Lawmakers began confronting a multibillion-dollar budget headache Wednesday that's been looming for years: the funding gap at the state teachers' pension fund.
The Legislative Analyst's Office called on lawmakers to erase a $73 billion shortfall at the California State Teachers' Retirement System over the next 30 years, saying any delay in dealing with the pension fund's finances will translate into higher costs down the road.
"This is more costly the longer that we wait," LAO analyst Ryan Miller told a joint Assembly-Senate hearing on CalSTRS funding.
Legislators vowed to deal with the problem, though they indicated it will take time to find a solution.
"We will come up with a strategy," said state Sen. Jim Beall, D-San Jose, chairman of the Public Employment and Retirement Committee.
CalSTRS gets a combined $5.7 billion a year from the state, teachers and school districts. The LAO wants contributions to increase by a total of $4.5 billion a year, starting in 2014.
Because the law limits the ability of the Legislature to impose higher contribution rates on teachers, the LAO said the bulk of the increased funding would have to come from the state and schools.
CalSTRS has been warning about its money problems for years, most recently in a report to the Legislature a month ago. Unlike its sister fund, CalPERS, the teachers' retirement system has to rely on the Legislature to set employers' contribution rates.
The pension fund's unfunded liability - an estimate of its long-term cash shortage - was pegged at $73 billion. That sum grows by $17 million a day, CalSTRS Deputy Chief Executive Ed Derman told the legislative panel.
Although CalSTRS has more than enough cash for the foreseeable future, it's projected to run dry in 2044.
The LAO said the shortfall was initially caused by the Legislature's decision in the late 1990s to raise certain benefits while lowering the state's contribution. The problem mushroomed with the market crash of 2008, which cost CalSTRS around $43 billion.
The fund's investment portfolio has since recouped much of its loss. Last year alone it earned a 13.45 percent return, well above forecast. The portfolio stood at $161 billion at the end of February.
But the effects of 2008 still linger, having deprived CalSTRS of billions in cash to invest the past few years. Today, the system says it can't realistically expect to invest its way out of its problem.
The state's contribution to CalSTRS totals $1.4 billion a year. The LAO acknowledged that pouring more money into the fund right away would put new strain on a state budget that's just beginning to recover after years of red ink. But waiting to fix the problem would deprive CalSTRS of cash it needs to invest in the near term to bulk up its portfolio, the LAO said.
The average CalSTRS pension for a teacher who retired last year is $3,936 a month. CalSTRS considers its benefits "relatively modest" and notes that California teachers don't get Social Security.
Call The Bee's Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.