Teachers' checks shrink a bit as California tackles pension shortfall

Teachers' checks shrink a bit as California tackles pension shortfall
Gov. Jerry Brown holds up poster boards with graphic information regarding revisions to his budget, specifically related to his projected increase in spending on health care and teacher pensions. His pension plan will start July 1. (Randy Pench / MCT)

When fifth-grade teacher Maggie Ellis receives her next paycheck at the end of the month, it will be a bit lighter. That's because she'll be contributing more money to the teacher pension fund, a small part of a sweeping, long-term plan to repair one of the state's most difficult financial problems.

"It hurts a little bit," said Ellis, who works in the Sacramento area and has more than a decade left until retirement. "But I look at it as a long-term investment."


The plan, which takes effect Tuesday, phases in higher contributions from employees, schools and the state over the next several years. If successful, the $74-billion shortfall in the teacher retirement system, the second largest public pension fund in the country, will be erased in three decades.

It's a sign that California's economic recovery has provided lawmakers with the cash necessary to tackle a problem that has dogged politicians around the country.

"If California can lead the way and show other states that this is the way to fund plans, this is a good step and a role model for other states to follow," said Hank Kim, executive director at the National Conference on Public Employee Retirement Systems.

Texas and New Mexico have already taken similar steps, requiring higher contributions into their teacher pension funds. Both states also reduced retirement benefits, something California did two years ago for newly hired educators.

Even with California's new plan in place, there are risks. The teacher pension fund's investments could be less lucrative than expected, making the shortfall more expensive to close. And schools are being forced to more than double their contributions into the fund, worrying district officials who are watching their own bottom lines.

In addition, the measure signed by the governor includes a self-destruct mechanism where the entire plan would grind to a halt in the unlikely scenario that a court decision forces the state to provide more education funding to help schools make their larger pension contributions.

"It is basically a safety mechanism to ensure the agreement that was reached for shared responsibility remains in place," said H.D. Palmer, a spokesman for Brown's Department of Finance.

The shortfall in the teacher pension fund developed over the last 15 years. During the dot-com bubble, lawmakers boosted retirement benefits without increasing payments into the pension fund.

"It was a predictable disaster," said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. "The assumption was, the bubble would last forever."

But the bubble burst, then the recession struck, torpedoing California's pension investments and turning a burgeoning shortfall into a gaping hole. The problem worsened during the state's budget crises, as lawmakers scrambled to protect vital government services and allowed pension bills to continue growing.

The shortfall became the largest chunk of $200 billion in festering long-term costs that the nonpartisan legislative analyst's office tallied earlier this year. Without a fix, the fund would eventually run out of money, forcing the state to pay for pension checks directly out of the budget.

In January, Brown said he was ready to start addressing the issue, but said a solution would have to wait until next year. Assembly Democrats, led by then-Speaker John A. Pérez of Los Angeles, pushed for quicker action, and when Brown unveiled an updated budget proposal in May, he included a plan for teacher pensions.

"It costs us hundreds of millions of dollars for every year we wait," the governor told reporters in the Capitol. "We've been talking about it, and I believe it's time for action."

Dean Vogel, president of the California Teachers Assn., praised the governor for moving faster than expected.


"We had no idea it was going to happen so soon," he said. "We anticipated we would spend this year trying to figure out the details."

Under the final measure, contributions for teachers who were hired before Jan. 1, 2013, will increase from 8% to 10.25% over three years. Teachers hired after that date will see their contributions rise to 9.21% because their retirement benefits are less generous, the result of 2012 legislation intended to reduce pension costs.

The state's portion of the cost, currently 3.29% of statewide payroll, is slated to increase to 6.33% over three years.

Contributions from schools are increasing the most, from 8.25% of district payroll to 19.1% seven years from now.

Josephine Lucey, president of the California School Boards Assn., said the higher payments will gobble up money that would have reached the classroom.

"There's going to be less money for closing the achievement gap," she said. "Dollars that would be spent on students and educational programs are now going to be allocated to pensions."