Out of Control Policy Blog

Teachers' Pensions Rob Students, Taxpayers

In 2012, California passed Proposition 30, which chiefly included a $7 billion tax increase intended to generate funds for education. These funds, however, will likely never reach the classroom. Instead, they will be used to fund bloated teacher pensions.

The structure of the California State Teachers Retirement System is to blame. As David Crane puts it in a Bloomberg article, "California teachers are unconditionally guaranteed lifetime pensions by their school districts. Everything works out fine if Calstrs, as the retirement system is known, earns the investment returns it forecasts and from which upfront contributions are derived. But if they fall short, school districts must make up the difference."

In short, when the state retirement system fails to generate enough revenue to fund teacher pensions, school districts (and therefore students) must suffer.

This issue is once again rearing its head after the state's nonpartisan Legislative Analyst's Office issued a report that cited a $73 billion shortfall in state teachers' retirement plans. Calstrs incurred such a massive budget shortage because it has earned a mere 60 percent of its forecasted investment return since 1999.

How does Calstrs plan to deal with what LAO Senior Fiscal and Policy Analyst Ryan Miller calls "perhaps California's most significant long-term fiscal challenge"?

While a specific funding proposal is not slated to be enacted until the end of the 2014 legislative session, Calstrs explained in a report to the California legislature that they require increased governmental contributions into the system for the next three decades, starting at $4.5 billion for the 2014-15 fiscal year and gradually increasing over time. Further, this request cannot be deferred, because for every year that a contribution is deferred the contribution amount increases by 7.5 percent.

This money is likely to come through increased contributions on the state or district level, specifically in the form of Prop 30 funds. The LAO report notes that reducing future teachers' benefits in an attempt to accrue funds is "unlikely to be a major funding solution." The report explains that the group of future teachers who would be eligible for benefit reductions (i.e. those teachers not locked into 2012 pension legislation) will remain for numerous years too small a group for cuts in their benefits to have any significant impact on the pension gap. According the LAO increased employee contributions to their pensions would also "only address a small part of the unfunded liability."

The most probable course of action will be additional payments from states and districts. Because neither the 2012-13 nor the 2013-14 budgets contain any provisions for additional pension funding, however, tax dollars will have to be redirected from other programs. The funds generated by Prop 30 may become a prime example of this type of reallocation. Under California law, schools receive the first 40 cents of every dollar of state revenue. The state forecasts that the tax increases implemented by Prop 30 will generate $7 billion, meaning that $3 billion extra dollars will flow to schools each year. This money will likely never reach the classroom, however. Instead, school districts will be forced to use it to fund teacher pensions, though it will only account for a mere two-thirds of Calstrs' annual $4.5 billion request. Even if Prop 30 funds are not specifically tied to pensions, these obligations continue to encroach on school districts' general operating funds as districts spend more and more of their yearly per-pupil funds on long-term pension obligations. Therefore, it is inevitable that new tax revenue from Prop 30 will support the broken pension system.

By upholding the status quo on pensions, politicians are driving yet another nail in the coffin of the American public education system. 


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