California Teachers $43 Billion Pension Fund Shortfall and Golden Handcuffs

If you ever wondered why school districts have generally higher per-pupil funding and in many cases smaller enrollments but still continue to have huge budget shortfalls, the teacher pension structure is partly responsible. Pension obligations will continue to encroach on the day to day operating budgets of school districts. This problem will only get worse as states require school districts to make larger employer contributions to compensate for shortfalls and losses.

Today’s Los Angeles Times reports on the coming funding shortfalls in the California State Teachers’ Retirement System which is the second largest pension fund in the nation:

Reporting from Sacramento – Another pension alarm bell is ringing in Sacramento, this time at the teachers retirement system, where the nation’s second-largest public pension fund is reporting a $43-billion shortfall.

The California State Teachers’ Retirement System said that as of June 30, 2009, it could meet only an estimated 77% of its future pension obligations — far less than the 100% recommended by actuaries.

Known as CalSTRS, the fund took a big hit during the 2008-09 fiscal year, losing a quarter of its value. Since then, its investment returns have improved, but the growth isn’t strong enough to keep up with a widening funding gap.

What’s worse, CalSTRS Chief Executive Jack Ehnes said in a report to be presented to the board Feb. 5, the fund could be broke in 35 years — the length of a typical teaching career.

Even worse than the financial toll that these pensions take on fiscal stability of school districts is the impact these traditional pension systems may have on teacher quality. As explained by Robert Costrell and Michael Podgursky in “Golden Handcuffs” in the Winter 2010 Education Next:

Teacher pensions consume a substantial portion of school budgets. If relatively generous pensions help attract effective teachers, the expense might be justified. But new evidence suggests that current pension systems, by concentrating benefits on teachers who spend their entire careers in a single state and penalizing mobile teachers, may exacerbate the challenge of attracting to teaching young workers, who change jobs and move more often than did previous generations.

Some other ways that public school teacher pensions are different from private sector pensions: