CalSTRS pension fix harder on taxpayers than UC fix

In the newly enacted 2015-16 state budget, the University of California has agreed to major pension changes, building on revisions already made under Gov. Jerry Brown since 2011. This account is from the Sacramento Bee:

As part of an arrangement that includes four years of funding increases, a two-year tuition freeze and additional money for UC’s sizable pension debt, the university is undertaking a significant overhaul of its retirement system. Though details remain to be worked out, it will introduce a pension tier with a dramatically lower compensation cap, and could shift new hires from a guaranteed benefit to a 401(k)-style defined contribution plan. …

 

Under the deal, UC will adopt a state limit on the amount of employees’ salaries that are used to calculate their guaranteed pension. The limit, which would be adjusted for inflation, now stands at $117,000. The current cap for UC workers, based on a federal ceiling, is $265,000.

The seriousness of the UC pension problem has gotten relatively little attention until now, but as CalPensions’ Ed Mendel pointed out in May, UC has had to engage in risky borrowing to pay its bills:

Four years ago UC began borrowing to help close the pension funding gap. By last July UC had borrowed $1.8 billion from internal sources and $937 million more from external sources.

 

Borrowing to pay pension costs can pay off in another way, if money loaned at a low interest rate is invested and earns a higher rate. The UC pension fund, valued at $52.8 billion last June, is expected to earn 7.5 percent a year, which critics say is too optimistic.

 

The “arbitrage” looks good so far. Last fiscal year the UC pension fund returned earnings of 17.8 percent. The UC short term investment pool, the source of the internal borrowing, earned about 1.5 percent.

 

But borrowing to pay pension costs is a gamble. The city of Stockton sold $125 million worth of pension obligation bonds in 2007 and put the money in its CalPERS investment fund, just in time for big losses during the recession and stock market crash.

UC employees pay bigger share of pension costs than CA teachers

To help get UC pensions on firm ground, UC officials have agreed in recent years to an arrangement in which the university system pays 14 percent of its payroll toward pension costs and individual employees contribute 8 percent of their gross pay. This means taxpayers foot 64 percent of the costs.

This is in contrast with the new standards for state teacher pensions enacted in 2014 as part of a law to shore up the struggling California State Teachers’ Retirement System. The contribution changes are being phased in through the 2020-21 fiscal year. When they are complete, teachers will contribute 10.25 percent of their paychecks, school districts will contribute 19.1 percent and the state government will contribute 8.8 percent. This means taxpayers will pay for 73 percent of the costs of teacher pensions.

Under the old status quo, taxpayers paid for about 63 percent of total CalSTRS contributions. So while teachers will pay somewhat more toward their pensions because of the CalSTRS fix, taxpayers will pay a significantly bigger share.

This doesn’t reflect the broad pension reform goals that Gov. Brown announced in 2012. He proposed that the state and its employees split the “normal” cost of pensions. In pension-speak, that refers to the value of retiree health care earned during a year of working, as determined by actuarial standards. The “normal” cost doesn’t include the cost going forward of dealing with a pension system’s unfunded liabilities, only the cost per specific employee.

The UC pension deal seems likely to move UC toward that goal of splitting “normal” costs, especially if enough new hires accept a hybrid benefits plan. But at least until June 30, 2021, the state is legally committed to a deal with public school teachers that goes away from that goal.