LAO: CalSTRS massively underfunded

March 26, 2013

By Katy Grimes

SACRAMENTO — The state’s Legislative Analyst released another stinging report last week showing the California State Teachers’ Retirement System suffers $73 billion of unfunded pension debt. But CalSTRS is using doubtful figures to minimize the billions in debt.

What is one billion?

As with most systems managed by the state of California, the pension rate of return practice is at odds with reality, as are the contribution rates by state employees.

CalSTRS is not accounting for expenses it should, instead pushing expenses off into the future. This is what creates the unfunded liability. But this cannot go on indefinitely.

“If the state’s current $1.4 billion annual contribution to CalSTRS were combined with the $4.5 billion additional contribution that may be necessary to achieve full funding in 30 years, the sum would exceed state spending on the University of California and California State University systems combined,” the LAO said. “The additional CalSTRS contribution alone would represent about one-half of state corrections spending.”

Same old story

The numbers published in the LAO study are not new, and definitely not the result of the 2008 recession, as some say. “A couple of years ago that annual contribution need was $3.5 billion,” said Jack Dean, the publisher of PensionTsunami.com. “The 2008 recession only exposed the debt — it made it more dramatic.”

Dean said California’s pension debt is like when a tsunami hits — the winds suck the ocean water way out, exposing everything on the ocean floor. Then a massive wave comes in, crashes, and destroys everything.  “The oncoming wave of public pension debt is even bigger than it seems,” the Pension Tsunami website says.

But as the California Taxpayers Association reported, “The retirement system’s defined-benefit program was fully funded in 1998. Then, under Governor Gray Davis, the state increased member benefits and reduced state contributions. By 2003, the unfunded liability was $23 billion.” That was well before the recession struck in 2007-08.

Money was promised that was just not in the fund. And the rate of return is suspect.

Pension math is ‘New Math’

“Discount rates, or investment rates of return, have a substantial impact on pension system funded status, defined as the ratio of assets to liabilities,” Stanford Professor Joe Nation found in his 2011 study, “Pension Math.” “Generally, pension systems strive for a funded status of 100 percent over the long term. At a 6.2 percent discount rate, equal to a 100-year rate of return for a hypothetical mix of equities and fixed income investments, the funded status for CalPERS [the California Public Employees’ Retirement System] is 58.3 percent. At the same rate, the funded status for CalSTRS is 60.6 percent; it is 72.0 percent for UCRP [the University of California Retirement Plan]. Even at a 7.75 percent discount rate, the funded status for CalPERS and CalSTRS remains below 80 percent. Private-sector pension plans are labeled ‘at risk’ if their funded status falls below 80 percent.”

Nation correctly identified solutions to the pension crisis that would include revenue increases and reforms to public employee pension systems. But both solutions are highly unlikely to happen any time soon.

“Revenue increases are unlikely to be approved absent pension reforms,” Nation wrote in the study. “Required pension system reforms include benefit reductions, such as prospective reductions for current employees, greater cost sharing, and governance reforms, particularly changes in pension system accounting methods and assumptions.” This is also quite unlikely because it is politically unfeasible.

The LAO explained just how the CalSTRS pension system works:

“For many decades, CalSTRS has administered its main pension program, which (1) receives contributions from members, school and community college districts, and the state; (2) invests those contributions; and (3) uses its assets to provide a specific monthly pension benefit to retirees and their beneficiaries. Retirement programs of this kind are known as Defined Benefit programs.

“Estimated $5.7 Billion of Contributions in 2012-13. In 2012-13, school and community college district employees, districts, and the state are expected to contribute a total amount of $5.7 billion to CalSTRS. Contribution rates set in current law are as follows:

“* Employees ($2.1 Billion). Employees contribute 8 percent of their pay to CalSTRS’ DB Program.

“* Districts ($2.2 Billion). Districts contribute 8.25 percent of payroll to the DB Program.

“* State ($1.4 Billion). The state currently pays about 5 percent of teacher payroll (measured on a two-year lag) to the DB Program and a companion program—the Supplemental Benefit Maintenance Account—combined. (This percentage will grow slightly in future years, but not enough to address a substantial part of CalSTRS’ funding problem.)”

The worse news

According to the CalSTRS actuary, the fund’s defined-benefit program is estimated to deplete its assets by 2044.

The LAO recommended restoring solvency to the CalSTRS retirement system before repaying some obligations in Gov. Jerry Brown’s “wall of debt,” yet more money the state owes. The LAO urged the Legislature to begin additional funding by 2014-15, and even more interestingly, recommended shifting funding for the CalSTRS program to teachers and local school districts.

Yet if California’s statewide pension systems are any benchmark, the funded ratio for the aggregated 24 statewide systems is 53.6 percent, as of June 2011, according to Nation’s study.

And the unfunded liability for the 24 systems is $135.7 billion.

Just as with CalPERS and CalSTRS, “[T]he 24 systems discount their liabilities at an expected rate of return, typically 7.75 percent,” Nation found. That number since has been dropped a little, to 7.5 percent. “This practice is at odds with that used in the private sector, and it is also at odds with standard practice in economics, which holds that pension liabilities are full-recourse obligations that must be paid without regard to the performance of pension fund investments. As such, each of the systems substantially understates liabilities and overstates funded ratios.”

Private sector funds generally expect only about 4 to 5 percent annual growth, at most. The state’s pension tsunami is rolling in and is just off shore.

36 comments

Write a comment
  1. larry 62
    larry 62 26 March, 2013, 09:27

    I know that it will not happen in my lifetime, but all that needs to happen is changing the retirement age to 65 for public employee pension eligibility. I see people retiring from these jobs at 55 with fat pensions and it is unsustainable.

    Reply this comment
    • Cityprof
      Cityprof 23 September, 2013, 20:46

      Or, do what they do in Canada. Cap retirement payouts at 70% of one’s final salary. Currently, it is possible to retire at much more of one’s final salary because the number of years of service is multiplied by a 2 – 3% factor. So if you start working at age 20 and retire at age 65 and your retirement factor is 2.4%, then you will make 108% of your final salary.

      Reply this comment
  2. Brown delta trout
    Brown delta trout 26 March, 2013, 09:40

    “If the state’s current $1.4 billion annual contribution to CalSTRS were combined with the $4.5 billion additional contribution that may be necessary to achieve full funding in 30 years, the sum would exceed state spending on the University of California and California State University systems combined,” the LAO said.

    It’s a bubble. Turn in the keys and walk away, it’s the new American way.

    Reply this comment
  3. Sean Morham
    Sean Morham 26 March, 2013, 10:40

    Higher taxes are coming..the booming California economy will support it.

    Reply this comment
  4. Mntngoat
    Mntngoat 26 March, 2013, 12:07

    I almost feel sorry for those going into teaching today.

    Reply this comment
  5. Tough Love
    Tough Love 26 March, 2013, 12:43

    Quoting ….. “This is also quite unlikely because it is politically unfeasible.”

    Translation ……. the Public Sector Union/Workers are VERY greedy, currently have been granted pensions (which continue to accrue benefits every day … digging the financial hole we are in even eeper) FAR FAR in excess of what comparable Private Sector workers get (all while Public Sector workers earn no less in cash pay), refuse to give up (i.e. compromise … by admitting that there is really no justification for this excess) …… and our self-serving, vote-selling, contribution-soliciting elected officials (a) do not have the stomach to stand up to the Unions, and (b) do not want to lose the Union’s campaign contributions and election support.

    Solution …. the Taxpayer should refuse any further funding of Public Sector pensions until future service pension accruals are brought FULLY down for CURRENT (yes CURRENT) workers to the level typically granted Private Sector taxpayers.

    Greed HAS consequences.

    Reply this comment
  6. Bill - San Jose
    Bill - San Jose 26 March, 2013, 13:01

    What pensions? It is vapor paper funding it now. When that ink runs out, watch the debacle in Cyprus surface here with property owners being tapped for the difference.

    Reply this comment
  7. Stephen
    Stephen 26 March, 2013, 14:15

    The ones that retire at 55 are the ones with fat pensions which is why most don’t retire until much later. The pension is just a compensation mechanism and a useful one at that. The problem is more with the unwillingness of the legislature to work with a truly balanced budget instead of hiding the imbalance by under-funding the pension funds. The employees then for some reason get the blame for the underfunded pensions just as in private industry when they simply want what is owed to them. Public employees might be better off by getting the money up front rather than trusting the promises of future payments.

    Reply this comment
  8. us citizen
    us citizen 26 March, 2013, 15:36

    Booming CA ?? Surely you jest………..

    Reply this comment
  9. stolson
    stolson 26 March, 2013, 16:08

    Bill–yes keep soaking the home owners–that’s the ticket! Dems need to tax and spend..it is all they seem to know. I don’t think many of these legislators have run a business and understand money. The taxpayer doesn’t need to pay extra for large salaries and big pensions. I think that the whole public service union worker thing needs a massive realistic overhaul.

    Reply this comment
  10. eatingdogfood
    eatingdogfood 26 March, 2013, 17:39

    If The Democrats Didn’t Give ” Sweetheart Deals ” To Your Public Service Union.

    Goon Employees To Get Reelected; You Would Have Plenty Of Money and The.

    Taxpayer would have Some Spare Change in His Pockets! Democratic Hustler

    Politicians + Corrupt Union Goons = BANKRUPTCY BABY! Time To Bring.

    RICO Conspiracy Charges Against The Hustler Corrupt Democrats and the.

    Criminal Unions!

    Reply this comment
  11. eatingdogfood
    eatingdogfood 26 March, 2013, 17:55

    Isn’t It Time For The Abused Taxpayers Of California To Leave In Masses.
    In Order To End This Unholy Conspiracy Between The Totally Corrupt.
    Democrats And The Equally Corrupt Public Service Unions? It Is Really.
    The Only Way To Finally End This Criminal Activity! Did Anybody Ever.
    Hear Of RICO?

    Reply this comment
  12. Andrew
    Andrew 26 March, 2013, 18:07

    All at the same time that the CALPERS board is talking about a 50% increase in required employer contributions, to be rolled out over 6 years, starting over the next couple of years.
    It reads as if it is not yet final, but certainly shows the direction that things are moving.

    Reply this comment
  13. cuisenart
    cuisenart 26 March, 2013, 22:45

    This is all going to crash. Politicians will deny, Teachers union reps will lie and nothing will happen until the checks bounce. They can pass additional taxes, but revenues will drop because of it and in the end state employees will be in the streets, throwing rocks at cops, wondering how it came to this. And the last thing that will dawn on them is that it is their own damn fault.

    Reply this comment
  14. Ted Steele, Associate Prof.
    Ted Steele, Associate Prof. 27 March, 2013, 06:45

    Hey Katy== you mortgage is due in full today. Therefore you are underfunded by 500k.

    These are alarmist right wing stories designed to promote the class warfare agenda of the Beckian right….zzzzzzzzzzzzzzzzzzzzzz

    Reply this comment
  15. STEPHEN HORVAT
    STEPHEN HORVAT 27 March, 2013, 08:33

    LIKE I HAVE SAID FOR YEAR’S NOW,YOU CANNOT SPEND MORE THEN YOU TAKE IN,& THE THE UNION’S ARE SO GREEDY THAT FHEY COULD CARE LESS ABOUT THE STATE OR COUNTRY.WHICH IS UN-AMERICAN,THAT’S WHY THEY ARE LOADED WITH COMMIE’S A REAL THREAT TO AMERICA.SO WAKE UP AMERICA! THAT’S IF YOU LOVE THIS COUNTRY.

    Reply this comment
    • Cityprof
      Cityprof 23 September, 2013, 21:29

      Let’s talk about the greed of American corporations who made nice profits by manufacturing in the U.S. market, even with unions, and then decided that what they were making was not enough. Instead of 10 million profit a year, these corporations wanted to make 50 or 100 million. So, fire all the workers and move the companies overseas or outsource as much as the company can. These fired workers who made good union wages make 1/3 or less their former wages. Happy? Fine, but then they can no longer spend their income in their neighborhoods keeping small businesses going. The small businesses shut down and then communities shut down. Who is the un-American one, the union worker or the corporation/company that took all the jobs overseas?

      Reply this comment
  16. Ted Steele, Navigator
    Ted Steele, Navigator 27 March, 2013, 10:00

    The sky is faaaaaaaaaaaaaaaaaaaaaaalling!!!!!!!!!!!!!!!!!!

    Reply this comment
  17. Tough Love
    Tough Love 27 March, 2013, 14:57

    Ted, You tried that BS before and it made no sense then … what’s changed ?

    Your example of an unfunded pension liability ridiculous. A correct example would be the amount owed for non-payment of a portion of monthly mortgage payments with due dates in the PAST.

    Reply this comment
  18. Ted Steele, Navigator
    Ted Steele, Navigator 27 March, 2013, 15:37

    Wrong TL– Here’s why.

    At least as to some funds, like calpers for police and fire….

    You bargained for these by your reps and under the law of col bargaining as part of compensation.

    The scheme you created requires gov funding as well as employee funding.

    The fund will roll on because you will honor your commitment as will the employees.New tiers and reform will and has occurred so the funds are more sustainable.

    The funds are doing well (calpers at 256 bil?)

    All the funds will be due over time like your mortgage.

    End of story.

    But
    Please
    let
    sob
    fest
    roll
    on
    like
    a
    mighty
    river

    Little Buddy!

    Reply this comment
  19. CalWatchdog
    CalWatchdog Author 27 March, 2013, 21:50

    Wrong Ted. Taxpayers had no role, or representation in the negotiations – those were held between union reps and politicians doing fundraising. And the “pension reform” passed by the Legislature last year is shameful. There will be no real savings for 30 years.

    Katy

    Reply this comment
  20. Ted Steele, Associate Prof.
    Ted Steele, Associate Prof. 28 March, 2013, 06:47

    Katy– Sadly, you are in need of yet another high school civics class. In a representative democracy YOUR elected officials bargained representing YOU. If you didn’t like it, what did you do about it?

    Blog, I guess.

    Reply this comment
  21. Tough Love
    Tough Love 28 March, 2013, 06:47

    Ted, Keep dreaming ….

    Calpers assets $256B

    & $400B-$500B in liabilities

    = pension reductions

    Reply this comment
  22. Ted Steele, Associate Prof.
    Ted Steele, Associate Prof. 28 March, 2013, 06:53

    Oh….and it’s ok for your ilk to project out the contributions for 30 years but not ok for my side to project out the solution for 20??? LOL — There was nothing shameful about the pension reform. You don’t think we’ll need it in 20 years? You remind me of the contribution vacation dweebs 15 years ago!

    Reply this comment
  23. Ted Steele, Associate Prof.
    Ted Steele, Associate Prof. 28 March, 2013, 06:55

    TL– Zzzzzzzzzzzz—-save the key stroke energy little buddy you’ve beat that dead horse to a pulp. Hey— your mortgage is due in full today!

    Zzzzzzzzzzzzzzz…..yawn…….stretch…….nite nite.

    Reply this comment
  24. CalWatchdog
    CalWatchdog Author 28 March, 2013, 08:00

    Ted wrote, “Katy– Sadly, you are in need of yet another high school civics class. In a representative democracy YOUR elected officials bargained representing YOU. If you didn’t like it, what did you do about it?
    Blog, I guess.”

    And leave.

    Ted, high-school civics in the government schools is just government propaganda. It doesn’t represent the real world, which some of us investigate and report on here. And they’re not “MY” elected officials and they don’t represent “ME.” They’re bought and paid for by the special interests, in California the top manipulators being the government-worker unions.

    — John Seiler

    Reply this comment
  25. Andrew
    Andrew 28 March, 2013, 08:40

    Calpers. 50%. Over 6 years. Our city and county entities here in California are going to love these numbers.
    Our mortgage might not be due in full, but that no cost, fixed rate mortgage they promised and delivered to us in 1999 just got jacked up to a variable with a previously hidden balloon payment due on the back end.

    Reply this comment
  26. Ted Steele, Navigator
    Ted Steele, Navigator 28 March, 2013, 08:49

    John— Wow. I do agree with the bumper sticker on my car and no doubt yours: Question Aouthority, your view of the world and the social compact that we call democracy is indeed incorrect. We elect leaders and like it or not they are your leaders. Cite me to ANY authority to the contrary. Your obligation is to work within the system to change things for the better. That you “investigate” things means what?

    You can pretend that the elected leaders are not “your” leaders. You can pretend then that these imposters do not bind you to any course of conduct or that the laws they pass do not apply to you and your fellow investiagors, sensitive no doubt one and all, but at the end of the day all you’ve done is to weakly undercut the authority of the leader.

    When YOUR leader is elected John…will I be free from the constraints of contracts she makes on my behalf? Can I refuse to pay my taxes or go to war because my “investigation” reveals it’s impropriety? ? Or should I follow her at least to the extent required by the law?

    Leadership requires cogent followship. Katy will be in good company in the adult education civics 101 class I require you to attend.

    Reply this comment
  27. Ted Steele, Navigator
    Ted Steele, Navigator 28 March, 2013, 08:52

    Andrew— No– your mortgage did not get “jacked up” with a hidden payment at the end.

    What happened is that YOU didn’t read the mortgage note when you signed the docs little buddy. And now you’re sad about it.

    Let the buyer beware.

    Reply this comment
  28. Andrew
    Andrew 28 March, 2013, 09:17

    The risk is the risk, and the math is the math, I guess.
    I do hope I am wrong. Time will tell.

    Reply this comment
  29. CalWatchdog
    CalWatchdog Author 28 March, 2013, 09:30

    Ted: 1. I don’t put bumper stickers on my car.

    2. I never signed any “social contract.”

    3. “We elect leaders and like it or not they are your leaders. Cite me to ANY authority to the contrary.” Here’s the authority: me. I didn’t vote for these leaders. They’re not my leaders, only my jailers.

    4. My “obligation to work within the system” is the same as that of a prison inmate.

    5. “at the end of the day all you’ve done is to weakly undercut the authority of the leader.” I hope so.

    6. “When YOUR leader is elected John…will I be free from the constraints of contracts she makes on my behalf?” I don’t want to elect any “leaders.” I favor voluntary associations.

    7. “Can I refuse to pay my taxes or go to war because my ‘investigation’ reveals it’s impropriety?” Yes. Taxation is theft and conscription is slavery.

    8. “Leadership requires cogent followship. Katy will be in good company in the adult education civics 101 class I require you to attend.” I already put in my time in civics class at Wayne Memorial High School in Wayne, Mich. in 1971-72.

    — John Seiler

    Reply this comment
  30. Ted Steele, Navigator
    Ted Steele, Navigator 28 March, 2013, 10:51

    John– You remain lost in a world where color colides with sound.

    The leaders are your jailers? You are a prison inmate? You don’t buy in to the social compact?

    OK–
    I read you loud and clear.

    Do you still get Beck on cable?

    Reply this comment
    • CalWatchdog
      CalWatchdog Author 28 March, 2013, 13:20

      Ted: I’ve never liked Glenn Beck. I’m just reflecting on what has happened in recent years, especially such Republican depredations as the “USA PATRIOT Act,” which shredded the Bill of Rights. Here’s a new one from today: the 1984 Computer Fraud and Abuse Act, signed by good “freedom-loving” Republican Ronald Reagan, and amended since then by largely Republican congresses, lets the government arrest any computer user, at any time, for any reason. Perhaps both of us, like the zeks in a Solzhenitsyn novel, will continue this conversation in prison.

      Link: http://www.ibtimes.com/computer-fraud-abuse-act-2013-new-cfaa-draft-aims-expand-not-reform-worst-law-technology-1158515#

      Swallow the Red Pill, Neo, and wake up in the Real World.

      — John Seiler

      Reply this comment
  31. Ted Steele, Navigator
    Ted Steele, Navigator 28 March, 2013, 15:55

    LOL— ok John—I know where you’re comming from– I just don’t share your sense of alarm.

    Reply this comment
  32. 55@1400
    [email protected] 25 March, 2017, 18:37

    My husband retired from CalSTRS at $1445.39 a month. Full time teaching for 26 years. Do you really think that benefits need to get cut? Really? Thank you ever so much for your appreciate of his years of excellent service. Future teachers, beware!

    Reply this comment

Write a Comment

Your e-mail address will not be published.
Required fields are marked*



Related Articles

The L.A. Story: Picture worth far more than a thousand words

Can’t really beat this for succintness, can you? New Los Angeles Mayor Eric Garcetti may think his slight standing up

Harkey has long history of whining — about coverage, questions and more

The coverage of Assemblywoman Diane Harkey, R-Dana Point, and her $10 million lawsuit against Sen. Mark Wyland, R-Solana Beach, over

‘Transit workers vs. just plain workers’

A renewed BART strike could bring chaos to the Bay Area on Monday. But as CalWatchdog founder Steven Greenhut points