about $1,000 a month, or a little more than $12,000 a year – replaces about a third of workers’ average earnings. The median yearly benefit of newly retired CalSTRS members was $49,000 per year last year, or about $4,100 per month. At the high end were top district administrators with retirement incomes well exceeding $150,000.

But many workers in private industry get to combine Social Security with company-paid pensions or employer-matched 401(k) plans; CalSTRS members don’t have those. And teachers and administrators also pay substantially more into CalSTRS than workers in the private sector pay into Social Security: 8 percent of paychecks is deducted for CalSTRS members, versus 6.2 percent deducted for Social Security (actually only 4.2 percent this year, because of the one-year tax cut Congress passed in December). In addition, teachers who have worked other jobs in their careers also qualifying them for Social Security will not receive full benefits of both. They are penalized, with some portion of their Social Security benefits wiped out.

There may be ways that the Legislature can tinker around the edges without running afoul of the courts. Last year, legislators passed SB 1425, which would address “spiking,” the practice of boosting the last year of pay by throwing in non-salary items, like the value of a car allowance and unused vacation for upper-level managers. It would base the retirement benefit for all public employees on the average salary of the final three years of work, instead of the final year. That’s what done now for CalSTRS employees who retire with fewer than 25 years of service.

Gov. Schwarzenegger vetoed the bill because it was attached to another retirement reform he felt didn’t go far enough. Sen. Joe Simitian, a Palo Alto Democrat who sponsored SB 1425, has resubmitted it this year as SB 27. It’s likely to pass again.

(For a look at what other states are considering, check a blog in today’s EdWeek.

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Calculating CalSTRS benefits:

  • Under the defined benefit program, teachers contribute 8 percent of their salary; districts contribute 8 percent, and the state 2.01 percent.
  • Teachers are vested in the system after working five years;
  • Employees can retire as early as 50, at a lower rate: 1.1 percent of pay times number of years worked (25 years would yield 27.5 percent of pay;
  • At age 60, the rate becomes 2 percent of pay times years (25 years would yield 50 percent of pay); at 60 years, 9 months, 2.1 percent of pay; at 61 years, 6 months, 2.2 percent; at 62 years, 3 months, 2.3 percent. The maximum rate, 2.4 percent, kicks in at 63 years (25 years would yield 60 percent of pay).

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Teachers’ pension costs to escalate

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.