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The Daily Wildcat

The Daily Wildcat


    California teachers’ pension system headed toward insolvency


    As California school districts anticipate possibly the worst budget crisis in a generation, many will try to lighten their burden by enticing older teachers into retirement. But as more and more teachers retire — with a pension averaging 55 percent to 60 percent of salary — they will be straining a system that already can’t meet its obligations.

    The California State Teachers’ Retirement System is sliding down a steep slope toward insolvency. The threat isn’t to teachers who have retired or plan to, but to the people ofCalifornia. Taxpayers, who already pick up 23 percent of CalSTRS expenses, will be increasingly burdened as the giant pension system fails to meet its obligations.

    “”We’re on a path of destruction,”” said Marcia Fritz, president of pension-reform group California Foundation for Fiscal Responsibility.

    And merely rejiggering formulas for new employees won’t rescue the system, she said. Simply put: “”We overpromised.””

    Among those promises, “”Californians have typically given their public employees richer retirement benefits”” than have other states, according to the nonpartisan Legislative Analyst’s Office.

    Despite the looming disaster, CalSTRS is like an ocean liner that’s slow and complicated to change course. Gov. Jerry Brown hasn’t mentioned overhauling the system that benefits one of his major supporters, the teachers union. Nor has the Legislature taken up the issue.

    CalSTRS, a $146.4 billion system, provides the

    retirement of public-school teachers and administrators. Like its sibling pension system, CalPERS, which provides for nonschool state employees, CalSTRS’ collections don’t meet its obligations to current and future retirees.

    Although CalPERS has imposed higher contributions, reformers say CalSTRS’ formulas can be revised only by legislation, a statewide initiative or possibly a constitutional amendment and litigation — not to mention immense political will. Courts have ruled that retirees are guaranteed the pensions promised them when hired.

    No Social Security

    Twin reports issued earlier this month amplify the alarm. The Legislative Analyst’s Office suggested that the state gradually decrease its share and move toward either cost-sharing with teachers or creating a hybrid retirement system, with reduced pensions and a 403(b) savings program — the public- and nonprofit sector’s equivalent to 401(k) retirement accounts.

    And actuaries for the state Teachers Retirement Board calculated that contributions would have to increase 77 percent to make the system sound.

    But the report added that given the state’s financial distress, those contributions likely can’t be increased

    for more than a year. By law, each teacher contributes 8 percent of salary to CalSTRS, the school district adds 8.25 percent, and the state puts in about 4 percent.

    Compare that to the private sector, where employers and workers each contribute 6.2 percent to Social Security, and may contribute and match more through 401(k) savings. Teachers do not participate in the Social Security system.

    Any move to pare benefits or collect more from employees would affect only future teachers, not current employees. That’s why Fritz thinks a constitutional amendment to reduce benefits for current teachers is necessary.

    The fund’s shortage is exacerbated by cutbacks to teaching ranks, so fewer teachers are paying into the system. But the core of the problem has roots in the 1990s, when Californiatook a contribution “”holiday,”” paring back payments to the two big state retirement systems and bumping up benefits, even retroactively fattening retirees’ checks. When the economy tanked, CalSTRS’ portfolio dropped 25 percent. Combined with enhanced benefits, the system now has a ballooning gap between its promises and income, or $40.5 billion in unfunded liabilities.

    Jason Sisney, the LAO’s director of state finance, in a video posted on the LAO’s website likens the state to consumers paying only the minimum balance on their credit cards — the overall balance keeps growing.

    Among his office’s recommendations are revising contributions, ending retroactive benefit increases and paying costs as they accrue, rather than deferring them to future generations.

    Any proposal to scale back current benefits is sure to raise opposition from teachers and their union. Teachers believe they’ve earned their CalSTRS benefits. “”It’s money I’ve been paying in for 30 years. It was promised to us when we signed on,”” Pioneer High teacher Anne Kline said.

    Although eligible for years to retire, Kline calculated her benefits and decided she still can’t afford it, because of the costs of health insurance.

    Although teachers widely agree with Kline that they’re merely reaping their own contributions toward retirement, systemwide teachers collectively are drawing out more than not only what they’ve personally put in, but what their school districts have contributed as well. Many can even take home more in pensions than they netted while teaching.

    ‘Buying’ bigger pension

    CalSTRS’ formula, which is based largely on employee salary, age and longevity, tends to reward retirement at age 61 1/2 . For example, a teacher who has worked for 35 years, making $90,000 in her final year, could retire at age 62 and reap a $75,600 annual pension — 84 percent of salary. Teachers can add to their pensions by “”buying”” additional years.

    A pension reform group has drafted a proposal that would cap the state share of future benefits at about 11 percent of salary.

    In contrast to the proposed overhaul, teachers’ pensions on average currently amount to 55 percent to 60 percent of their salaries, CalSTRS counselor Dave Gillies said.

    The pension reformers hope to find a sponsor for their legislation soon, said ?Dan Pellissier of California Pension Reform. And if the Legislature doesn’t pass a bill by mid-May, the group will circulate a petition to put it on the state ballot, he said.

    “”We have seen polls that 80 percent of likely voters know something needs to be done,”” said Fritz, an accountant and former CalPERS consultant. “”They’re listening.””

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