The State Worker

Gavin Newsom’s budget makes big down payment on California pensions

By making early payments on California’s unfunded pension promises, Gov. Gavin Newsom’s first budget aims to free up billions of dollars for schools in coming years.

His budget calls for $7.8 billion in payments above what is required by law to the California Public Employees’ Retirement System and the California State Teachers’ Retirement System.

Public schools would get special help if lawmakers passed Newsom’s budget. School districts have been struggling since 2014 with escalating CalSTRS rates that have more than doubled how much they pay for teacher retirement plans every year.

Newsom’s budget would give them some relief by putting $3 billion into CalSTRS on their behalf They’d get $700 million over two years to “buy down” CalSTRS rate increases, and the state would put another $2.3 billion toward their long-term pension debt.

Newsom’s office estimates that would save $6.9 billion over the next 30 years by paying down debt ahead of schedule.

“This is exactly what we’ve been looking for,” said Derick Lennox, a lobbyist from Capitol Advisors Group who represents California school districts. “Gov. Newsom is actually freeing up money to stay in the classroom by using really smart budgeting on pensions.”

Newsom’s office estimates the CalSTRS payments would shave about 1 percent off school employer pension contribution rates next year. That would have them paying a sum equivalent to 17.1 percent of each teachers’ wages toward CalSTRS instead of 18.1 percent.

“By paying more now, the state would likely decrease its costs over the long-term duration of the funding plan while also reducing the annual contributions of school districts,” said CalSTRS Chief Executive Officer Jack Ehnes.

Advocacy group Children Now commended Newsom for making the teacher pension commitment, too.

“It’s not often thought of as a kids’ issue, but, in fact, it’s the people who work with our kids. There are many who draw down these pensions, and we need to support them and at the same time, we need to make sure we address the issue so that we can actually provide services for kids, too,” said Samantha Tran, it’s senior managing policy director.

Separately, Newsom wants to make $4.8 billion in early payments toward the state’s share of its unfunded liabilities at CalPERS and CalSTRS. CalPERS would get $3 billion; CalSTRS would get $1.8 billion.

Each pension fund is considered underfunded because each has about 70 percent of the assets its owes to public employees and retirees.

Their unfunded liabilities are the amount of money they’re lacking. Government agencies make payments every year to work down that debt.

They’re a risk to government agencies and taxpayers because those debts would have to be paid even if a recession hits and forces cities, counties and schools to cut public services.

“We greatly appreciate Gov. Newsom’s proposal to contribute an additional $3 billion to the CalPERS fund. The commitment to the public employees who serve California will help to ensure the long-term sustainability of the fund, reducing taxpayer costs and saving the state billions,” said CalPERS Chief Executive Marcie Frost.

The state in last year’s budget estimated it has $287 billion in unfunded retiree liabilities for pensions and health care. Newsom’s early payment to CalPERS would save the state about $7 billion over time, his office estimates.

Sen. Steve Glazer, who last year submitted a bill that would have allowed public employees to opt of CalPERS, praised Newsom’s pension plan.

“Our retirement programs still need reforms to become sustainable over the long term. But previous legislators and governors made commitments to employees which we must uphold. The sooner we retire those debts the better,” said Glazer, a Democrat from Orinda.

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Adam Ashton is The Bee’s Capitol Bureau Chief. He leads a team of reporters covering California politics and government. His assignments for The Bee and its sister papers have taken him from Merced to Baghdad since joining McClatchy in 2004.