CalSTRS pension fix harder on taxpayers than UC fix

University of CaliforniaIn 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.

16 comments

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  1. Ronald Stein
    Ronald Stein 30 June, 2015, 11:47

    The international business world is intelligent enough to know that defined benefits are financial disasters to any business, thus all businesses focus on the known, i.e., defined CONTRIBUTIONS alone. When public sector contracts are negotiated by public sector employees that hammer out a contract with defined benefits that forces under duress a third party, the taxpayers, to cough up the necessary dough, then it’s truly a case of the inmates running the Asylum. Any challenges to that “racket” would be heard before judges who have pension and benefit package they want to protect. Again, seems like a racketeering cover-up right before our public eyes.

    Legally, we may be obligated to pay those DEFINED benefit pension plans, but their unsustainability is killing the budget and discouraging new job creation as the entrepreneurs’’ taxes and fees are contributing to paying for those defined entitlements that are not available in the private sector.

    “Defined benefit” programs are lucrative to the recipients, but unsustainable as they are funded by investments that do not get defined rates of returns. Currently there are more than 12,000 people receiving pensions over $100,000 from CALPERS. When the CALPERS investments perform poorly, the consumer picks up the tab for those defined guaranteed pensions.

    Reply this comment
    • Ulysses Uhaul
      Ulysses Uhaul 30 June, 2015, 11:51

      Have at it…….the slavers vs the feeders.

      Reply this comment
      • bobl
        bobl 30 June, 2015, 12:46

        Slavers…I like that term…very accurate for the taxpayer…who is a tax slave….I’m a doomer and a gloomer and a boomer and a denier and a slaver…

        Reply this comment
        • ricky65
          ricky65 30 June, 2015, 14:31

          Excellent observation, Bob.
          Good thing cuz if you were a ‘feeder’ you’d be a joker, ..a smoker, …and a midnight toker….and get your lovin’ on the run.

          Reply this comment
          • bob
            bob 30 June, 2015, 18:20

            …and get your lovin’ on the run.

            Well, stand by for tax increases….the DemoNcrats are going to give you some lovin’ good and hard and right up the….and on the run, too…you can run but you cannot hide. You’re gonna get taxed good and hard and then get taxed again.

          • bob
            bob 30 June, 2015, 18:23

            Those midnight space cowboy DemoNcrats are gonna give you some of that gangster love…right up the….

        • S and P 500
          S and P 500 30 June, 2015, 23:59

          This slaver is buying a roll of Brawny Paper Towels to support Koch PAC’s.

          Reply this comment
        • bob
          bob 1 July, 2015, 08:37

          I’m a boomer and a doomer and a gloomer and a birther and a truther and a denyer and a slaver, but not a midnight DemoNcrat space cowboy…

          Reply this comment
    • Bill Gore
      Bill Gore 1 July, 2015, 06:19

      There once was a time in this great land of ours, a long time ago, when the returns on a ‘defined benefit pension’ were tied to an archaic thing called the ‘actuarial rate of interest’. The actuarial rate of interest was the safe return you could get on cash in the bank, and although it did fluctuate, it was conservatively pegged at 8%, for the purpose of performing routine pension calculations, such as required contributions, levels of payouts, etc. Now to the casual reader the actuarial rate of interest may be as relevant as Morse Code, steam trains and women’s clothing made of black taffeta silk, but guess what kids, the 8% actuarial rate of interest LIVES!. Where does it live in this hyper-modern age, you ask? It lives in the compounding assumptions that are built into public employee defined benefit retirement plans! That’s right: in an age of real world ZIRP and even NIRP, guilded, cosseted and oh-so-beloved public servants get to assume a constant 8% return on their retirement funds every year! So where do these yields come from? Tax increases! Right again! Dang you guys are smart…..

      Reply this comment
      • S and P 500
        S and P 500 1 July, 2015, 14:17

        Of course nothing is risk free–even pensions. Detroit and Stockton retirees lost their COLAs and health care benefits. Greek pensioners are getting one fifth of their usual monthly pensions because the ATM’s have run out of money.

        Reply this comment
  2. Truthteller
    Truthteller 30 June, 2015, 13:24

    You neglect to mention that teachers have always paid 8% of salary to CalSTRS while UC had a long, inadvisable holiday when employees did not make any contribution.

    What you call “government contribution” is a misnomer. The state’s contribution certainly qualifies, but until the recent financing scheme, what districts pay would more appropriately be called an “employer contribution.” DIstricts in California do not pay Social Security for teachers (6.2%), and the additional 2.05% (total 8.25% until recently) might be compared to the employer match to a defined contribution plan (401k, 403b, 457b) that is necessary to compete for and retain employees.

    The 19.1% contribution that will be required of school districts is no joke. Hopefully the state will reimburse districts for some of this cost because it is the state that is the guarantor of CalSTRS – and part of the system’s financial problems is due to the state shorting its promised contribution to CalSTRS when the system was well-funded. The legislature also ignored years of repeated requests by CalSTRS to increase contribution rates.

    Reply this comment
    • S and P 500
      S and P 500 30 June, 2015, 23:51

      The state doesn’t have to and probably won’t “pick-up” that 19.1%. It’s money that could be going to classrooms but is instead going to pensions. That’s fine with me because that will result in education budget cuts and not tax increases. And I assume you won’t mind paying your kid’s tuition of $4500 per quarter if he wants to go to UC. UC has big pension bills too.

      Reply this comment
  3. Queeg
    Queeg 30 June, 2015, 20:23

    Comrades the publicans are warming up to harass, collect and then feed the plutocrats.

    There will be no middle class. Get used to beet soup!

    Reply this comment
  4. S and P 500
    S and P 500 1 July, 2015, 00:05

    “The seriousness of UC pension problems has gotten little attention until now…”

    Well actually that’s not true. Remember the student demonstrations over tuition increases and the students who got pepper sprayed at a UC campus? How about all that’s been reported about $1.3 trillion of student loan debt in the U. S.? How about the discussions if college is worth it? What about Cooper Union in NYC charging tuition (as much as $20,000) for the first time? It’s all partly an offshoot of bloated pensions given to college employees.

    Reply this comment
  5. Ulysses Uhaul
    Ulysses Uhaul 1 July, 2015, 14:06

    You Donkey devotees best spend time on making all you can get before you move to Doomsville……and hire the best…. Uly……

    Pack and Ship!

    Move with the Fair and Balanced shippers-

    Reply this comment

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Chris Reed

Chris Reed

Chris Reed is a regular contributor to Cal Watchdog. Reed is an editorial writer for U-T San Diego. Before joining the U-T in July 2005, he was the opinion-page columns editor and wrote the featured weekly Unspin column for The Orange County Register. Reed was on the national board of the Association of Opinion Page Editors from 2003-2005. From 2000 to 2005, Reed made more than 100 appearances as a featured news analyst on Los Angeles-area National Public Radio affiliate KPCC-FM. From 1990 to 1998, Reed was an editor, metro columnist and film critic at the Inland Valley Daily Bulletin in Ontario. Reed has a political science degree from the University of Hawaii (Hilo campus), where he edited the student newspaper, the Vulcan News, his senior year. He is on Twitter: @chrisreed99.

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