The biggest pension fund for California teachers, CalSTRS, is experiencing a massive funding gap and the California Governmental Accounting Standards Board (GASB) is proposing new accounting rules for calculating the fund’s liabilities that will make those numbers even worse. CalSTRS currently has a funding gap of 56 billion dollars–the difference between money it expects to have compared with what it expects to have to pay out in benefits. If the new GASB accounting rules take effect that funding gap will be almost tripled to over 150 billion dollars.
Either way CalSTRS needs more money from taxpayers, teachers or both to avoid running out of money that pays out these benefits over the next 30 years. This issue, and many like it have created a hot button political debate pitting conservatives and conservative groups, who say the current public pension systems in California are unsustainable, against unions, that, while making some concessions, have resisted major structural changes. Unlike CalPERS, who can simply demand more money from their participants (cites, counties, and special districts) CalSTRS needs a legislative solution. In other words, CalStRS needs lawmakers to find a way to balance the books.
In many ways, CalSTRS’ current problem comes down to an accounting question: How should pension funds measure their long-term liabilities? Right now, pension funds base their calculation on a forecast that their investments will earn 7.75% a year. However, because public pensions are guaranteed by the taxpayer, many argue including GASB, that the assumed investment return should be much lower comparable to safe investments like U.S. Treasury Bills. If the investment earning assumption decreases the pension fund simply needs more cash, a lot more. It is fair to assume the pension fund investments will earn at least 7.75% per year? Maybe, maybe not. Look at your own personal investments over the years for guidance. Certainly there have been years when average investment earnings have exceeded 7.75% (dot com boom, real estate boom, etc.) Of course there have been years when investment earnings have been far less than 7.75% or even in the negative. What the question really is: How much tolerance for risk does or should the California taxpayer have.
CalPERS CEO Issues Statement on Governor’s Pension Reform Proposal
SACRAMENTO, CA – Anne Stausboll, Chief Executive Officer of the California Public Employees’ Retirement System (CalPERS), today issued the following statement in response to Governor Edmund G. Brown, Jr.’s 12-point pension plan:
“CalPERS is closely involved in the pension policy dialogue that will affect our employers and members in the State, schools and local government. We encourage discussion between all parties to ensure that public employee retirement plans are sustainable, secure and cost-effective.
CalPERS pensions have provided retirement security for California’s hard-working State and local public employees for nearly 80 years. Retirees with a dependable income contribute to stimulating our economy. In 2010, CalPERS $12 billion in monthly pension checks resulted in more than $26 billion in economic activity throughout the State, including $14 billion in business revenue and more than 93,000 jobs.
In today’s fragile economy, many employers are facing budgetary challenges and have already made changes to their pension systems. We have observed more than 175 cities, counties and local governments negotiate changes to lower near-term and future costs by increasing employee contributions, modifying benefits for new hires, or both. Changes in the State plan that have already occurred will result in significant savings of about $13 billion over the next 30 years. Some of the Governor’s proposals may require constitutional changes, while others may require collective bargaining.
At CalPERS, we believe that defined benefit plans are an important cornerstone to adequate and secure retirement. Pension change dialogue should focus on the critical policy issue of how to provide adequate and secure retirement income for public workers in a cost-effective way, while honoring vested rights for existing employees. We are committed to serving as an honest broker of information and an expert in pension administration as all parties work together on pension solutions. As the pension policy discussion progresses through the Legislative process, CalPERS can assist with information on costs and potential savings over time to facilitate lawmakers in a fully informed discussion.
CalPERS provides retirement benefits to 1.6 million State, public school, and local public agency employees, retirees, and their families, and health benefits to more than 1.3 million members.
CalPERS Pension Quick Facts (as of June 30, 2011)
Average monthly service retirement allowance for all retirees: $2,331
Average monthly service retirement allowance Fiscal year 2010-11 retirees: $3,065
Average years of service for all retirees: 20.3
Average years of service for Fiscal Year 2010-11 retirees: 21.2
Average monthly service retirement for school miscellaneous members: $1,250
Average years of service for school retirees: 16.9
Average monthly service retirement for State members: $2,597
Average years of service for State retirees: 23.2
74 percent of all service retirees receive $3,000 a month or less.
86 percent of CalPERS retirees, survivors, and beneficiaries live in California.
$12 billion in pension payments in 2010 resulted in $26 billion of economic activity in California and 93,651 jobs.
$22 billion of CalPERS assets are invested in California.
CalSTRS Response: http://www.calstrs.com/Newsroom/whats_new/pension_reform_response.aspx CalSTRS appreciates that Governor Brown has taken a very important step in addressing the critical and complex issues facing the state’s public pension systems. We look forward to receiving more detail on the proposal and having the opportunity to review it in depth. The most important reform CalSTRS needs is a plan of action to address its long-term funding shortfall, which only the Legislature and Governor have the authority to implement. We will continue to work with the Governor, Legislature and our stakeholders to develop a plan that includes contribution increases that are gradual, predictable and fair to all parties. It’s important to note that some provisions of the Governor’s proposal, such as board governance and health care costs, do not apply to CalSTRS. Moreover, since CalSTRS contribution rates are set in statute by the Legislature, our contribution structure is extremely predictable and has not experienced pension “holidays.” CalSTRS members contribute 8 percent of salary to fund their pension, while their employers contribute 8.25 percent. These rates haven’t changed since 1972 and 1990, respectively. The State’s contribution of 2.541 percent was reduced from 4.607 in 1998. CalSTRS administers a hybrid pension system consisting of a mandatory traditional defined benefit pension and a cash balance plan which is similar to a 401(k). CalSTRS also offers its members a voluntary defined contribution supplemental savings program such as 457(b) and 403(b) plans. A look at the average CalSTRS member who retired in 2009-10 further illustrates the unique aspects of CalSTRS: • Retired at age 62 • Performed 27 years of service • Earned a pension that replaces nearly 60 percent of salary • Receives approximately $49,000 in earned benefits annually • Does not earn Social Security benefits for their service • Does not receive employer-paid health care benefits after age 65
Governor Brown’s 12 point pension reform plan that was released today outlines big changes to current and future public employees, including California state employees as well as employees of local governments, schools and special districts. The Governor’s plan, while probably outraging institutional Unions, probably does not go far enough for conservatives and conservative activist groups. The Governor’s pension reform plan cannot be implemented, in most cases, without bargaining with the employees and employee organizations it affects. One thing is for sure though, the employee associations better bring it’s “A” game to the bargaining table to discuss the Governor’s plan. With the right approach, many of the employer needs outlined in the pension reform plan can be accommodated while preserving the fundamental elements of California public employee pensions. The California public employee pension system has been the cornerstone of public service for over 2 generations. That system, which has supported probably the finest public sector workforce in the country, needs to be preserved the common sense way.
Main Points of Governor Brown’s Pension Reform Plan
1. Equal Sharing of Pension Costs: All Employees and Employers
2. “Hybrid” Risk-Sharing Pension Plan: New Employees
3. Increase Retirement Ages: New Employees
4. Require Three-Year Final Compensation to Stop Spiking: New Employees
5. Calculate Benefits Based on Regular, Recurring Pay to Stop Spiking: New Employees
6. Limit Post-Retirement Employment: All Employees
7. Felons Forfeit Pension Benefits: All Employees
8. Prohibit Retroactive Pension Increases: All Employees
9. Prohibit Pension Holidays: All Employees and Employers
10. Prohibit Purchases of Service Credit: All Employees
11. Increase Pension Board Independence and Expertise
12. Reduce Retiree Health Care Costs:
State Employees Savings will be in the neighborhood of $900 million per year to the State.