SACRAMENTO, Calif. (AP) — In Gov. Jerry Brown’s promise to start paying off California’s massive liabilities, the largest single unfunded debt will not be seeing any additional pay-down in the coming fiscal year.
The unfunded liability for teachers’ pensions stands at more than $80 billion, a gap so large that the fund is projected to deplete all its assets in about 30 years. It is the largest single component of both the state’s unfunded retirement liabilities, which the Department of Finance puts at nearly $218 billion, and of the state’s overall $354 billion in long-term obligations.
The deficit for the nation’s largest educator-only pension fund is so huge it would cost teachers, local school districts, community colleges and the state budget a combined $4.5 billion a year to bridge. The California State Teachers’ Retirement System says it grows by $22 million each day nothing is done.
Yet Brown has no plans to start closing the gap in the fiscal year that starts July 1.
Instead, he said he will meet with the key players over the next year to create a plan for long-term solvency. The proposal, which he discussed Thursday as he released his annual budget blueprint, is likely to include higher contributions from teachers whose future pension checks might otherwise be in jeopardy.
The debate “is going to be quite contentious,” said Brown, a Democrat who is up for re-election this year. “It’s going to be daunting. It has to be done, and sometimes it’s hard to get things done until people really see disaster ahead.”
Unlike other professions, teachers in California do not pay into Social Security and thus do not receive it when they retire, making their CalSTRS pensions particularly vital.
And unlike the California Public Employees’ Retirement System, which covers a wide range of state and municipal employees, CalSTRS cannot unilaterally increase the amount it collects from state and local governments. CalSTRS contributions can be increased only if the Legislature votes to do so.
While CalPERS plans to boost contribution levels again next month for the third time in the last two years, the 8 percent that teachers pay into the pension fund from their salaries has not changed since 1972. The 8¼ percent that school districts pay has not been altered since 1990.
While the state’s share can vary slightly, it has hovered at 5.5 percent including an annual cost-of-living adjustment — about $1.4 billion a year. The state’s general fund contribution to CalPERS is projected to top $1.8 billion next fiscal year.
The bulk of the pension funds’ revenue comes not from contributions but from investment income. And that also is the cause of CalSTRS’ problems.
The dot.com boom led to the fund being fully funded by 1998, but the windfall prompted state lawmakers to increase benefits and decrease the state’s contribution. CalSTRS Chief Executive Officer Jack Ehnes said the fund has been seeking an increase ever since the tech market balloon deflated more than a decade ago, but the bottom really dropped out during the Great Recession.
There is general agreement that the gap is so large that it cannot be bridged by the rebounding economy alone, said Ehnes and Ryan Miller, a CalSTRS analyst with the state’s nonpartisan Legislative Analyst’s Office.
“There is no silver bullet,” Ehnes said.
The Brown administration says the state cannot afford to absorb the full $4.5 billion annual increase because it would overwhelm other budget priorities. Paying $4.5 billion on top of the current $1.4 billion would eclipse state spending for the University of California and California State University systems combined, according to the legislative analyst. It calls the unfunded teacher pensions perhaps the state’s most difficult fiscal challenge.
Local districts “should anticipate absorbing much of any new CalSTRS funding requirement,” advises Brown’s budget, while “the state’s long-term role as a direct contributor to the plan should be evaluated.”
Sal Villasenor, a legislative advocate for the Association of California School Administrators, said the burden should be shared by all three current contributors: districts, the state and teachers.
“We certainly don’t want to see the bulk of the solution placed on school districts, that’s for sure,” he said.
Any increases should be phased in over time and take into account the possibility that CalSTRS’ rebounding investment income could help close the gap, Villasenor said, although he agreed that those gains will not be enough on their own.
By law, the state would have to provide current teachers with greater benefits to make up for an increase in their payroll contribution. Ehnes said that requirement could be met at no additional cost to the state if lawmakers guaranteed the annual cost-of-living increases that the state has routinely been providing, anyway.
That would potentially allow an increase of about 2.8 percentage points, to nearly 11 percent of their salaries.
Yet opposition from the state’s main teachers union, the California Teachers Association, is one reason the problem will take at least another year to resolve, said Assembly Minority Leader Connie Conway, R-Tulare.
“They have a strong presence in the Capitol,” she said. “We (the state) absolutely can’t meet that obligation. So I hope that they’re amenable to some kind of productive conversation that can really help alleviate those issues.”
California Teachers Association spokeswoman Claudia Briggs said the union has worked toward pension reform in the past and is committed to doing so again, recognizing that this time, “It’s going to require all parties to contribute, including our members.”
Fred Glass, a spokesman for the California Federation of Teachers, which represents community college faculty, said his union is “confident we can work out the details in an equitable way for teachers and the public.”
Assemblywoman Joan Buchanan, D-Alamo, chairwoman of the Assembly Education Committee, and Sen. Jim Beall, D-San Jose, chairman of the Senate Public Employment and Retirement Committee, said they expect the eventual solution to require a shared response from teachers, districts and the state. But Beall said the state should try to limit the increase for teachers because they receive comparatively modest pensions and no Social Security benefits.
“Everybody’s going to have to take a bite. The question is how much and what is reasonable?” he said. “We don’t want teachers to be on food stamps or anything.”
Brown was criticized by several Republican lawmakers, including Assemblyman Tim Donnelly, who is running for governor, for not tackling the pension problem in his 2014-15 budget proposal, which now goes to the Legislature.
But Buchanan and Beall said the governor deserves credit for starting the debate.
“It would be very easy for him to do what other governors have done — just ignore it,” Buchanan said. “But he’s saying we have to right this financial ship not just for the current budget, but for future generations.”
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