California teachers'
pension system headed toward insolvency
Posted: 02/21/2011
07:00:22 PM PST - The Mercury News
As California school districts anticipate
possibly the worst budget crisis in a generation, many will
try to lighten their burden by enticing older teachers into
retirement. But as more and more teachers retire -- with a
pension averaging 55 percent to 60 percent of salary -- they
will be straining a system that already can't meet its
obligations.
The California State Teachers' Retirement System is sliding
down a steep slope toward insolvency. The threat isn't to
teachers who have retired or plan to, but to the people of
California. Taxpayers, who already pick up 23 percent of
CalSTRS expenses, will be increasingly burdened as the giant
pension system fails to meet its obligations.
"We're on a path of destruction," said Marcia Fritz,
president of pension-reform group California Foundation for
Fiscal Responsibility.
And merely rejiggering formulas for new employees won't
rescue the system, she said. Simply put: "We
overpromised."
Among those promises, "Californians have typically given
their public employees richer retirement benefits" than have
other states, according to the nonpartisan Legislative
Analyst's Office.
Despite the looming disaster, CalSTRS is like an ocean
liner that's slow and complicated to change course. Gov. Jerry
Brown hasn't mentioned overhauling the system that benefits
one of his major supporters, the teachers union. Nor has the
Legislature taken up the issue.
CalSTRS, a $146.4 billion system, provides the retirement of public-school teachers and administrators.
Like its sibling pension system, CalPERS, which provides for
non-teaching state employees, CalSTRS' collections don't meet
its obligations to current and future retirees.
Although CalPERS has imposed higher contributions,
reformers say CalSTRS' formulas can be revised only by
legislation, a statewide initiative or possibly a
constitutional amendment and litigation -- not to mention
immense political will. Courts have ruled that retirees are
guaranteed the pensions promised them when hired.
No Social Security
Twin reports issued earlier this month
amplify the alarm. The Legislative Analyst's Office suggested
that the state gradually decrease its share and move toward
either cost-sharing with teachers or creating a hybrid
retirement system, with reduced pensions and a 403(b) savings
program -- the public- and nonprofit sector's equivalent to
401(k) retirement accounts.
And actuaries for the state Teachers Retirement Board
calculated that contributions would have to increase 77
percent to make the system sound.
But the report added that given the state's financial
distress, those contributions likely can't be increased for more
than a year. By law, each teacher contributes 8 percent of
salary to CalSTRS, the school district adds 8.25 percent, and
the state puts in about 4 percent.
Compare that to the private sector, where employers and
workers each contribute 6.2 percent to Social Security, and
may contribute and match more through 401(k) savings. Teachers
do not participate in the Social Security system.
Any move to pare benefits or collect more from employees
would affect only future teachers, not current employees.
That's why Fritz thinks a constitutional amendment to reduce
benefits for current teachers is necessary.
The fund's shortage is exacerbated by cutbacks to teaching
ranks, so fewer teachers are paying into the system. But the
core of the problem has roots in the 1990s, when California
took a contribution "holiday," paring back payments to the two
big state retirement systems and bumping up benefits, even
retroactively fattening retirees' checks. When the economy
tanked, CalSTRS' portfolio dropped 25 percent. Combined with
enhanced benefits, the system now has a ballooning gap between
its promises and income, or $40.5 billion in unfunded
liabilities.
Jason Sisney, the LAO's director of state finance, in a
video posted on the LAO's website likens the state to
consumers paying only the minimum balance on their credit
cards -- the overall balance keeps growing.
Among his office's recommendations are revising
contributions, ending retroactive benefit increases and paying
costs as they accrue, rather than deferring them to future
generations.
Any proposal to scale back current benefits is sure to
raise opposition from teachers and their union. Teachers
believe they've earned their CalSTRS benefits. "It's money
I've been paying in for 30 years. It was promised to us when
we signed on," Pioneer High teacher Anne Kline said.
Although eligible for years to retire, Kline calculated her
benefits and decided she still can't afford it, because of the
costs of health insurance.
Although teachers widely agree with Kline that they're
merely reaping their own contributions toward retirement,
systemwide teachers collectively are drawing out more than not
only what they've personally put in, but what their school
districts have contributed as well. Many can even take home
more in pensions than they netted while teaching.
'Buying' bigger pension
CalSTRS' formula, which is based largely on
employee salary, age and longevity, tends to reward retirement
at age 61½. For example, a teacher who has worked for 35
years, making $90,000 in her final year, could retire at age
62 and reap a $75,600 annual pension -- 84 percent of salary.
Teachers can add to their pensions by "buying" additional
years.
A pension reform group has drafted a proposal that would
cap the state share of future benefits at about 11 percent of
salary.
In contrast to the proposed overhaul, teachers' pensions on
average currently amount to 55 percent to 60 percent of their
salaries, CalSTRS counselor Dave Gillies said.
The pension reformers hope to find a sponsor for their
legislation soon, said Dan Pellissier of California Pension
Reform. And if the Legislature doesn't pass a bill by mid-May,
the group will circulate a petition to put it on the state
ballot, he said.
"We have seen polls that 80 percent of likely voters know
something needs to be done," said Fritz, an accountant and
former CalPERS consultant. "They're listening."
Contact Sharon Noguchi at 408-271-3775.
To HELP make the teachers retirement fund
solvent
Among the nonpartisan Legislative
Analyst's Office suggestions to reduce the future burden on
taxpayers:
Increase employees' share of costs
Create a
hybrid retirement system, with a pension plus a 403(b) savings
plan, the public-sector equivalent of a 401(k) plan
Stop
paying retroactive benefits
Ensure a pay-as-you-go
system