CalSTRS cuts state a break

Trustees of the California State Teachers' Retirement System agreed Thursday to allow the state to reduce its contribution to a supplemental pension plan as long as payments from the fund to teachers never dip below a fixed rate.

The plan would give Gov. Arnold Schwarzenegger something he wants – a substantial budget savings – but it also exposes the state to possible fluctuations in inflation that could prove costly in the future.

If approved by the Legislature during the budget process, the proposal would save taxpayers about $80 million in 2008-09, and between $70 million and $75 million in subsequent years.

With state budget makers still reckoning with a lingering $8 billion deficit, that would be good news for the general fund.

But it could spell trouble in the more distant future: Under the proposed guarantee for retirees, the plan would require the state to shoulder an unknown amount of financial risk should inflation rise faster than the retirement system's financial experts are predicting.

"I understand the spirit of this and the willingness of everyone to take care of these retired teachers," said Marcia Fritz, vice president of the California Foundation for Fiscal Responsibility, a pension reform advocacy group based in Citrus Heights. "But inflation is a very real threat. They are opening themselves up to risk."

The state is aware that it might have to shoulder increased payments if inflation rises but views the risk of a big jump as remote, said H.D. Palmer, deputy director for the state Department of Finance.

"On a long-term basis, inflation has been very moderate," he said.

The plan involves a supplemental benefit for older retirees that helps them cope with inflation.

Public school teachers in California do not receive Social Security. Instead, the CalSTRS pension is their main source of retirement income. It comes with an annual 2 percent cost-of-living increase.

The supplemental program was set up in 1989 by the Legislature. The program is tied to the California Consumer Price Index and provides pension recipients extra cash when their purchasing power falls below 80 percent of the purchasing power of their original allowance.

The money helps some of the state's most vulnerable elderly citizens. The benefit goes to people who retired before 1988, said David Walrath, legislative advocate for the California Retired Teachers Association. Many of those who receive it are widowed women surviving on as little as $500 or $600 a month, he said.

About 56,000 people received the extra benefit last year. The average amount has been about $4,100 per year, according to CalSTRS records.

The supplemental fund currently has $3.4 billion, but the benefit is not guaranteed. If investment income were to fall, retirees could receive less than the 80 percent threshold.

Under the system, the state general fund contribution has been 2.5 percent of the state's overall teacher payroll.

The state proposed reducing its payment to the special benefit fund to 2.2 percent next year, and then setting it at 2.24 percent in subsequent years. In exchange, the state said it would agree to a guarantee that eligible recipients would always receive the benefit. Actuarial and legal experts determined the supplemental fund could still perform at the lower contribution rate.

On Thursday, eight members of the CalSTRS board agreed to the proposal, and set the guaranteed purchasing power threshold at a higher rate of 82.5 percent.

Several board members said they welcomed the chance to provide the security for retirees.

"A guarantee is a significant benefit," said trustee Terry McGuire.

Only one trustee, Jerilyn Harris, voted against the proposal. Anne Sheehan, representing the Department of Finance, abstained.

Several representatives of teacher organizations expressed support for the guarantee.

However, Walrath, who represents retired teachers in California, said conditions are so dire for some elderly teachers that he would have preferred to see the threshold rise to 85 percent without the long-term guarantee.

"Eighty-five percent could be maintained indefinitely if inflation stays in the right range," Walrath said.

In the past, the supplemental benefit was a point of contention between CalSTRS and the administration. Faced with a deficit five years ago, former Gov. Gray Davis skipped a $500 million payment. CalSTRS sued, and the 3rd District Court of Appeal ruled for the agency. The state repaid the $500 million last year and eventually will repay the interest.

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Call The Bee's Deb Kollars, (916) 321-1090.