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Teacher pensions deficit grows $22 million a day

6:16 PM, Nov 7, 2013   |    comments
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It's still just a speck on the horizon, but getting closer by the second: the point at which California's oldest pension fund -- and the only real retirement security for more than 800,000 educators -- will, without a major infusion of cash, be flat broke.

And yet, there's little sign of actual movement inside the halls of state government to take action.  Talk, yes, but not yet action.

In classrooms, even the savviest educators haven't heard the warning sirens about the California State Teachers Retirement System (CalSTRS).

"I emailed some other teachers and said, 'Did you know anything about this?'" says Libbie Coleman, who teaches ninth and tenth grade science at McClatchy High School in Sacramento.  "And frankly, most of them didn't."

Part of the problem may be that the politics of public employee pensions in California has become so toxic that it's been hard to separate the accusations from the actuarials.

But this isn't part of that political fight.  Rather, it's simple math.

 "The message now," says CalSTRS CEO Jack Ehnes, "is much stronger, much more pointed, and with far fewer options."

That message is this: California's 100 year old teachers' retirement fund is, even with recent good returns from Wall Street, at least $70 billion short of what it needs to meet just its existing pension promises.

Without higher state and school district contributions -- taxpayer dollars -- CalSTRS projects it will be insolvent by the time this year's new crop of teachers retires in 30 years.

Tough Decisions Ahead

"The state's decision makers are going to face some very difficult choices," says Ryan Miller, who analyzes CalSTRS for the nonpartisan Legislative Analyst's Office (LAO).

The projected shortfall -- known in pension circles as an 'unfunded liability' -- is not unique to CalSTRS; the larger pension fund for state workers, CalPERS, is also underfunded.   But a recent LAO report (PDF) says the teachers' pension dilemma "may be the state's most difficult fiscal challenge."

In part, that's because it's powerless to solve the problem on its own.  Unlike CalPERS, the teachers' system can't send an invoice to lawmakers to require a boost in the state's contribution.  Instead, its charter requires the Legislature and governor to approve any request for a boost in the state's contribution.

Lawmakers can say no.  And for several years running, they've done just that.

"The bar is much higher for us," says CEO Ehnes.

How It Got So Bad

The story of the teachers pension fund's ticking time bomb dates back more than a decade.

Although the pension system had been underfunded several times since its creation in 1913, the current problem began in 1998.  That's when the Internet dot-com boom boosted CalSTRS' investments so high as to give the system a $3 billion cushion -- more in estimated assets than projections said would be needed to pay out promised benefits.

(It's important to note that teachers, under rules laid out in their pension plan, are generally not eligible to receive Social Security in their retirement years -- unlike state workers who are eligible for a pension through CalPERS.  Also unlike CalPERS, teachers are not guaranteed health care coverage in their retirement.)

The euphoria of that stock market boom reverberated through state government, and the pension pot was sweetened.

"Within a few years," says analyst Miller, "the state increased benefits and decreased contributions."

Taken individually, the added benefits for teachers didn't have a huge price tag; and some were only temporary.  But combined with an action by lawmakers to lower the amount of the state's annual CalSTRS contribution, it meant that hundreds of millions of dollars of pension promises would rely on the CalSTRS fund's Wall Street investments.

"I do think, in retrospect, there are lessons learned," says Senate President pro Tem Darrell Steinberg, D-Sacramento, who served in the Assembly when some of those pension fund decisions were enacted.

The first warning signs came with the 2001 recession.  Shortly afterwards, CalSTRS officials began formally asking lawmakers to raise the state's annual contribution.  That didn't happen.  Once the global recession of 2008 and 2009 hit, what was once a relatively small problem became much more serious.

Now, CalSTRS says its pension shortfall is growing at some $22 million a day.  That's almost $255 every second.

"There is not the luxury of waiting another ten years to figure out this problem," says CEO Ehnes.

The Problem Could Be Even Worse

As bad as a $70 billion shortfall may be, it pales in comparison to a different assessment of the problem released just a few months ago.

That's when the independent Government Accounting Standards Board (GASB) unveiled a new system for measuring the health of public employee pension funds across the country, called the "net pension liability."

Under that new GASB standard, which assumes a more conservative rate of return on pension fund investments, CalSTRS unfunded problem grows from $70 billion to almost $167 billion.

Exactly how the new standard will be used in governing pension funds remains unclear.  It undoubtedly fuels the argument of pension critics that the benefits system needs a second look.  But in CalSTRS case, it's also unclear who ultimately must accept the legal responsibility.  Most pension funds are built on three pots of money: employee contributions, employer contributions, and investment returns.  For CalSTRS, there are four sources of money; the state is not the employer (that's school districts), but nonetheless has an obligation to contribute revenue.

CalSTRS Ideal Fix: $4.5 Billion More a Year

Exactly how the teachers' pension fund should be made whole is the question that's still unanswered.  While everyone seems to agree that the solution requires more money from all players -- teachers, school districts, and the state -- just how much more remains a source of debate.

The best scenario, according to a February report by CalSTRS, would be an additional $4.5 billion more from all sources... every year, for the foreseeable future.

For some context, that's equivalent to double the entire state general fund cost of the Cal State University system in 2013-14.

No one believes that will happen, and so most observers are pinning their hopes on extra cash in the hundreds of millions of dollars... which itself isn't chump change.

"It's a significant amount of money that would be required over a very long time period," says LAO pension researcher Ryan Miller.

While teachers have not had their retirement contributions increased since 1972, their portion of the eventual 'fix' is limited by what they can afford, and by concerns that too high of an increase would - by law - require an even larger pension promise in years to come.

Taxpayer cash is the real solution, and it's not easy to come by - especially with several years of deep cuts in a number of programs... including schools.

"It is hard, even if it's necessary," says Senate leader Steinberg.

A Lot of Talk, Not As Much Action

But while interviews with a number of pension observers find consensus that lawmakers are now starting to take notice of the problem, there's been little to show for it.  An Assembly committee hearing in March took a deep dive into the red ink of CalSTRS, but not a single bill was introduced in the Legislature in 2013 to resolve the problem.

Gov. Jerry Brown has also not offered a plan, or a formal position.

The most obvious political heavyweight, the California Teachers Association, says it's been advocating for a fix for several years.  But the CTA's pension efforts have, at least in public, been mostly about defending the existence of pensions.

"Retirement has become a wedge issue," says Jennifer Baker, CTA's lobbyist on pension issues.

But in waging the larger fight over pensions, CTA's own message seems to have downplayed the CalSTRS problem.

On its website, the CTA calls the idea that the teachers' pension fund is headed towards insolvency a "myth."

Is it?

While it's true that CalSTRS can keep paying retirement benefits for the next 30 years, it's undisputed by the fund and outside observers that it will be depleted of funds -- insolvent -- absent corrective action.

Who Pays?

Perhaps the hardest fight ahead in fixing the CalSTRS problem, even harder than finding the money, is who pays it.  In particular, it's unclear of how much interaction there could be between additional contributions made by school districts and by the state.  While not all school districts depend on state tax dollars, many do; would their share be -- in essence -- a doubling up of the state's commitment?

There's also a complicated policy question as to whether an increase in the state's contribution  should be counted towards its legal obligation for school funding, via the voter-approved Proposition 98.

In the end, the solution may be a gradual fix... with a commitment to measure the problem several more times over the coming three decades. "It could be a 'check-in' strategy," says CTA lobbyist Baker, where the law would automatically recalibrate the taxpayer dollars being sent to the CalPERS system based on the success of its investments and other markers.

That's a slower -- and likely more expensive -- option than just adding enough cash now to bring the books back in balance over the next 30 years.  But either option, say some, is better than doing nothing.

"Their job is supposed to be to solve these big problems," says McClatchy science teacher Libbie Coleman.  "That's what we elect them to do."

NOTE: This story was modified from its original content due to a typo, which underestimated the comparison between the $4.5 billion in annual need to fix the pension shortfall and the state's general fund spending on CSU.

News10 intern Samantha Gallegos contributed to this report.

John Myers is News10's political editor.  Check out his Twitter feed on California politics, his Facebook page, and the weekly News10 Capitol Connection politics podcast.

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