Audit: California Teachers Pension System Remains ‘High-Risk?

For all of Governor Jerry Brown’s self-congratulatory claims of engineering a balanced budget, the reality is that and claims of “balance” are wholly predicated on ignoring over $100 billion of debts and unfunded liabilities. From understating the “wall of debt” to completely skipping out on addressing unfunded public employee pension and health care obligations, California is digging itself into a deeper hole that threatens long-term systemic stability.

As one example, the California State Teachers’ Retirement System (CalSTRS), which provides retirement benefits to California K-12 and community college educators and administrators, has long been underfunded. With 862,000 members, it is the second largest pension system in California. CalSTRS allows members to collect a generous defined benefit plan that includes several benefit enhancements (e.g. longevity benefits) to boost retirement benefits. As a consequence, over 6,000 retired teachers and school administrators currently receive pensions in excess of $100,000 per year.

Presently, the CalSTRS Defined Benefit Program, which provides for pensions, only has 67 cents for every dollar it promises in benefits. The decline in the system hasn’t been a sudden development, but a gradual process that the Legislative Analysts Office (LAO) has been sounding the alarm on for years.

Ahead of the finalizing of the California budget, the LAO reported to the Senate Public Employment and Retirement Committee that CalSTRS is currently short $73 billion. As a result, the LAO reported that CalSTRS assets would be fully depleted by 2044 if corrective action weren’t taken. For recently hired teachers and administrators, this directly imperils their future. For taxpayers, this means finding a resolution to this funding shortfall.

According to the LAO, CalSTRS received $5.7 billion in contributions in 2012-2013, with $2.1 billion in contributions from employees themselves, and an additional $3.6 billion in contributions from state and local school and community college districts. In order to keep the system solvent, the LAO reported that an additional $4.5 billion in contributions is necessary, per year, for 30 years. This could hypothetically be achieved by higher contributions from teachers, school districts, and state government. In plain speak, this could mean smaller take-home pay for teachers, fewer services from school districts, and diverted tax dollars from state functions to cover the shortfall.

To make matters worse, these numbers all assume that CalSTRS’ assumption of receiving a 7.5% investment return on pension investments are reasonable over 30-years. Using accounting standards by the Governmental Accounting Standards Board (GASB), CalSTRS’ unfunded liability balloons to a “Net Pension Liability” of $166.9 billion due to the incorporation of lower investment return assumptions.

How CalSTRS will adjust to this figure is unclear. Unlike the California Public Employee Retirement System (CalPERS), the contribution rates needed to address liabilities are set by the state legislature rather than the system itself. That is, whereas CalPERS has the authority to make the necessary adjustments of contribution rates, CalSTRS is at the mercy of an (up until know) unresponsive and irresponsible state legislature.

This has all been underscored by a recent California State Auditor report characterizing the underfunding of CalSTRS as a “high risk issue” for California. Unless California “takes steps to ensure that funding for the CalSTRS program is increased, it may have to make up for the deficit using revenue from taxes.” This is concerning, as California taxpayers are routinely baited into voting for higher taxes in order to “invest in education.” In 2012, California voters approved Proposition 30 (“Temporary Taxes to Fund Education”), which raised income and sales taxes to the tune of $7 billion in additional revenue. One fear, raised by my colleague Emma Collins in a blog post, is that such revenue siphoned from taxpayers on the pretense of funding education may end up financing the currently unsustainable CalSTRS system.

Presently, there appears to be no discussion in the state legislature or from the Governor about seriously addressing this problem. It is possible that making reforms such as allowing CalSTRS to make the necessary adjustments to contribution rates may assist in at least maintaining a facade of sustainability. It may also just make viable more sensible and sustainable alternatives. Giving employees the option of switching to a defined contribution plan may ease some of the burden going forward. Either way, any resolution to this long-developing problem is likely to be a significant burden on teachers and taxpayers.

Stay in Touch with Our Pension Experts

Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.

This field is for validation purposes and should be left unchanged.