Moody’s raises questions about teacher pension funding fix

Moody’s raises questions about teacher pension funding fix

CalSTRSSoon after the CalSTRS funding fix crafted by the Legislature and Gov. Jerry Brown took effect on July 1, Moody’s Investors Service raised CalSTRS’ bond issuer rating.

But six weeks later, Moody’s has put out another release that examines how much strain the law meant to stabilize funding for California teachers’ pensions is likely to put on the state budget and warns about the effect on some school districts:

The rate increases that CalSTRS is instituting are modest and manageable for school districts over the  next three years. For 2015, school district contributions will increase by only 0.63% of payroll to total 8.88%, which is below the 9.5% that the governor included in the May revised budget. Fiscal 2015 school district budgets would likely have included the higher 9.5%, so the lower adopted rate is budget positive.

Over the next three years, school districts will receive higher LCFF funding from the state which will more than compensate school districts for their higher pension expenses. School districts’ pension contributions will amount to only 25% of the projected increase in LCFF funding over the next three years. Employers, consisting mostly of school districts, will contribute $1.29 billion more toward the CalSTRS pension plan, but LCFF funding will increase by $5.26 billion through fiscal 2017. …

Managing rising pension costs will prove challenging over time because CalSTRS rate increases are back-loaded. School districts face future budgetary stress not only from rising pension costs but from salary and benefit expenditures and programmatic priorities. Further, school districts have minimal revenue flexibility. … Rising pension costs will pressure financial operations and may cause a deterioration in credit quality for some school districts.

An ‘inflection point’ for the bond market?

moodysTo get a handle on the implications of this, I turned to someone who speaks bond. Dan McSwain is a successful businessman turned journalist who is now an unusually insightful business columnist for the U-T San Diego. (Enjoy his amazing look at the latest Socal pension follies here.) Dan thinks that Moody’s is sending a clear warning signal to investors — and to the state of California.

… ratings agencies telegraph future adjustments far in advance, when they can. And this is definitely a shot across the bow of the school bond issuers themselves. So while CalSTRS might keep its rating, I wouldn’t be surprised to see a series of downgrades in a few years for districts that issued all those stupid long-term iPad bonds over the last few years. They’ve gotten a decent bump in cash flow this year and last, but this retirement contribution squeeze could get tight very fast when the next recession comes and the state pulls back again.

Also, downgrades can cause a vicious cycle, triggering selling by mutual funds and pension funds that are required to keep only top-rated munis in their portfolios. This doesn’t hurt issuers directly; only bond holders who want to sell before their bonds reach full term. Yet when the buy side disappears, it kills the ability of schools and governments to sell new bonds. These guys depend on the ability to sell new bonds whenever they want to refi or build something, because they don’t build construction reserves in California.

Maybe I’m looking too far down the road, but this Moody’s advisory seems like an inflection point of some kind.

I defer to Dan on how to interpret Moody’s actions. But I think the Cal Watchdog piece I wrote in May about the dog-eat-dog budget politics that are sure to result from the CalSTRS fix looks more likely to come true than ever. The state of California can’t just casually come up with $4.5 billion a year — because it can’t print money.

Covering the cost of the CalSTRS bailout going forward is going to be the Sacramento version of the federal budget sequester for non-education budget categories. Spending on just about everything but  K-12 is going to be curtailed.

14 comments

Write a comment
  1. SeeSaw
    SeeSaw 16 August, 2014, 18:16

    Moodys has no credibility with me since the great recession. They were giving the crooks in that wall street fiasco A ratings when it knew they were corrupt!

    Reply this comment
  2. Donkey
    Donkey 16 August, 2014, 18:41

    No one feeding at the RAGWUS trough likes economics SeeSaw, but just remember this old saying, “what goes up, must come down.” 🙂

    Reply this comment
    • T Mind of Ted Your God
      T Mind of Ted Your God 17 August, 2014, 06:27

      Duncey,

      In the interest of what little credibility you have out here, will you please report back here on the financial health of your family’s gov worker pension plans?

      Maybe these vast plans are doing something right we can all learn from. I am certain that with all of your hate filled critique of gov worker compensation that none of this actually applies to your family, right?

      Your mentor,
      T

      Reply this comment
      • Donkey
        Donkey 17 August, 2014, 11:42

        TCS, stealing from the private sector taxpayers to make the life of RAGWUS feeders easy is no model for financial stability, or shared responsibility, sure you live the good life, while most in the private sector stand in line for Doctors, medicine, and EBT cards.

        You are a shameless trough feeder, with no moral borders, seal is all you know. 🙂

        Reply this comment
        • Ted
          Ted "Eddy Baby" Steele, Associate Prof. 17 August, 2014, 21:06

          Yes Duncey it’s true— we live in castles usually. We are each assigned a doctor, usually attractive and in my case a female, and we are each given 3 mil per year stipend for health concerns—–We are provided millions each year in pension benefits and all free meals are served with a wonderful desert menu.

          Are you taking your meds?

          You must be thinking of your family’s secret benefits? Huh?

          lmao!

          Reply this comment
          • Donkey
            Donkey 18 August, 2014, 11:36

            I know it’s true TCS, and thanks for telling the truth finally! 🙂

      • Donkey
        Donkey 17 August, 2014, 11:44

        Typo TCS, “…steal is all you know.” 🙂

        Reply this comment
    • SeeSaw
      SeeSaw 17 August, 2014, 17:56

      Yes, Donkey–you just remember this old saying, “What goes around comes around”.

      Reply this comment
      • Donkey
        Donkey 18 August, 2014, 11:34

        And that is where the truth will show up SeeSaw my RAGWUS feeding love! 🙂

        Reply this comment
      • Donkey
        Donkey 18 August, 2014, 11:38

        What was that you posted a while back SeeSaw, you took in $90,000 a year from then taxpayers? While people on SS are bring home around $12,000, have you no shame? 🙂 🙂

        Reply this comment
  3. thetruth
    thetruth 17 August, 2014, 09:48

    Make a note, Global Bond Markets, gov t dweeb has no confidence in Moodys, but worships Calpers and Calstrs…..time to review.

    Reply this comment
    • Donkey
      Donkey 18 August, 2014, 11:41

      TT, you are never going to bring any of the RAGWUS feeders to the light with logic and reason, they have sold their souls for money. 🙂

      Reply this comment
  4. SeeSaw
    SeeSaw 17 August, 2014, 17:59

    thetruth: It wasn’t government deweebs that brought down the whole country’s economic system in 2008. It was Moodys and the wall street brokers with their wonderful sub-prime mortgages–they knew they were scamming ordinary folks while they grabbed the money and ran! It might be time for you to get your head screwed on straight!

    Reply this comment
  5. T Mind of Ted Your God
    T Mind of Ted Your God 23 August, 2014, 21:27

    Yes Duncey it’s true— we live in castles usually. We are each assigned a doctor, usually attractive and in my case a female, and we are each given 3 mil per year stipend for health concerns—–We are provided millions each year in pension benefits and all free meals are served with a wonderful desert menu.
    Are you taking your meds?
    You must be thinking of your family’s secret benefits? Huh?
    lmao!

    Reply this comment

Write a Comment

Leave a Reply



Related Articles

Parents Able To Close Failing Schools

The Los Angeles-based group Parent Revolution, pushed hard to pass a new law called the “parent trigger.” The new law requires school

Unions Root Cause Of Prison Problem

Editor’s Note: We would like to welcome Joseph Perkins as a new CalWatchdog columnist. Perkins is the Business Editor for

California exports regulations worldwide

(Editor’s Note: The first part in a two-part series on how California’s regulations affect the global economy.) July 26, 2012