At long last, Gov. Jerry Brown has stopped ignoring the burgeoning fiscal sinkhole that is CalSTRS, the state teacher retirement fund. The question now is whether he can sell his plan to lawmakers and the schools in their districts.
CalSTRS holds nearly $74 billion less in assets than it needs to meet its pension obligations to public school teachers and community college instructors, and the gap is growing by $22 million daily. If the state does nothing, the fund is projected to be cleaned out in 33 years. Policymakers have known for years that CalSTRS was locked into a funding formula that led to ruin, yet they averted their gaze because there was no easy or affordable path out.
As with any pension fund, CalSTRS can’t simply cut the benefits it pays to retirees, not even the ones it has promised to teachers who haven’t yet retired. Such changes are barred by federal law and the California Constitution. The most the state can do is reduce the benefits offered to future employees, which the Legislature and Brown did in 2012. That’s not much help for CalSTRS, though, given that there aren’t a lot of new teachers being hired.
Instead, Brown’s revised budget proposes to close the financing gap by bringing more money into CalSTRS from three sources: teachers, taxpayers and school districts. And the latter would be hit so hard by the plan, you can expect school boards and superintendents across the state to howl in protest.
Under the proposal, teachers and other beneficiaries would gradually raise their contributions from 8% of their pay to 10.25% over the coming three years. That’s in line with the increased contributions that many other public employees have been asked to make in recent years.
The state’s ante would increase a little more than 5.5% of payroll to 8.8%, also over three years. Administration officials said the increase was meant to undo a mistake lawmakers made in 1998, when flush times at CalSTRS led them to cut the state’s contribution by more than a third even as benefits were being increased.
The higher burdens on teachers and the state general fund pale in comparison, however, to what Brown’s plan asks of school districts, whose contributions would increase over the next seven years from 8.25% of payroll to 19.1%. In other words, school boards would have to put more than twice as much into pension benefits seven years from now as they do today.
And because teacher salaries constitute about 40% of the typical district’s budget, according to the American Assn. of School Boards, that means pension contributions will go from about 3.3% of the total school budget to 9.6%.
Where is that money going to come from? Higher state aid, potentially; according to Brown, public schools are expected to receive $10 billion in additional dollars over the coming three years. Of course, that assumes the state doesn’t fall back into recession and that economic growth offsets the end of the temporary increases in sales and income taxes enacted in 2012.
A less appealing possibility is that districts keep fewer teachers on the payroll and cram more kids into each classroom. The higher pension burden certainly gives them an incentive to reduce their teaching staff. There’s not many other places to cut, considering how little schools spend on books and other instructional material. The districts might also seek more revenue locally through parcel taxes.
Ordinarily, I’d say that it serves the districts right for promising bigger pensions than were prudent. Except the pensions aren’t all that big, and the districts had no say in them. CalSTRS reports that teacher pensions average $47,000 a year, which is about 60% of the beneficiary’s highest salary. The average retirement age is 62, and retirees typically quit with more than 25 years of experience. Retirees aren’t eligible for Social Security benefits because they didn’t pay into the system, and many have to pay for their own health insurance.
More to the point, those benefits were set by the state, not negotiated by the districts. Yet administration officials asserted that it would not be appropriate for the state to contribute more to CalSTRS that Brown proposed. That’s because the Legislature held the state responsible only for unfunded liabilities accrued before 1990. After that, lawmakers wanted the districts and teachers to be responsible for any funding gaps.
Regardless of what you think of that rationale, it’s won’t be sustainable if school districts make a compelling argument that they’d be left with too little money to provide a high-quality education (or at least the quality they provide today). If they’re already spending more than half of their budget on teacher salaries and benefits, they may find that case easy to make.