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.