Even among the nation’s busted defined-benefit teachers’ pensions, the California State Teachers’ Retirement System stands out for its fiscal morass. The nation’s most-insolvent teachers’ pension, CalSTRS has become a tremendous burden on Golden State taxpayers; in fact, nearly all of the revenues from new taxes raised as a result of the passage of Prop. 30 two years ago has gone toward paying down the pension’s insolvency as well as fund quality-blind traditional teacher compensation. Yet neither Gov. Jerry Brown nor the state legislature, both beholden to affiliates of the National Education Association and the American Federation of Teachers, have offered reform plans that actually address the burden.
So it isn’t shocking that CalSTRS’ latest actuarial valuation, released earlier this month, shows that its unfunded liabilities continue to increase unabated. But as with so many pensions, CalSTRS isn’t being completely honest about the true extent of its insolvency.
This time around, CalSTRS officially reports a pension deficit of $74 billion in its defined-benefit program for 2012-2013, the latest year available. Based on the officially-reported numbers, the pension’s insolvency increased by four percent between 2011-2012 and 2012-2013. But the officially-reported deficit doesn’t reflect reality. One reason: Because CalSTRS uses an assumed rate of return of 7.5 percent, which allows for the pension (and ultimately, the state government, which sets the rate of return) to present a rosier picture than reality. This is because if investments are increasing in value at a healthy clip, it can help reduce the level of unfunded liabilities on the pension’s balance sheet. Not only is the assumed rate of return higher than the 5.2 percent five-year rate experienced in the market, according to Wilshire Associates, it is even higher than the 3.7 percent rate of return the pension admits in its comprehensive annual financial report that it has experienced over the past five years.
To get to the bottom of CalSTRS’ insolvency, Dropout Nation uses a version of a technique developed by Moody’s Investors Service, which assumes a more-realistic 5.5 percent rate of a return. [Moody’s bases its rate of return on the performance of a bond index, which can range between four and six percent.] The conclusion? CalSTRS’ pension deficit is actually $93.3 billion, or 27 percent higher than officially reported. Based on last year’s DN analysis looking at the pension’s virtual insolvency for 2010-2011, its underfunding has increased by $6 billion between 2010-2011 and 2012-2013. By the way: If you look on page six of its most-recent comprehensive annual financial report, CalSTRS quietly itself admits the officially-reported numbers are nowhere close to reality.
Based on a 17-year amortization schedule, taxpayers would have to pay an additional $5.5 billion a year just to make up CalSTRS’ underfunding, nearly double the $5.9 billion contributed to the pension in 2012-2013 — and double the additional $3.6 billion-to-$4.5 billion CalSTRS said it needed for the next 30 years to stay afloat, according to a report it submitted last February to a state legislative committee.
Addressing CalSTRS’ insolvency is critical for the state largely because of the number of Baby Boomers retiring from the teaching ranks. The number of retirees (excluding deaths and other removals) added to CalSTRS’ rolls increased by 34 percent (from 201,241 annuitants to 269,429) between 2004-2005 and 2012-2013, while the payouts increased by 84 percent in that same period. Based on the pace of increases in annuitants in that nine-year period, CalSTRS will likely add 13,398 new annuitants (excluding deaths and other removals) to its rolls every year for at least the next decade before retirements slow down. And with each retiree likely collecting at least $45,581 a year, CalSTRS will have to pay out at least $611 million more in annuities every year, further increasing its underfunding.
Let’s keep in mind that the insolvency number is just for CalSTRS defined-benefit program alone. The pension also provides healthcare benefits to Golden State teachers, as well as offers two supplemental annuity programs. For the moment, the unfunded liabilities for CalSTRS’ healthcare program is negligible compared to the massive underfunding in its main defined-benefit program. [The fact that CalSTRS assumes just a four percent rate of return for assets dedicated to those programs is a sign that the pension can be honest about its financial condition.] But given the unwillingness of Golden State politicians to engage in fiscally sensible decision-making, taxpayers would be advised to keep a sharp eye on CalSTRS’ other operations.
As for addressing CalSTRS’ insolvency? At least CalSTRS has offered Brown and state legislators some solutions for the problem. Under the most-aggressive (and, given that it is CalSTRS, sensible) scenario, teachers, districts, and the state would contribute additional $15 billion a year by 2033 just to address current and future payouts. But that only works if annuities don’t become more generous over time. That’s unlikely. More importantly, the plan offered by CalSTRS will force districts to bear an even greater share of contribution payments (excluding the contributions they often make on behalf of teachers as condition of collective bargaining agreements with NEA and AFT locals) than they do now, from 38 percent in 2012-2013 to 87 percent by 2032-2033. Given the Golden State constitution’s amendment barring the state from forcing local governments to bear unfunded mandates, such a shift is unlikely to survive any legal challenge. And given that CalSTRS’ assumptions are based on inflated expected rates of return on investments, this solution (along with the others) don’t really address the insolvency.
Ultimately, it is up to Brown and his colleagues in the Golden State legislature to tackle the challenge of restoring CalSTRS to solvency (as well as overhauling how teachers are compensated for the long haul). Whether they will actually do so? That’s an open question. Addressing CalSTRS’ insolvency will mean requiring teachers to contribute even more to the pension than they do now — and, in the long run, for the sake of younger teachers, moving away from unsustainable defined-benefit pension arrangements to a hybrid benefit-contribution plan. But this means a battle with the NEA’s state affiliate, the California Teachers Association, and the California Federation of Teachers (the AFT affiliate), both of which hold sway over both Brown and the legislature’s Democrat majority. Given the past unwillingness of both Brown and legislators to battle with the NEA and AFT — and their dependence on the campaign cash the two unions provide — it is unlikely that any serious solution will come to pass.
For families, high-quality teachers, and children, along with veteran instructors who have been promised retirement annuities (and restricted by both politicians and teachers’ unions from pursuing more-sensible approaches to retirement savings), CalSTRS’ woes will only get worse. And they will bear the consequences of the fiscal fecklessness.