What CalSTRS regards as its “most significant reform issue” was not in the pension reform bill signed by Gov. Brown last week. But a long-sought first step toward closing a huge gap in the teachers’ pension fund is in a companion measure.
Most of the 44,000 employees on the 23 campuses of the CSU system will continue to make a low pension contribution, 5 percent of pay. The state Finance department lost another round with labor-backed educators.
The largest group in CalPERS, non-teaching school employees, were untouched by cost-cutting reforms bargained by state workers and some local governments. Now schools can impose a contribution increase after five years if bargaining fails.
How the pension reform bill affects public education varies with the different operational laws covering the parts of the system. A notable example: The semi-independent University of California is excluded from the bill.
Pension reform was driven by the view that voters, who are being asked to approve tax increases in November, need to see that lawmakers are trying to control spending and that new revenue will not be eaten up by soaring pension costs.
Avoiding devastating cuts in school funding is one of the main arguments for Brown’s Proposition 30 and a competing tax initiative, Proposition 38, backed by the personal wealth of Molly Munger.
The pension reform bill, AB 340, gives new hires a lower pension that the California State Teachers Retirement System expects to save $22.7 billion over the next 30 years, about $12 billion if adjusted for inflation at 3 percent a year.
New hires will have to work two years longer to get the same pension earned by current CalSTRS members. The new formula, “2 at 62,” provides 2 percent of final pay for each year served at age 62, down from the current “2 at 60.”
Like current members, new hires are expected to contribute 8 percent of their pay to pensions. Employers and employees will equally share the pension “normal” cost, but only employers pay for the large “unfunded liability” from investment earning shortfalls.
An inflation-adjusted cap on salary used to set pensions for new hires, currently $132,000, will along with other changes help curb “spiking,” the improper boosting of CalSTRS pensions recently reported by state Controller John Chiang.
About 4,500 CalSTRS members have salaries of more than $132,000 a year. The cap will eventually eliminate annual pensions large enough to make the “$100,000 club,” now joined by 6,609 CalSTRS retirees according to a pension reform group.
A CalSTRS summary said the pension bill “validates” the CalSTRS plan design, an unusual “hybrid” created in 2000 as a stock market boom helped give many pensions funds a surplus.
Pensions are supplemented by a “cash balance” investment plan guaranteeing a minimum return based on 10-year U.S. bonds. For a decade ending last year, a quarter of the teacher pension contribution, 2 percent of pay, was diverted into the supplement.
The reform bill is said to roll back new-hire pensions to the “pre-SB 400” level, a major trendsetting pension increase sponsored in 1999 by CalPERS, which famously told legislators it would not cost taxpayers a dime.
But the bill does not change the CalSTRS supplement, even though it can add to CalSTRS debt when earnings fall below the guaranteed return.
Since the diversion of a quarter of the teacher pension contribution ended, the supplement gets employee pay (bonuses, summer school, etc.) not credited toward pensions. Pay for new hires above the $132,000 cap cannot go into the supplement.
Employers can offer a 401(k)-style individual investment plan for salary above the cap, making an employer contribution that does not exceed the employer pension contribution, currently 8.25 percent of pay.
In the recruitment of new high-salaried employees, employers in CalSTRS presumably would be more competitive if they offer a 401(k)-style plan in addition to the capped pension.
Private firms reportedly are interested in offering employers a 401(k)-style plan. At a CalSTRS board meeting this month, staff was directed to prepare a report on whether CalSTRS should offer a 401(k)-style plan for pay above the new cap.
A CalSTRS summary of the pension reform bill gives equal billing to a legislative resolution, SCR 105, that asks CalSTRS to consult with “stakeholders” and submit three options for closing a 30-year funding gap, currently estimated to be $64.5 billion.
Unlike most California public pension systems, CalSTRS lacks the power to set annual contribution rates that must be paid by employers, needing legislation instead. CalSTRS has been seeking a rate increase for a half dozen years.
Actuaries estimated in April that the total employer-employee contribution to CalSTRS, about 19 percent of pay, would have to increase by an additional 12.9 percent of pay (about $3.25 billion a year) to fully fund pensions over the next three decades.
A half dozen funding scenarios sketched by CalSTRS for legislators earlier this year would begin phasing in a rate increase in 2016. Only one would get CalSTRS to full funding, but all were projected to keep CalSTRS from running out of money.
CalSTRS, founded in 1913, differs from most public pension funds in several ways. Members do not receive Social Security. Contributions come from school districts and other employers, 8.2 percent of pay, and from the state, about 5 percent of pay.
Can an agreement on funding options be reached among employers, the state Finance department and teacher unions told by a CalSTRS legal opinion that an increase in current employee pension contributions must be offset by a new benefit of equal value?
In these deficit-ridden times, an agreement among the major CalSTRS “stakeholders” on a funding strategy could be a step forward, even if it’s a small increase that would not begin to be phased in until 2016 or later.
A funding strategy is not a problem for public education employees in the giant California Public Employees Retirement System, which can set an annual contribution rate that employers must pay.
New employees of the California State University system and new non-teaching employees of school districts will receive lower pensions and pay half the “normal” pension cost. But there is little change for current employees.
When most state workers agreed to increase their pension contributions from 5 to 8 percent of pay, the contribution of CSU employees with the same pension formula, “2 at 55,” remained at 5 percent.
Arguing that CSU was not paying a fair share, state Finance asked CalPERS last year for a $50 million increase in the CSU employer rate, which would have lowered the rate for other state employers by $50 million. Labor board members rejected the request.
Because of the way pension funds are pooled, CSU argues that its budget would be cut if current employee contributions are increased, another blow to a system that is turning away students because of deep budget cuts and staff reductions.
Legislators apparently agreed with CSU, putting nothing in the reform bill that would change the current employee contribution. Current non-teaching school employees with “2 at 55” pensions contribute 7 percent of pay.
These school employees say they were paying 7 percent for years while state workers with similar pensions paid 5 percent. But the reform bill allows employers to impose a limited employee contribution increase after five years if bargaining fails.
Ed's Note: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com.