Let’s say this much about California Gov. Jerry Brown’s plan to address the Golden State’s virtually-insolvent teachers’ defined-benefit pension: At least he has put a plan on the table. By proposing that an additional $5 billion annually will be poured into the California Teachers’ Retirement System by the 2020-2021 fiscal year — and that some of $2.4 billion in additional tax revenue it is collecting should go to that purpose — Brown is forcing the state to admit that it must address the biggest drag on its long-term fiscal prospects. Considering that his colleagues in the Democrat-controlled state legislature would rather spend more money on their pet programs, Brown is actually acting like the grown up Golden State taxpayers need at this time.
Yet Brown’s plan for addressing CalSTRS’ insolvency isn’t nearly as adequate as it should be. For one, Brown’s proposal to require the state, districts, and teachers to contribute an additional $450 million to the pension next fiscal year doesn’t even come close to the $5.5 billion Dropout Nation estimates will be needed to make it solvent in 17 years. [More on the timeline later.] Certainly it would be difficult for Brown to use all $2.4 billion in additional tax collections in order to help make that possible; after all, two-fifth of any additional revenue goes to school funding as a result of Prop. 98 , the three decades-old law governing education finance. There’s also the fact that districts (along with the National Education Association’s and American Federation of Teachers’ state affiliates the California Teachers’ Association and California Federation of Teachers), would balk at such immediate hikes. But in light of the Golden State’s penchant for fiscal fecklessness, Brown would be better off forcing everyone to pay the piper now than hope that legislators and districts (both of which have proven more than willing to do the bidding of the NEA and AFT) will go along with a gradual increase over the next seven years. If that means opposing any increases in spending on other programs — and ditching his own plan to revive the state’s senseless high-speed rail project — then in should be done.
Part of any revised plan would likely have to include the state and teachers paying even larger shares of contribution increases than Brown currently proposes. Under Brown’s plan, districts would pay 75 percent of the $450 million in new contributions (along with the nine percent that teachers are supposed to pay themselves, but in most cases, will actually be covered by the districts as part of collective bargaining agreements with NEA and AFT locals), while the Golden State contribute the rest; this is greater than the 38 percent districts currently contribute (along with the 39 percent that they pay on behalf of teachers). In light of the Golden State constitution’s provision barring the state from forcing local governments to bear unfunded mandates, Brown’s attempt to shift the bulk of contributions to districts is unlikely to survive any legal challenge. So Brown should figure out a way for the Golden State to cover at least 23 percent of any new contribution increases — which is equal to its current level of contributions to CalSTRS — as well as force legislators to pass a law mandating that veteran teachers actually contribute to the pension out of their own pay checks. Pushing the legislature to give CalSTRS the ability to increase contribution rates without seeking state permission, something that sister pension CalPERS can do now, would also make sense.
There’s also the fact that Brown is going along with CalSTRS’ push to address the insolvency over the next 30 years instead of in a shorter, more-sensible, 17 year period. This makes no sense. For one, given that 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 will have to pay out at least $611 million more in annuities every year, there’s no way that a 30-year payment plan can address those additional increases. Based on Dropout Nation‘s estimate, CalSTRS will end up paying out at least $6.1 billion in additional annuities (excluding reductions because of deaths and other removals) by 2021-2022 — and that’s not accounting for the usual cost-of-living increases. If Brown wants to address the insolvency in a meaningful way, he needs to have it done in the next 17 to 20 years.
Then there is the fact that Brown’s bases its assumptions on CalSTRS’ official numbers, which deliberately hide the true extent of its virtual insolvency. This is because CalSTRS assumes a 7.5 percent rate of return on its investments, which is far higher than the 5.2 percent five-year rate experienced in the market and the pension’s own actual five-year rate of return of 3.7 percent. [That CalSTRS also excludes all but a smattering of investment losses and gains through actuarial tricks such as smoothing is another reason why the officially-reported numbers aren’t real.] Based on a more-realistic 5.5 percent rate of return, CalSTRS’ insolvency is likely $93.3 billion, or 27 percent higher than the $74 billion it officially reported in 2011-2012. The only way Brown and the state can get a real handle on CalSTRS’ pension underfunding is by getting the real numbers and basing any plan on that data.
But the biggest problem with Brown’s plan is that it doesn’t offer better options for younger teachers to save for their retirements. Defined-benefit pensions such as CalSTRS are of no use to most newly-hired teachers because half of them are likely to leave classrooms within five years, which means they are unlikely to fully vest in the pension and be able to collect any kind of annuity payment. Particularly for high-quality new teachers, whose attrition rates are likely even higher, both because of the lack of support they get from school leaders and districts as well as because of their own desires to utilize their talents beyond classroom instruction, CalSTRS ends up being a bum deal; the lack of reward (in the form of performance-based bonuses and other recognition) they receive for their good-to-great work is compounded by a shoddy retirement deal that only works well for laggards (who often remain in classrooms because they are not sent out of the profession).
Brown should have proposed a new retirement option for younger teachers so that they can reap the full rewards of their work. This would feature a defined-contribution account toward which teachers can contribute as much of their income to retirement as they see fit (with a five percent match from districts and the state), as well as a cash-balanced plan that guarantees an annual savings rate. Such a move, by the way, would also help CalSTRS (and ultimately, taxpayers) by reducing the number of new annuitants that will add to its insolvency.
Don’t expect Brown to take up any of these suggestions. After all, Brown’s fealty to the state’s NEA and AFT affiliates is well-established. But in light of the fact that Brown has offered a plan to address CalSTRS’ insolvency, perhaps he will do the right thing.
Photo courtesy of the Sacramento Bee.