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.
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