For the moment, once-and-future Gov. Jerry Brown can claim that he has taken some sensible steps in addressing the California State Teachers’ Retirement System’s massive virtual insolvency. Last week, legislators backed Brown’s plan to increase contributions to the pensions by $5.5 billion (from the current $2.2 billion) over the next seven years. [Brown signed the legislation yesterday.] This is an important (if still less-than-satisfactory) step toward addressing CALSTRS’ officially-reported underfunding of $74 billion, which is more likely $93 billion based on a Dropout Nation analysis of the pension’s financial using a formula developed by Moody’s Investors Service.

statelogoWhether or not Brown’s plan will survive beyond legislative approval and his signature on the dotted line is another question entirely. Why? Because school districts are none too happy about the move, and they can easily claim that state law is on their side.

As your editor pointed out last month, Under Brown’s plan, districts bear most of the burden of increased contributions, paying 75 percent of the increased 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); this is greater than the 38 percent districts currently contribute (along with the 39 percent that they often pay on behalf of teachers). This certainly makes sense. After all, Brown’s move last year to end full state funding of education and place the bulk of school subsidizing onto local property taxes effectively makes districts responsible for their fiscal affairs. There’s also the fact that the fiscal fecklessness of districts is a key reason for CalSTRS’ virtual insolvency; this includes the penchant to engage in spiking, or ratcheting up the salaries of teachers and school leaders during their last five years on the job in order to boost annuity payouts upon retirement.

The problem? California’s state constitution bars the state from forcing districts and other local governments to bear what they may consider to be unfunded mandates. This provision, which has been an obstacle to other statewide reform efforts — including the development of longitudinal data systems needed to improve student and school achievement — will also likely prove to be a stumbling block to Brown’s pension plan. Given that districts are up in arms over the contribution increases (and angered at Brown’s teachers’ union-driven plan to limit their ability to build substantial financial reserves), expect districts and their lobbying groups to proceed with litigation to stave off the hikes.

Litigation isn’t the only obstacle to the success of Brown’s plan. As Dropout Nation noted last month, the plan is based on faulty numbers that don’t fully reflect the true extent of CalSTRS’ virtual insolvency. Because CalSTRS assumes a 7.5 percent rate of return on its investments, a rate 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, the teachers’ pension is understating its level of unfunded liabilities. The fact that CalSTRS also engages in actuarial tricks such as smoothing of investment losses and gains means that Brown’s plan is not based on a realistic picture of the pension’s financial condition.

Then there is the fact that Brown’s plan for reducing CalSTRS’ insolvency is based on a way-too-long 30-year timeline. 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, a 30-year payment plan will not fully address those growing liabilities. At the same time, by using a 30-year timeline instead of a 17-year plan as originally recommended by Moody’s, the state isn’t being aggressive enough in getting CalSTRS’ financial condition — and that of the entire state — in order.

Finally, there is the fact that Brown’s plan doesn’t reduce the growth in unfunded liabilities at all. That can only happen by moving existing and new teachers out of the defined-benefit pension and putting them into a hybrid plan that features a defined-contribution element into which they can save as much as they choose for retirement. This is a step being taken by Detroit next week as part of its effort to emerge from bankruptcy. For the state, districts, and ultimately, taxpayers and children, this move would immediately slow the growth in liabilities. It is also beneficial for teachers. Particularly for younger teachers, half of whom are likely to leave the profession within their first five years, such a move would actually allow them to reap the full rewards of their work by having a portable retirement savings plan.

Neither Brown nor the state legislature were willing to take any of these steps. But districts may be able to do so, especially if a court ruling next month in the bankruptcy proceedings for Stockton, Calif.’s main city government end up reflecting that handed down in December by the judge overseeing Detroit’s Chapter 9 filing.

Earlier this month, one of the creditors in Stockton’s bankruptcy, Franklin Templeton Resources, challenged the city’s proposed plan to exit Chapter 9. The money manager argues that no proposal can be valid unless CalSTRS’ sister pension, the State Employees Retirement System, is treated like a contractor or creditor under the U.S. Constitution’s Supremacy Clause, superseding the state constitution’s provision treating pensions as a vested right that cannot be tinkered with under any circumstances. Essentially, bankrupt municipalities can voluntarily (or be forced by creditors) to slash annuity payments for retirees, restructure defined-benefit pensions, and even replace traditional pensions with defined-contribution plans. And it is a position already validated by the federal bankruptcy court in Detroit’s case.

Whether or not the judge in Stockton’s case will go along with Franklin Templeton’s argument is an open question, and one that won’t be known until he hands down his ruling on July 7. But given that the judge has already allowed Stockton to slash its unfunded retiree healthcare benefits from $544 million to $5.4 million using the same reasoning, you can bet that he may likely rule the same way on how Stockton’s obligations to CaLPERS. If it happens, it could lead to other financially-strapped municipalities in California (and even in the rest of the country) taking much-needed steps toward addressing their pension insolvencies. And given that CalSTRS is similar in structure to CALPERS, equally cash-strapped districts may force pension reforms that neither Brown nor legislators want to do.

The future of CalSTRS may end up being a matter decided by the courts and not by Sacramento’s mandarins.