By Richard W. Raushenbush
My Word
In 2014, the Legislature finally addressed the $74 billion unfunded liability in the California State Teachers Retirement System (CalSTRS) Defined Benefit Program.
While long overdue, the Legislature’s action will significantly degrade California’s K-12 public education system. By placing the burden of paying down this debt primarily on school districts without providing any new funds to do it, the Legislature’s 30-year mandate will force stagnant wages and teacher layoffs.
The CalSTRS’ Defined Benefit Program provides pension benefits to our children’s teachers, who do not receive Social Security benefits. Teachers count on the CalSTRS benefits in pursuing a teaching profession.
The Legislature caused CalSTRS to become drastically underfunded. Under California law, the Legislature is the CalSTRS administrator — it sets the contributions into, and the benefits paid out of, CalSTRS. School districts have no control over contributions or benefits. In 2000, excited by temporary high investment returns, the Legislature passed a package of bills that increased CalSTRS retirement benefits without increasing the contributions necessary to pay for them, and in fact cutting the state’s contributions.
The mirage of endless high investment returns quickly vanished. A 2013 study found: “Had the Legislature not increased benefits, even if CalSTRS’s investments had still underperformed, the funding ratio would currently be 88.4 percent, thereby making CalSTRS one of the nation’s best-funded public pension plans.”
A 2013 report to the Legislature explained: “In 2001-02, when the DB Program first became underfunded, the state and employer contributed 90 percent of the amount needed to fully fund the program within 30 years. By 2011-12, that percentage had declined to 46 percent.” For over a decade, the Legislature ignored the CalSTRS Board’s warnings that the plan was underfunded, and it was getting worse.
In 2014, the Legislature adopted AB 1469, which seeks to pay down CalSTRS underfunding over about 30 years by relatively small increases in contributions from teachers and the State, and by increasing school districts’ contributions over seven years by 10.85 percent. In 2020, school districts’ CalSTRS contributions will be 19.1 percent of teacher payroll!
This is not sustainable. School districts are funded by the public to provide free public education; they do not make profits that can be devoted to paying off the Legislature’s CalSTRS debt. The Legislature did not provide any new funds to pay the significant CalSTRS’ increases. Worse, school districts are being hit twice.
Other school employees are covered by the California Public Employees’ Retirement System (CalPERS), and those contribution rates are projected to go up from 11.442 percent to 20.4 percent by 2020. Think of it this way. School districts spend about 60 percent of their budgets on teacher and staff compensation, so a 10 percent increase in retirement contributions means roughly 6 percent of the entire budget has to be reallocated from educating children to paying off underfunded pension plans.
School districts have few tools to manage their budgets. Absent sufficient funds, pretty quickly the ugly choice is to limit employee compensation or reduce the number of employees. Stagnant or declining compensation will reduce the pool of dedicated and qualified teachers. Teacher layoffs will impact children with larger class sizes and fewer courses. For school districts covering some of the CalSTRS and CalPERS increases with large LCFF “supplemental” and “concentration” grants, the impact may be deferred for a short time. For those districts without, the harm is now.
In Piedmont, where I have served on the Board of Education for the past eight years, the expected state LCFF funding increase in 2017-18 is less than the increase in CalSTRS and CalPERS contributions. For PUSD, the projected LCFF increase in 2017-18 is $196,000, while the CalSTRS and CalPERS increases are projected at $450,000. That’s a budget crisis even with no spending increases on employee compensation, health insurance contributions, Special Education, maintenance, instructional materials, technology, professional development, etc. Absent an increase in State funding, this will get worse as the contribution rates increase through 2020, and then persist until 2046.
The Oakland Unified School District faces significant deficits also. Some of this is caused by the CalSTRS and CalPERS increases. New funds from the state to cover this cost would help OUSD bring its budget back into balance.
Teachers cannot be expected to accept stagnant wages for decades. Good teachers will leave public schools and good candidates will avoid the teaching profession. Students will suffer from larger class sizes, reduced program, loss of counseling and poorer teaching. By placing the burden of paying off the CalSTRS debt on school districts, without any new funding, the Legislature is degrading, and may ruin, California’s public K-12 education system.
There are no easy solutions. The legislators in the 2000 Legislature put unfounded hope over fiscal prudence, and 15 years of adequate retirement contributions were lost. Now, the bill is due. The Legislature and Gov. Jerry Brown must act, and there are two choices, which can work in tandem. First, some budget surplus could be devoted to reducing the CalSTRS debt. Like any other loan, the quicker you pay it off, the less it costs. Second, the state must take responsibility for the portion that must be paid over time, either by increasing the state contribution rate and decreasing the school districts’ rate, or by providing new funding to school districts to pay the CalSTRS increases.
There are many demands on the state budget, but our children’s education must come first. Undoubtedly, this asks our current legislators, who mostly were not around in 2000, to make hard choices. But it must be done. Finally, once the Legislature has made these hard choices, it should then remove itself as CalSTRS pension manager and leave pension administration to professionals driven by their fiduciary duty to current and future retirees.
Richard W. Raushenbush is a former Piedmont Unified School District Board of Education member and an attorney.
