CalSTRS bailout cost: Pension tsunami laps at CA shores

by Chris Reed | February 24, 2015 12:32 pm

Gov. Jerry Brown’s relative stinginess in seeking to hold the line on social services spending and in demanding an end to the practice of state education bonds paying for local districts’ construction dumbfounds some Democrats[1], who cite a healthier economy and growing revenue.

They presume Brown is nervous about the capital-gains revenue rollercoaster as well as the revenue lost when Proposition 30’s temporary sales tax hike expires at the end of 2016 and when its temporary income tax hike expires at the end of 2018. Their solution is to seek to extend the tax hikes, which generated $6.2 billion in fiscal 2013-14.

But another jolt is on the horizon: the cost of the CalSTRS bailout enacted last year, which will ramp up contributions annually for the next six years. The full phase-in is far off. But with 90 percent of the eventual $5 billion annual cost borne by state taxpayers — 20 percent directly and 70 percent indirectly, paid by state-funded local school districts — the bailout tab had Moody’s investor service worried last summer, before it even took effect:

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.

LAUSD faces $1.1 billion in new costs in 2020-21

And the California Department of Education’s warnings to local school districts to prepare for a difficult era as the CalSTRS bailout is phased in show that issue is very much on the radar of the Brown administration.

Los Angeles Unified could be near a teachers strike[2] because UTLA rejects the district’s offer of a 5 percent raise as inadequate in a time of healthier revenue. But L.A. Unified leaders emphasize that they face a $1.1 billion bigger pension bill[3] in 2020-21 than the district now pays and have been surprisingly resolute, given the UTLA’s ability to target and defeat board incumbents who are independent.

In the bigger picture, the U-T San Diego reported [4]some districts see the budget problems posed by bailout costs as impossible to address:

Officials in districts throughout California are talking about forming a coalition to explore ways to fix the teacher retirement system without cutting into their own school programs.

As the pension contributions grow, “the things you want and need for educational purposes will take a second seat to funding this retirement system, or paying for utility bills,” said Gary Hamels, assistant superintendent in charge of business services with San Marcos Unified School District.

“It’s going to hit the fan because you’ll have to make a decision — I have to pay this so you can’t buy that,” Hamels said. “We’ll have a situation where there’s demand for some academic improvement but this is where the money is going first.”

CTA and CFT officials have touted renewing the temporary sales and income tax hikes for months. So far, the unions have been quiet about doing anything to address the fiscal turmoil looming in local school districts because of the cost of the pension bailout.

Source URL: https://calwatchdog.com/2015/02/24/calstrs-bailout-cost-pension-tsunami-laps-at-ca-shores/

---