In an effort to portray a far-reaching bill as a compromise between charter schools and teacher unions, Gov. Gavin Newsom invited leaders of both groups as well as state Superintendent of Public Instruction Tony Thurman to recent signing ceremonies for Assembly Bill 1505.

In remarks at the event, Myrna Castrejón, president and CEO of the California Charter Schools Association, asserted that the new law “affirms that high-quality charter schools are here to stay and that the charter model — one that embraces accountability in exchange for the flexibility to innovate — is worth protecting and is of tremendous value to the students we serve.”

But what Newsom and Castrejón sought to depict as a balancing act was instead seen in most news coverage as the biggest blow yet to the California charter school movement, which began slowly in 1992 but now includes 1,300 schools that educate about 660,000 of the state’s K-12 students.

One modification to the original bill by Assemblyman Patrick O’Donnell, D-Long Beach, was a huge win for charter schools. It allows charter applicants and charters seeking renewals to appeal rejections from local school boards to county and state officials. A provision on requiring all charter teachers have formal credentials was revised to give charter schools until 2025 to comply.

Trustees can cite fiscal concerns in opposing charters

But the single most important part of the new law is the provision most sought by teacher unions and most feared by charter advocates. That is language that allows district boards to reject charters solely on financial grounds.

In an era in which annual school spending has soared — up from about $67 billion in 2014 to a record $102 billion now, a 52 percent increase — it would nominally appear that charters don’t have much to worry about from such a provision. Yet many state school districts are struggling to make ends meet now as much as they did during the Great Recession a decade ago, when state spending plunged nearly 20 percent in a single year.

Analysts say one reason districts are in trouble has to do with the increase in special-education students, who cost significantly more to educate and whose statewide budget got a 21 percent boost in May.

But the main headache is the enormous cost of the Legislature’s 2014 bailout of the California State Teachers’ Retirement System. It mandates that districts increase their CalSTRS payments by 132 percent from 2014-15 to 2020-21. Yet partly because of a significant increase in the number of retiring teachers getting pensions, the actual hit on district budgets over that span is much worse — 196 percent, the Legislative Analyst’s Office said earlier this year.

Pension bailout eating up surge in school funding

This has had the effect of pushing the total cost of compensation to 90 percent or more of the operating budgets in some districts, with by far the state’s largest district — Los Angeles Unified — among the hardest-hit. In May, LAUSD officials warned that a state takeover by 2022 was likely unless voters approved a parcel tax. Voters opposed the tax despite a heavy lobbying campaign. LAUSD’s fiscal reserves may not even cover the next three years unless state education spending keeps going up, district watchers warn.

But the problems are statewide. The state’s Fiscal Crisis & Management Assistance Team — which helps districts in distress — has had to focus on problems in the counties of San Diego, Sacramento, Oakland and more.

In response, a union-led coalition is seeking to qualify a November 2020 ballot measure modifying Proposition 13, the state’s famous 1978 tax-limitation law. It would allow the valuation of commercial properties to go up each year to reflect their value instead of the maximum 2 percent increase allowed under Proposition 13, generating potentially $5 billion or more in new annual funds for schools. 

The coalition had already qualified a similar measure for the 2020 in fall of last year, but decided to withdraw it because of the fear that its harsh potential effects on small businesses would make it a hard sell.

Because voters approved Proposition 13 in 1978 — the ballot initiative that capped property tax hikes at 2 percent per year and required a two-thirds vote of the Legislature before taxes could be added or increased — California became known as the birthplace of the anti-tax movement that swept the nation. After President Ronald Reagan got a 25 percent income tax cut through Congress in 1981, antipathy toward taxes became a defining feature of modern conservatism.

The Howard Jarvis Taxpayers Association, business groups and Republican activists enjoyed decades of success in fighting off tax hikes in the Legislature and on the ballot. And in 2010 — long after California’s emergence as a progressive redoubt — this potent partnership won voter approval of Proposition 26, which targeted local and state efforts to get around laws like Proposition 13 by defining taxes as “fees” which only need majority approval by legislative bodies. It eliminated this loophole and applied the two-thirds approval threshold for tax hikes to local governments.

But less than a decade later, anti-tax groups have the right to feel besieged in California. In 2012, voters approved Proposition 30, which increased sales taxes for four years and income taxes for those who made $250,000 or more by seven years. In 2016, voters approved Proposition 55, which extended the higher income taxes on the wealthy until 2030.

Teacher unions push for Prop. 13 ‘split roll’

And in November 2020, it appears increasingly likely that voters will be asked to consider two separate ballot measures that would each raise state taxes by about $11 billion.

One measure — the California Schools and Local Communities Funding Act — has already made the ballot. Sponsored by the League of Women Voters and pushed by teachers unions, it would create a “split roll” exception for commercial property from Proposition 13, allowing the parcels to immediately have sharply higher assessments based on their current value and exposing many businesses to the possibility of large annual property tax hikes in an era in which property values are soaring. 

About $5.5 billion of the annual revenue would go to counties and cities for local services. Roughly the same amount would go to K-12 schools and community colleges.

But with school districts around California reeling from the phased-in 132 percent increase in payments to the California State Teachers’ Retirement System required as part of the CalSTRS bailout approved by the Legislature in 2014, that funding boost looks inadequate to the California School Boards Association. The group recently released a poll that showed public support for tax hikes on personal incomes of $1 million or more and on corporate income of $1 million or more, which it said would generate $11 billion in annual new revenue.

School boards seek relief from cost of pension bailout

EdSource reported that the CSBA was considering launching a “Full and Fair Funding” signature-gathering campaign to get such tax hikes before voters in November 2020. K-12 schools would get 89 percent of the new revenue and community colleges the remainder.

A May 26 analysis in the Los Angeles Times suggested that each tax hike measure might benefit from focusing on helping public schools.

But voters may question why two major tax hikes are needed less than two years after state leaders boasted about having a $20 billion-plus surplus. Democratic state lawmakers’ nervousness about the optics of adopting a first-ever tax on water when the state treasury was flush led to that proposal’s death even after months of lobbying by Gov. Gavin Newsom.

And the June 4 special election in the Los Angeles Unified School District raised questions about the value of linking tax hikes to school improvements. Measure EE would have imposed a parcel tax based on the square footage of commercial and residential property to generate $500 million a year for the state’s largest school district.

But even though advocates had a much better-funded campaign than opponents, Measure EE got only 46 percent of the vote — far less than the two-thirds necessary for approval. Analysts argued that many local voters simply didn’t trust L.A. Unified to spend the money in the ways that district leaders promised.

The teachers union – the Oakland Education Association – wants a 12 percent increase phased in over three years. The district has offered a 5 percent raise over three years. The union and district have been unable to agree on a contract since the last one expired in 2017.

That’s at least partly because Oakland Unified is in a financial bind that is worse than many other districts. It has the same problem as other districts in dealing with the increasingly heavy annual cost of the Legislature’s 2014 bailout of the California State Teachers’ Retirement System. The bailout – phased in from 2014 to 2021 – requires school districts to increase by more than 130 percent their annual contributions to CalSTRS.

But Oakland Unified also has seen among the sharpest enrollment drops of any state school district, falling from 54,000 to 37,000 since 2003. Because state funds depend on average daily attendance, this has wiped out many non-mandatory programs.

Schools kept open despite huge drop in enrollment

Yet Superintendent Kyla Johnson-Trammell and other district officials have been leery of closing schools because of parents’ concerns, leaving nearly 11,000 empty seats in often half-full schools. They’ve also failed to significantly reduce administration and support staff even as enrollment has dropped by more than 30 percent.

That may change soon. According to a Bay Area News Group report, to free up money for raises for the district’s 3,000 teachers, the Oakland school board is prepared to lay off 90 administrators and nearly 60 school support workers to generate annual savings of $21.75 million. Oakland Unified officials say that this will not only pave the way for labor peace, it will help reduce the district’s structural deficit, which is otherwise on track to top $56 million by the 2020-21 school year. They have also vowed to follow through on staff recommendations that 24 schools be closed.

But a 2017 analysis by a state agency that helps school districts in financial distress raises a question that most local coverage of Oakland Unified doesn’t address: Can district staff be trusted to competently manage its $500 million-plus budget?

After looking at district budget information dating back to 2010, the Fiscal Crisis & Management Assistance Team (FCMAT) depicted the district as on track to a “fiscal emergency” because of its slowness to acknowledge, much less respond to, obvious problems. It noted that the school board had approved pay raises – including boosts of about 15 percent for teachers from June 2014 to January 2017 – without first identifying how they would be funded. FCMAT also cited “constant turnover” in key positions; a lack of district supervision of how schools deal with spending decisions; and an “abundance of budget exceptions granted to sites and departments that overspend.”

District hoping for emergency state loan

In the short term, the district has taken steps to secure an emergency state loan of $34.7 million. But as the EdSource website reported in September, the district still hasn’t fully paid off the $100 million emergency state loan it got in 2003.

State officials may feel that for political reasons, they have no choice but to help Oakland Unified again. But as FCMAT and others have noted, the district’s enrollment is expected to keep plunging – even as pension obligations keep growing. A 12 percent raise for teachers would only make achieving fiscal stability even more daunting for district leaders.

L.A. Unified school board members heard similar warnings last month, but chose to provide a 6 percent raise to teachers – just shy of the 6.5 percent the teachers union had wanted.

Next fiscal year, Newsom wants to give $3 billion to the California Public Employees’ Retirement System. He also proposes giving up to $5.9 billion over four years to the California State Teachers’ Retirement System.

Both funds have less than 70 percent of the assets they will need to pay off promised pensions. Last year, CalSTRS’ unfunded liability was estimated to be $107.3 billion and CalPERS’ was put at $136 billion. Some see Newsom’s proposal as a confirmation of the failure of ballyhooed efforts by Gov. Jerry Brown and the Legislature to reform pensions and shore up the pension giants.

In 2012, they enacted the California Public Employees’ Pension Reform Act (PEPRA). It changed retirement terms for state employees hired after Jan. 1, 2013, by limiting what types of pay would apply toward pensions and by making small reductions to benefit calculation formulas and pushing back when employees could retire.

Brown hailed the law’s passage as a significant first step toward Sacramento bringing pension costs under control.

The next significant step came in 2014, when the Legislature and Brown approved a bailout of CalSTRS. It gradually raised the $5.7 billion that school districts, the state and teachers contributed to CalSTRS in 2013-14 to $11 billion in 2020-21, when the phased-in increases were complete. Districts have to pay for 70 percent of the new contributions, with the state picking up 20 percent and teachers 10 percent.

‘Significant’ CalSTRS changes didn’t stabilize fund

The nonpartisan state Legislative Analyst’s Office described the funding law as a “significant” accomplishment with promise to keep CalSTRS on firm ground for decades to come.

But as Brown’s second term wore on, with CalPERS alternating between poor and relatively successful years with its investments, it became clear that the 2012 pension reform measure hadn’t changed the grim long-term picture for CalPERS’ finances. A 2017 Pensions & Investment report detailed how CalPERS’ 10-year record of 4.4 percent average returns wasn’t keeping up with its obligations and noted that in one poor investment year alone, CalPERS saw its unfunded liabilities soar by $27.3 billion.

And the LAO soon changed its tone on the CalSTRS bailout. In 2016, its analysts warned that liabilities continued to increase. And in November, as CalWatchdog reported, an internal CalSTRS analysis concluded there was a 50 percent chance that CalSTRS’ funding would drop to less than 50 percent over the next 30 years. Pension analysts note that few pension systems ever recover from dropping below the 50 percent level.

Perhaps the most significant hope for pension reform from the Brown era came as the surprise result of a legal challenge to some of the limits on pensions for new hires in the 2012 law. A public safety union argued that this was a violation of the “California rule,” the long-standing court precedent that held pension benefits could not be reduced for public employees without comparable additional benefits being provided.

But two appellate courts not only disagreed with the lawsuit’s premise, they held the “California rule” of inviolate pensions didn’t apply to years not yet worked by public employees, and that cheaper benefits could be collectively bargained.

The California Supreme Court held a hearing on the lawsuit last month and a decision is expected in coming weeks.

Four years after the state Legislature passed a bailout of the California State Teachers’ Retirement System that will nearly double annual direct contributions to the giant pension fund, a newly released internal report raises the prospect that the infusion of extra dollars may not protect CalSTRS from future disaster.

The 2014 changes in funding required districts to more than double their CalSTRS contributions, phasing in an increase from 8.25 percent of teacher pay in 2013-14 to 19.1 percent in 2020-21. Individual teachers and the state government also were required to pay more. But about 70 percent of the new funding – which will push total annual contributions from nearly $6 billion in 2013-14 to $11 billion in 2021 – is coming from districts.

The assumption in 2014 was that this extra funding was so significant that CalSTRS’ long-term viability was assured. The nonpartisan Legislative Analyst’s Office billed the hikes as a “major state accomplishment.”

On Nov. 8, however, the CalSTRS board was presented with a “risk report” that included both upbeat and gloomy scenarios. As Ed Mendel reported on the Calpensions website, the report found that if investment returns met their 7 percent target, CalSTRS’ retirement liabilities would be 100 percent funded by 2046 – a vast improvement on the present 70 percent.

50% chance fund hits point of no return threshold

But whether a 7 percent projected annual return is reasonable isn’t just questioned by pension watchdogs like Stanford professor Joe Nation and former Schwarzenegger policy adviser David Crane. CalSTRS’ number crunchers concluded that “even with the new rate increases, there is still a 50 percent probability that the CalSTRS funding level will drop below 50 percent in the next 30 years, according to 5,000 simulations based on the current asset allocation,” Mendel reported. Going below the 50 percent threshold is considered by many pension experts the point of no return, with little prospect that stricken retirement funds could ever rebound.

The problem for CalSTRS isn’t just consistently hitting or surpassing the 7 percent annual return goal. It’s that as few as one or two bad years of returns have a compound effect on long-term liabilities. The weak performances by CalSTRS and the California Public Employees’ Retirement System when the Great Recession hit more than a decade ago still haunt the funds, which are the two largest government pension agencies in the U.S. CalSTRS went from being 100 percent funded in October 2007 to 60 percent funded in March 2009, according to a Calpensions report.

CalSTRS’ and CalPERS’ grim numbers are a big reason why state Democrats are pushing for major changes in Proposition 13, the state’s landmark 1978 measure capping property tax increases at 2 percent a year. An initiative ending the protection for commercial and industrial properties will be on the 2020 state ballot and has the potential to generate $11 billion in new revenue a year.

School districts growing desperate over budgets

It may be a tough sell in an era in which the state has run surpluses for several years – including a $15.8 billion windfall expected in fiscal 2019-2020. But the “split roll” change sought for Proposition 13 reflects in many ways the deep concerns in the education establishment that the cost of the 2014 CalSTRS bailout is making it increasingly difficult for school districts to craft balanced budgets.

As CalWatchdog reported Oct. 1, one reason that the Legislature adopted new rules on permissible levels of lead in school drinking water that some health experts thought didn’t go nearly far enough was that the California School Boards Association worried that tougher standards would have been far more costly. The new standards for state schools were seen as still leaving students at risk of developing the severe cognitive and behavioral problems associated with children and adolescents being exposed to lead.

As of July, CalSTRS had $224 billion in assets. It would need to have $320 billion in hand to be considered fully funded.

After reports of problems with lead contamination of water at schools around California, Gov. Jerry Brown signed a

The measure by Assemblywoman Lorena Gonzalez Fletcher, D-San Diego, mandates that every school test one to five water outlets for the presence of lead. If any of the tests shows over 15 parts of lead per billion, the parents or guardians of students must be notified. Young people exposed to lead can suffer permanent problems – sometimes extreme – with cognitive development and behavior.

Given the attention paid to the national scandal over dangerous water in Flint, Michigan, the state law came as a relief to concerned parents, school officials and health agencies. But a comprehensive new analysis by the EdSource website suggests this relief may be premature.

The key issue is whether the 15 parts per billion standard, which is recommended by the U.S. Environmental Protection Agency, is strict enough to protect students’ health. The American Academy of Pediatrics considers that standard to be so weak that it puts young people at risk. The academy calls for a maximum of 1 parts per billion.

Pediatricians say federal standard is risky

“We know there is no safe lead level,” Dr. Jennifer Lowry, chair of the American Academy of Pediatrics’ Council on Environmental Health, told EdSource. “Schools ought to work to remove that source of lead for these kids.”

Experts were also sharply critical of the California law because it didn’t require all sources of water to be tested at every school. While sometimes lead contamination is system-wide – as seen in large parts of Flint in recent years – a single corroded pipe, faucet or other plumbing fixture can be responsible for lead contamination.

Gonzalez Fletcher told EdSource she supports strengthening the law and said the 15-parts-per-billion standard was agreed on to gain enough support so her bill would pass. The California School Boards Association worried that a tougher standard could be financially onerous for school districts.

The CSBA’s concerns may seem dubious, given that schools have enjoyed large increases in funding in recent years, thanks to a strong economy and Proposition 98 – a 1988 state law mandating that public education get roughly 40 percent of state revenue. But every school district is likely to face at least one and more likely two fiscal crises in coming years.

School districts face fiscal double-whammy

The first is the immense cost of the 2014 California State Teachers’ Retirement System bailout. The great majority of the cost – 70 percent – is borne by districts, which face a phased-in increase of CalSTRS contributions, going from 8.25 percent of pay in 2013-14 to 19.1 percent in 2020-21. In many districts, increased state funding due to healthy revenue gains has been largely used for these new pension bills. By 2020-21, when the final increase takes effect, most school districts are likely to have compensation costs eating up 90 percent or more of their general operating budgets.

The second crisis is not an absolute certainty, just highly likely. That crisis is a recession that sends state revenue plunging. Because California is so reliant on the income taxes paid by the very wealthy, the Great Recession a decade ago prompted a 20 percent drop in revenue and a corresponding reduction in state funding for public education.

That is why in recent years that Gov. Brown worked so hard to get the Legislature to strongly increase state fiscal reserves. By summer 2019, the state could have $13.5 billion in hand, according to an analysis earlier this year. But given that Brown has warned that a recession could wipe out $55 billion in revenue over a three-year span, these “rainy day” funds won’t go that far in helping schools.

Against this backdrop, the next governor, state lawmakers and education officials face a difficult calculus next year: how tight a standard for lead in schools are they willing to set with such a gloomy budget picture.

In the last testing results made available by the state, 150 schools – or 4 percent of those surveyed – had one or more more water outlets with lead levels over 15 parts per billion. Just under 25 percent of schools had lead levels over 5 parts per billion – hinting at how costly it would be if the state went to a tougher standard.

In 2007, researchers associated with Stanford University released “Getting Down to Facts” – a massive compilation of studies of the California K-12 public school system. The hundreds of pages of voluminous research allowed both the state education establishment and its critics to pick and choose what conclusions to emphasize.

Democrats and teachers unions cited the omnibus report’s call for much greater school spending. Reformers noted it said extra funding should be contingent on adoption of evidence-driven reforms.

Now “Getting Down to Facts II,” again led by Stanford-associated researchers, has been released – to much the same reaction. Education leaders cite its call for a huge 32 percent increase in school spending. Reformers note that once again, experts say California hasn’t done nearly enough to use education “best practices” to improve the performance of poor Latino and African-American students and schools in general.

But those who delve past general statements that praise the “boldness” of the California Dashboard school evaluation program and the success of the Local Control Funding Formula (LCFF) in getting more funds to needy poor schools will find a series of downbeat assessments.

Lack of ‘coherence’ found in implementing key reform

Four major examples:

– A series of research briefs about school governance broadly questions key LCFF elements, citing a lack of “coherence” in how the state expects individual districts to come up with their own unique “Local Control Accountability Plans” to improve their schools. This echoes criticism in a 2017 study that found local districts lacked the resources, expertise and enthusiasm to comply with this requirement. The briefs also said the state does not have adequate “mechanisms for accountability” in evaluating how local districts have used LCFF funds meant to help disadvantaged students.

– One study faulted the state for committing to help struggling schools in minority neighborhoods by increasing funding, but not addressing the frequency with which these schools were staffed with “early career” teachers – i.e., those who were just entering the job market or who had failed to win tenure in other districts. This also parallels one of the most common long-term criticisms of California public education: that too few of the most skilled, experienced teachers ended up in the districts that needed them most.

– One brief expressed borderline astonishment that California did not use data on student and teacher performance that would allow principals, superintendents, school boards and state education officials to develop a statistical model of what school practices worked best. These “weaknesses could be readily solved,” authors noted. In a seeming reference to political battles over data-driven reform, the report’s executive summary notes that “the limitations of California’s data system are not the result of technological difficulties.”

– An analysis of school finances cited the punishing effect of the 2014 bailout of the California State Teachers’ Retirement System on school budgets, which on a phased-in basis requires that districts increase by 123 percent how much they contribute to CalSTRS per teacher in a six-year span from the 2014-15 to 2020-21 school years. But while this was familiar turf, other parts of the fiscal analysis were not. The analysis warned of the ballooning costs of special education programs and the certainty that eventually districts will have to somehow find a way to pay for billions of dollars in neglected infrastructure and maintenance.

As CalWatchdog reported in 2015, school districts were already so stressed by money headaches that they were using the proceeds from 30-year bonds for needs normally covered by district operating budgets, such as computers and teaching materials. And that came in only the first year of rising pension bills because of the Legislature’s 2014 move to shore up CalSTRS.

The California Public Employees Retirement System and the California State Teachers Retirement System recently announced that they had exceeded their investment goals by at least 1 percentage point in fiscal 2017-18, with CalPERS citing annual gains of 8.6 percent and CalSTRS reporting 9 percent returns.

This came after strong returns in 2016-17 as well for both of the pension giants. But even with CalPERS now reporting $355 billion in assets and CalSTRS $225 billion, both systems have 70 percent or less of funds needed to cover their long-term commitments.

This troubling long-term picture is why the League of California Cities, in a January report, said it expects CalPERS to keep raising rates on local governments for years to come until they become “unsustainable.” CalSTRS, meanwhile, relies on the Legislature to set the rates it charges workers, districts and the state for pension costs – and the bailout the Legislature approved in 2014 that sharply increased what districts in particular must pay has not shored up the system nearly as much as was hoped.

Against this backdrop, CalPERS and CalSTRS are offering hints that they aren’t happy with the Legislature and think it is making their jobs more difficult.

CalSTRS’ chief investment officer, Christopher Ailman, issued a statement about the good returns that downplayed their significance: “We will rank high compared to similar funds, but it is only one year. We need to repeat that performance year in and year out, on average, over the next 30 years.”

But in an interview with the Private Equity International website that was posted July 2, Ailman elaborated on his view of investment gains. He did so in a way that challenged claims made by many Democratic lawmakers and pro-pension groups such as the Californians for Retirement Security that state pensions’ biggest problem was the Wall Street crash of a decade ago.

CalSTRS exec: Don’t blame investment results

“Ailman points out it’s often not the investment results that have led to the underfunding, it’s either poor management of liabilities or a lack of contributions,” the article said.

“Asked whether this keeps him up at night, he says he sleeps like a baby – wakes up and screams every three hours. ‘We pay out half a billion dollars a month in benefit payments, more than we bring in.’”

In the interview, Ailman also complained about Assembly Bill 2833, a state law that took effect last year that requires pension systems to disclose more information about expenses and fees related to their investments. He said the law ignored existing disclosure requirements and that it had caused CalSTRS to miss out on lucrative opportunities.

He said the “extra rules and extra issues” were having unintended but negative effects.

“We now have a situation in the state of California where CalPERS and CalSTRS have less invested in Silicon Valley than the Dutch, Asian and Middle Eastern sovereign wealth funds. Fundamentally, as a native Californian I think that’s just so wrong, but I can’t change people’s minds. It is what it is now,” Ailman told Private Equity International.

CalPERS knocks bill to monitor divestment laws

CalPERS’ concerns about legislative actions are also plain, if more muted. The Pensions & Investments website reported July 18 that the pension fund opposes Senate Bill 783, which already passed the Senate and now is before the Assembly. It would set up a review body to analyze how CalPERS and CalSTRS had complied with state laws directing the pension funds to divest from certain industries. CalPERS says this review panel would duplicate the work of pension staffers.

Given that CalPERS and CalSTRS at times have resisted the Legislature’s attempts to micromanage their portfolios, SB783 could be seen as giving teeth to lawmakers’ attempts to have a bigger say in investments.

The debate over SB783 comes as CalSTRS faces demands from activists to divest in a new corner of the private sector: companies which run private prisons. Other recent calls for divestment have targeted assault-rifle makers; finance companies that helped with construction of the Dakota Access Pipeline; and fossil-fuel companies.

It’s been a tumultuous era in Oakland. The Police Department has been enmeshed in an ugly

But now Oakland is also wrestling with a painfully familiar story: financial turmoil in local schools. The state took some of Oakland Unified’s autonomy in 2003 after the Legislature approved an emergency $100 million loan to the then-reeling district. With $40 million of the loan still unpaid, the state continues to oversee district spending, though with a smaller role. Now there are new indications that even Oakland Unified’s limited autonomy could disappear for another long stretch as school officials struggle to make ends meet yet again.

In recent months, district officials had to approve what were described as “emergency” $9 million cuts in the district’s $521 million general fund 2017-18 budget and to authorize potentially greater reductions in 2018-19 as well. The cuts were widely denounced in public meetings as unnecessary and indicative of poor management.

This criticism has been buttressed by the Fiscal Crisis Management Action Team (FCMAT), the state agency that works with struggling school districts. In an August report, FCMAT warned that a “fiscal emergency” loomed if Oakland Unified officials didn’t quit spending reserve funds to cover budget shortfalls. FCMAT depicted the Oakland school board as irresponsible for approving cumulative raises for teachers of 14.5 percent in the 2014-15, 2015-16 and 2016-17 school years in a three-year span in which the cost of living went up by less than 2 percent. These pay hikes were the biggest drain on district reserves.

Oakland board members brought more criticism on themselves in January when they approved 5 percent pay raises for themselves. While the total amounts were small – $39 per board member per month – San Francisco Chronicle columnist Otis Taylor Jr. wrote that district students and parents were appropriately “livid” about the salary boost at a time when schools often lacked funds for basics like toilet paper.

A recent East Bay Times analysis suggested there was plenty of blame to go around for Oakland Unified’s fiscal headaches. It largely absolved district Superintendent Kyla Johnson-Trammel, who took over in January 2017, noting her predecessor had failed to follow through on plans to lay off 42 employees because declining enrollment had left the district with less than 37,000 students. Since enrollment directly determines how much state aid comes to districts, well-run districts usually reduce employees when enrollment drops. With enrollment down 33 percent from its 1999 peak of 55,000, Oakland Unified has thus faced constant pressure to downsize.

Pension costs grow 132% per teacher by 2020

But information distributed by the district before Oakland Unified trustees approved the recent $9 million in cuts pointed to another budget culprit – one that is hammering districts statewide. That is the bailout of the California State Teachers’ Retirement System approved by the Legislature and Gov. Jerry Brown in 2014. It phases in an 80 percent increase in annual contributions to CalSTRS from fiscal 2014-15 to fiscal 2020-21 – going from $5.9 billion a year to $10.9 billion.

More than two-thirds of this additional cost must be borne by local school districts. In 2014-15, they were required to pay 8.25 percent of teacher payroll to CalSTRS. Beginning in fall 2020, that amount will be 19.1 percent – a 132 percent increase in per-teacher pension funding obligations. Even in districts with high numbers of English-language learners – which receive additional funding under the Local Control Funding Formula, a 2013 state law – pension obligations have created major headaches.

School Services of California – a consultant which advises a large majority of the state’s 1,000 school districts – estimated last July that at least 280 districts would struggle to pay bills in the 2017-18 school year. A San Jose Mercury-News analysis at the time suggested that the just-ended 2016-17 school year might be looked back on in 10 years “as the last good year in recent times for public education.”

The August 2017 FCMAT report on Oakland Unified raised additional concerns about why the district would struggle with its finances in coming years beyond inadequate funding. FCMAT faulted the district for inadequate internal budget controls, for allowing significant expenditures without board approval and for inadequate training of officials with budget responsibilities.

The bailout requires school districts, the state government and teachers to steadily increase their annual contributions to CalSTRS in coming years. The $5.9 billion in 2014 funding for CalSTRS’ future unfunded liabilities ramps up to nearly $11 billion in fiscal 2020-21, with school districts providing 70 percent of the extra funds, 20 percent coming from the state general fund and 10 percent from teachers.

The report is only the latest from the LAO to raise concerns about how the bailout is being implemented. But it offers a particularly serious warning: Even though the 2014 law sharply increases the amount of money that must be set aside for long-term pension costs, it may not reduce long-term state liabilities:

Over the long term, if investments consistently underperform assumptions — or if CalSTRS reduces its investment return assumption — the state’s share of the unfunded liability could increase substantially and state contributions could be several billion dollars higher by the 2040s. As implemented, districts would be largely insulated from large unfunded liabilities under these bad investment scenarios. While there are pros and cons to the implementation — both from the perspective of the state and districts — we are unsure that these are the outcomes the Legislature intended when it passed the CalSTRS funding plan into law.

The concern about low returns has been an increasing focus both of pension systems and financial rating firms. Early last year, when Standard & Poor’s raised California’s credit rating because of its improved revenue picture and relatively tight budgets, it also warned that “the state teachers’ retirement system (CalSTRS) is in need of a long-term funding strategy.”

Life expectancy increase may balloon liabilities

Another factor has CalSTRS officials worried, as Ed Mendel reported this week on calpensions.org:

Last week, the CalSTRS board was told that the life spans of retirees have been increasing faster than anticipated. Two years ago CalPERS increased employer rates to cover longer life spans expected for its retirees.

 

Rick Reed, CalSTRS chief actuary, said the same mortality table has been used for persons age 20 and age 60. A weighted average tends to estimate a life span that is too long for the 60-year-old and too short for the 20-year-old.

 

With new computer technology, Reed said, it’s possible to have a mortality table for each individual for each year. For a person age 20, there would be 70 mortality tables by age 90.

Such technology will also make it easier to track the unpward arc in unfunded liabilities because retirees are living longer.

The double whammy of low investment returns and increased life expectancy has already had a harsh impact on San Francisco. The Chronicle reported in December that these factors had badly undercut hopes that Proposition C, a 2011 pension reform approved by voters, would deliver big savings:

Numbers crunchers say the pension payout for retired government workers could grow to $380 million a year from the city’s general fund by 2019. That’s $113 million more than was projected just last year. … Of the $99 million deficit that the city will have to eliminate by the start of the fiscal year July 1, $42 million is attributable to more going out in pensions than the city is taking in from the fund’s investments. …

Retirees are living longer than expected — and investments are coming in with only a 4 percent return versus the 7.5 percent that actuaries had predicted.