The cost of public pensions is going up again in California, this time to rescue the state’s troubled teachers’ retirement system.
The Legislature voted Sunday to pump billions of additional dollars into the California State Teachers’ Retirement System, which had been warning for years that it would run out of cash by mid-century.
Under AB 1469, approved by lawmakers as part of a package of budget bills, CalSTRS will get increased contributions from school districts, the state and teachers themselves. The plan, which kicks in July 1, is designed to gradually erase a $74 billion gap between CalSTRS’ assets and its long-term obligations.
Much of the added burden will be felt by school districts. Their combined annual contribution will grow from $2.2 billion to nearly $6 billion, with the increases phased in over seven years, said CalSTRS Deputy Chief Executive Ed Derman.
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School district officials said the increased pension contributions will devour much of the increased funding the Legislature approved for education. The budget approved Sunday includes an additional $4.75 billion for school districts under a new funding formula.
Sacramento City Unified School District’s pension bill will grow from $13.8 million a year to $35.4 million at the end of the seven-year phase-in period, said district spokesman Gabe Ross. The district’s total budget is around $400 million.
“This is eating away at everything we need to be doing,” said Dennis Meyers, assistant executive director at the California School Boards Association. “There’s a little bit of panic going on.”
The Legislature’s decision comes amid an ongoing political and legal debate, in California and elsewhere, about the cost of supporting public employee pensions. Even though Gov. Jerry Brown signed legislation reducing pensions for state and local government workers hired after January 2013, critics say more must be done to curtail costs.
San Jose Mayor Chuck Reed has vowed to promote a 2016 statewide ballot initiative that would give government agencies the leeway, under certain circumstances, to reduce benefits for existing workers. Reed, a Democrat, said the CalSTRS legislation gives his proposal greater impetus. The school districts will have to “raise taxes or cut services,” he said. “Right now they have a very limited range of choices.”
Meanwhile, two federal bankruptcy judges are mulling whether the bankrupt cities of Stockton and San Bernardino have the right to scale back their contributions to CalPERS, the California Public Employees’ Retirement System. A decision could come next month in the Stockton bankruptcy, where an investment firm that lent $35 million to the city is demanding that the city reduce its pension payments to free up cash. CalPERS has argued that the dollars needed to support public pensions are legally untouchable.
Two months ago, CalPERS’ board approved higher contribution rates for the state, municipalities and school districts. (Janitors, cafeteria workers and other employees who aren’t teachers are covered by CalPERS.) For instance, the state’s annual CalPERS contribution will gradually grow by about $1.2 billion, to a total of $5 billion. CalPERS said it needs the additional money to pay for longer life expectancies for retirees.
CalSTRS, unlike CalPERS, doesn’t have the right to impose higher contribution rates. It has to ask the Legislature’s permission, and has been nudging lawmakers for several years to come up with a long-term funding plan.
Although the teachers’ retirement system has plenty of cash to pay benefits for the foreseeable future, it said it was on a path to run out of money in 2046. CalSTRS said its problems stem from huge investment losses suffered in the meltdowns of 2001 and 2008.
Under the legislation approved Sunday, the state’s CalSTRS contribution will grow from $1.3 billion to around $2.1 billion, phased in over three years.
That’s a sliver compared to what school districts will pay.
Naj Alikahn, spokesman for the Association of California School Administrators, said the increase approved by the Legislature represents “a pretty significant leap” for districts. Nevertheless, he said, district officials recognized all along that contribution rates would rise to put CalSTRS on sounder footing. “If we do absolutely nothing, if we fail to act, it runs out in 30 years,” Alikahn said.
Assemblyman Rob Bonta, who authored the CalSTRS bill, said it makes sense to have school districts shoulder most of the higher contributions. “The employer should have the largest share, just as is the case with all other pension plans in the state,” said Bonta, D-Alameda, in a statement emailed by his staff.
Teachers will pay more to shore up CalSTRS, too. Their contribution will rise from a combined $2.25 billion to around $2.8 billion, with a three-year phase-in period. The California Teachers Association said the plan was fair.
“We knew that everybody was going to have to pay more,” said Dean Vogel, CTA president.
While teacher compensation is ordinarily a function of collective bargaining agreements, the state has the right to impose higher pension contribution rates. But by law, Derman said, the state must give them “something of comparable value in return.” In this case, the state is guaranteeing the 2 percent annual increase in retirement benefits the teachers have been receiving, he said.
Brown has signaled his support for the CalSTRS funding plan, saying Friday it “brings stability to the teachers’ pension system.”