Why CalSTRS fix is impossible: It would force cut in teacher take-home pay

Why CalSTRS fix is impossible: It would force cut in teacher take-home pay

pension-red-inkThe California State Teachers’ Retirement System is terribly underfunded. The last official report put its shortfall at $74 billion. State officials say it needs an infusion of $4 billion more money a year for decades to come.

This week, as reported by Cal Watchdog founding editor Steve Greenhut in his U-T San Diego column, CalSTRS came forward with a proposal to jump-start discussions on how to fix the funding problem. Officials floated …

“… a ‘hypotethetical’ plan that would allow them to increase the amount of money they collect from teachers to reduce the pension debt. In exchange for that give-back from teachers, CalSTRS would guarantee a 2 percent cost-of-living adjustment every year. Currently, retirees receive that annual boost – but it is not a ‘vested’ right. The Legislature can take it away any time that it chooses.

“Because of state law, CalSTRS must gain legislative approval for any new dollars it seeks.  …

“CalSTRS explains in its legal analysis that public employees cannot have their vested benefits reduced unless they receive a ‘comparable new advantage.’ So these pension-fund officials are arguing that ‘vesting’ the annual boost — making it a guarantee rather than an option — is an advantage that more than offsets the contribution increases. They provided legislators with a complicated actuarial formula backing that point.

“It’s a clever effort by CalSTRS to find some way to gin up the struggling system’s funding levels given a legal and political situation that offers few cost-saving options. But it could cost more than it gets in return.”

Usual approach to pension reform involves concessions

brochure04_MyCTASteve makes a strong case that this is a “fix” that could make current problems worse.

But I have an additional, more unconventional thesis: There is no way to reconcile deeply held beliefs among some of the various “stakeholders” here. It’s impossible to imagine a compromise that the 500,000-plus members of the California Teachers Association and the California Federation of Teachers would find remotely acceptable.

Under the funding formula written in state law, teachers’ employers pay a sum equal to 8.25 percent of their pay toward pension costs; teachers contribute 8 percent of their pay; and the state contributes in two ways to the cost. As of 2015, per Calpensions.com’s Ed Mendel, the state contribution will be equal to 6 percent of pay.

But 22.25 percent of pay isn’t nearly enough to cover CalSTRS’ liabilities. A 2012 analysis suggested between 36 percent and 37 percent of pay is needed to cover “normal” costs of retirement for veteran teachers.

So where do we go from here?

In California, in recent years, we’ve established a framework for stabilizing underfunded pensions: Both governments and employees contribute significantly more toward pensions, and new hires get less generous benefits.

Are some unions more equal than others?

Two of those three things could easily happen in Sacramento. Even Republican lawmakers have long since acknowledged the state needs to pay more to shore up CalSTRS. And veteran teachers would make a show of indignation about a change that the Maviglians of the world would depict as throwing young teachers under the bus, then go along with it.

But the third thing — the significant increase in teacher contributions — is about as likely to happen as Cruz Bustamante making a triumphant return to statewide office. This would mean a significant drop in take-home pay. The CTA and CFT won’t stand for that.

Remember, the easiest way to understand how Sacramento works is to begin with the presumption that the no. 1 priority of elected Democrats is protecting union teachers.

Example: The complicated change in education funding known as the “Local Control Funding Formula” was adopted last year by the Legislature in shockingly quick fashion. It sharply limited the state mandates on how local districts must spend their funds so officials could ensure more money went to help English-learners and the most academically challenged. But depending on the follow-through, the eliminating of those mandates could have as its primary effect freeing up money to compensate teachers — not helping struggling students. Why else would the bill have passed as quickly?

If the CTA and CFT are that ruthless and Machiavellian — and they are, they are — there is no way they’ll go along with a cut in teacher take-home pay.

Even if other public employee unions have accepted pension reforms that made the same concession.

15 comments

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  1. S Moderation Douglas
    S Moderation Douglas 11 April, 2014, 12:09

    They could follow the example of most state contracts. Increase employee pension deductions by 3%, 5%, or more, and increase pay by the same amount. Except the deductions begin immediately, and the pay “increases” begin 12 to 18 months later, and only for those already at the top step of their pay scale.

    But, when CalPERS did it, instead of using the increased employee deductions to reduce unfunded liability, they REDUCED the employers share by the same percentage. Back to square one.

    Reply this comment
  2. S Moderation Douglas
    S Moderation Douglas 11 April, 2014, 12:44

    ” But 22.25 percent of pay isn’t nearly enough to cover CalPERS’ liabilities. A 2012 analysis suggested between 36 percent and 37 percent of pay is needed to cover “normal” costs of retirement.”

    Are we talking CalSTRS or CalPERS?

    And what analysis suggested 37% of pay for normal costs?

    Reply this comment
  3. Chris Reed
    Chris Reed Author 11 April, 2014, 14:19

    Thanks, SMD — I fixed it.

    The numbers are from a Millman actuarial study that Ed Mendel has repeatedly cited on calpensions.com.

    Reply this comment
  4. S Moderation Douglas
    S Moderation Douglas 11 April, 2014, 16:52

    ” normal cost” is where I was confused. Milliman still says the normal cost is 18.3% (as of June, 2112)

    The additional costs are not “normal costs”, but are needed to pay the unfunded liability. And according to Milliman, the additional costs would be 14.6%, for a total cost of 34%, not 37.

    Reply this comment
  5. Ulysses Uhaul
    Ulysses Uhaul 11 April, 2014, 20:04

    Yawn…..this is beat beat beat……raise taxes. End of problem….

    Reply this comment
  6. S Moderation Douglas
    S Moderation Douglas 11 April, 2014, 22:26

    “If the CTA and CFT are that ruthless and Machiavellian — and they are, they are”

    It’s gonna be bad!

    Reply this comment
  7. Queeg
    Queeg 12 April, 2014, 09:29

    No pensions from globalists on stinking service jobs driving forklifts of high priced tech gadgets….from China.

    Why rail on someone getting a hard earned pension…..go after the bad boy globalists cleaning you out daily.

    Reply this comment
  8. billybs
    billybs 12 April, 2014, 18:10

    Sybil, Straight out of the Manifesto, good job,but give the author his due. Karl is his name.

    Reply this comment
  9. billybs
    billybs 13 April, 2014, 06:05

    Not true, Sybill.

    Reply this comment
  10. S Moderation Douglas
    S Moderation Douglas 13 April, 2014, 13:02

    Ce qu’il y a de certain c’est que moi, je ne suis pas Marxiste.

    Reply this comment
  11. Leotis Ahmad Jones
    Leotis Ahmad Jones 13 April, 2014, 17:15

    Ok, Sybill, a French communist is still a communist. 30 years of hardly working, with a sweet retirement…That may be a French idea.

    Reply this comment
    • Ted O'Steele, CEO
      Ted O'Steele, CEO 14 April, 2014, 17:17

      Or, oh wait— yes— turns out it was an American idea clothed in contract language and written by the doomers representatives in the elected gov…..lol—–

      Reply this comment
  12. David G. Pipes, CLU
    David G. Pipes, CLU 12 June, 2014, 14:44

    In the next few months teachers are going to hear a lot about the condition of CalStrs and steps proposed to “fix it.” Before becoming involved in the recriminations and recitations of incompetency and failed promises there are a few things you should know.
    CalStrs is a modified defined benefit pension plan. It is modified because it takes contributions from teachers, districts and the state. It is a defined benefit plan because the individual participants do not have separate accounts but receive benefits based upon a formula that includes years of service, age, and highest wage (this is determined in different ways for different groups.) The benefit does not have a direct relationship to the amount that the individual teacher puts into the plan.
    Defined benefit plans are the domain of people trained as actuaries. Using death statistics they project how many participants will actually live to receive the defined benefit. They also determine the life expectancy of those who draw the benefits.
    This is a monumental task, especially when you consider that highest salary is a “moving target” and that the plan guarantees annual increases in the basic benefit. However, the thing that makes this whole thing work is interest or earnings on investments.
    CalStrs is based on an assumed rate of interest of approximately 8%. They have actually realized much lower results. It is likely that those results will remain below 8% for the foreseeable future as the federal government pursues a low interest environment. Today the plan has large “unfunded liabilities.”
    Unlike the federal government the state cannot print money to remedy its problems so at some point CalStrs must return to fiscal solvency. The large wave of “baby boomer” teachers places enormous pressure on the system. Like any system that depends upon earnings or interest, whenever you run out of earnings you must consume capital which then further reduces earnings.
    How can CalStrs system return to fiscal viability? The answer is, “money.” The last question is, “whose money?”

    Reply this comment

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