CalSTRS unfunded liability hits new high

The California State Teachers’ Retirement System just announced it faces $73.7 billion in long-term liabilities. Left untouched, that would spell bankruptcy in 2043.

For critics of California’s public-employee pensions programs, the grim numbers heighten the urgency for reform. If CalSTRS wants to address its shortfall, it has to get legislative approval.

CalSTRS is the product of a contract with the state of California. Most experts say its funding is guaranteed by the California Constitution. So the state government is responsible for ensuring that CalSTRS remains solvent. CalSTRS CEO Jack Ehnes has admitted that it’s essential to raise rates, shifting pressure to the Legislature.

At least one lawmaker has developed a proposal to address the liability. State Senator Mimi Walters, R-Laguna Niguel, wants to reduce CasSTRS’ burden by $2 billion in the 2014-2015 fiscal year.

“CalSTRS has a $71 billion unfunded pension liability,” she told News 10 ABC. “Two billion is a very small number but it’s a step in the right direction and it shows the teachers we are willing to take care of them and we care about them when they retire.”

By contrast, the California Public Employees’ Retirement system has the legal authority to raise its own rates for member contributions. In February, the CalPERS board voted for a rate increase “that will cost the state treasury around $400 million beginning July 1. The increase will be phased in over three years and will ultimately cost the state an extra $1.2 billion a year. That will bring the state’s annual payout to CalPERS to around $5 billion,” reported the Sacramento Bee.

Brown’s choices

In January, Gov. Jerry Brown’s budget proposal for fiscal 2014-15, which begins on July 1, projected a surplus — or “rainy day fund” — of $1.6 billion. The surplus was produced by Proposition 30, the $7 billion tax increase voters approved in Nov. 2012.

Brown’s budget also included $10 billion in more spending for health care, prison upgrades, schools, paying down some state debt and even the high-speed rail project.

The Brown budget conceded that CalSTRS’ eventually will require $4.5 billion a year in more funding from the general fund and from teacher contributions.

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The California Teachers Association wants billions in increased school funding to offset any increase in teacher contributions to the CalSTRS fund. Bigger teacher contributions, however, are essential to salvaging the CalSTRS budget.

Yet some retired teachers pull in $100,000 or more per year in retirement. That’s information CalSTRS only released when the governor’s office compelled it.

Brown’s actions indicate he’s still formulating how to proceed — especially as his own November re-election campaign picks up steam. According to the Bee story, he favors a legislative funding plan for 2015, but supports Assembly and Senate hearings on what to do.

CalSTRS has run up against its own awkward choices. As Ed Mendel just reported on CalPensions.com:

“On a split vote, the CalSTRS board last week gave members in two unusual retirement accounts, which have a guaranteed minimum return, a $300 million credit from a surplus.

“To some board members it looked like bad timing and a policy out of step with the times. CalSTRS is seeking a multi-billion dollar rate increase for the main under-funded pension system.

“A board member representing Gov. Brown’s finance department, Eraina Ortega, urged a delay until the policy adopted in 2006 during different economic conditions could be reconsidered at the next board meeting.

“’I do think we have to be conscious as well of what those perceptions might be when we are seeking a funding solution to the defined benefit (pension) program,’Ortega said.”

To help navigate such challenges, CalSTRS brought on a new consultant firm, Meketa Investment Group. With a portfolio valued at $180 billion, CalSTRS is the largest pension fund in the world set up solely for teachers.

But however influential its consultants and lobbyists may be, the fate of CalSTRS rests in the hands of the state Legislature.