Ed Mendel | Pension360

Schools Want Spotlight on CalSTRS Rate Hike

Ed Mendel is a reporter who covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. Find more of his stories at Calpensions.com.

The push back from schools hit with a huge CalSTRS rate increase, expected to be an additional $3.7 billion a year when fully phased in, is not that it’s unaffordable and will hurt students or unfairly lets the state and teachers off the hook.

Instead, a coalition of school districts, including the giant Los Angeles Unified School District, is proposing a separate budget item for the CalSTRS rate increase within the Proposition 98 school-funding guarantee.

The change would not require the state to spend more money on schools. But the coalition thinks a separate budget item could ensure that funding for the CalSTRS rate increase, as it’s phased in over seven years, “will grow at a predictable rate” for all school districts.

As it stands now, school districts would have to pay for the CalSTRS rate increase with money from a new K-12 funding plan adopted two years ago, the Local Control Funding Formula.

The big bite for CalSTRS would be obscured among other funds, the coalition fears, and the new funding plan’s goals of restoring funding to the pre-recession 2007-8 level and providing more money for targeted schools could be disrupted and delayed.

“The requirement of schools to fund these increased (CalSTRS) contributions within the LCFF undermines the goals and the promise of increased services for students in California,” the coalition said in a statement last December.

“Addressing this important funding issue up front will keep the goals and objectives of the LCFF intact, and is essential to ensuring students are served as envisioned.”

Since December the coalition membership has grown to 160 school districts, and legislators and the Brown administration have been told of the proposal, Scott Patterson, Grossmont Union High School District deputy superintendent, said last week.

A potential issue is whether the California State Teachers Retirement System rate increase could create winners and losers among school districts.

The new funding formula gives extra money to targeted schools with large numbers of students who are English language learners, recipients of subsidized meals, and from foster homes.

If there is no separate budget item, a district that gets mainly the base grant might have much of its Proposition 98 increase eaten up as the CalSTRS rate increase is phased in. But a district that gets additional targeted money could still get a substantial increase.

STRS pension costs are based on the number of teachers, which tends to be proportionate to total student enrollment. Extra money for targeted schools under the new funding formula is based on a different factor, student demographics.

Patterson said the coalition believes its proposal for a separate state budget item “would help alleviate” the creation of winners and losers as the CalSTRS rate increase is phased in.

The coalition knows of no active opposition to its proposal among schools or community colleges, he said, and the powerful California Teachers Association has not taken a position.

Rate increase projected to get CalSTRS to full funding

The Brown administration had no comment on the coalition proposal last week. Gov. Brown is expected to issue the “May revise” this week, an update of his January proposal for a new state budget for the fiscal year beginning July 1.

The state could have a surplus of several billion dollars, though much of the tax revenue surge may be temporary. It’s a windfall for schools, possibly too much for lawmakers who want to restore funding for other programs cut during the recession.

“Surprisingly perhaps, these revenue trends pose a risk for the state budget mainly because higher revenues in 2014-15 boost ongoing spending on schools and community colleges under Proposition 98, potentially making it harder for the state to balance its budget in 2015-16 and beyond,” the Legislative Analyst’s Office said last month.

The timing is remarkable for CalSTRS, which unlike most California public pension funds lacks the power to raise employer pension rates, needing legislation instead. Lawmakers ignored CalSTRS pleas for a rate increase for nearly a decade.

Now the big rate increase finally approved last year begins to phase in amid an incoming tide of school funding, arguably making it more difficult for the coalition to catch the ear of lawmakers because there is no squeaking wheel.

If the coalition is not successful this year, the issue may heat up before the CalSTRS rate increase is fully phased in by 2020.

The coalition expects CalSTRS costs for the average unified school district to increase from 3.8 percent of the budget to nearly 9 percent over the seven years. Districts also have another big pension cost for non-teaching employees in CalPERS.

In the new fiscal year, the coalition expects the CalSTRS rate increase to increase school costs by an estimated $430 million and then to escalate, step by step, to an additional $3.7 billion a year by 2020.

“We want to be careful in expressing that we are not opposed to the increased CalSTRS contributions that are necessary to help put the program back on sound financial footing,” said Patterson.

A big rate increase is sorely needed. A new actuarial report last month shows that CalSTRS as of last June 30 had 68.5 percent of the projected assets needed to pay future pension obligations. The debt or unfunded liability was $72.7 billion.

The total contribution to CalSTRS from schools, teachers and the state last fiscal year was $5.7 billion, about half of what CalSTRS paid out during the year for pensions and death and survivor benefits, $11.7 billion.

The CalSTRS investment fund, expected to pay roughly two-thirds of future pension costs, was $180 billion in 2007, dropped to $112 billion in 2009, and was only back up to $191 billion last March 31, despite a major six-year bull market.

Before the increase last year, the CalSTRS contribution rates for schools and other employers (8.25 percent of pay) and teachers (8 percent) were similar. Now the schools rate will more than double to 19.1 percent of pay by 2020.

The rate for most teachers goes up about a quarter, reaching 10.25 percent of pay next year. The increase is regarded as a violation of “vested rights” only allowed if offset by a new benefit that, in this case, is guaranteeing a 2 percent cost-of-living adjustment.

The state contribution to CalSTRS, which had been a combined total of 5.5 percent of pay to two separate funds, tops out after three steps at 8.8 percent in July of next year.

When a soaring stock market briefly pushed the CalSTRS funding level above 100 percent in the late 1990s, a half dozen measures increased pension benefits and cut contribution rates.

A Milliman actuarial report two years ago said if CalSTRS were still operating under its 1990 structure, pensions would have been 88 percent funded instead of 67 percent — a gap that could have been closed with a much smaller rate increase.

Photo by dhendrix73 via Flickr CC License

San Francisco Retirees Get Voter-OKed Pension Cut Overturned

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. Find more of his stories at CalPensions.com.

A retiree group won a big victory last month. Reversing a superior court ruling, an appeals court overturned part of a voter-approved San Francisco pension reform in 2011 that ended higher payments to retirees when investments have “excess earnings.”

But the feisty retiree group, Protect Our Benefits, is unhappy because the appeals court ruled higher payments can be ended for city workers who retired on or before Nov. 5, 1996, when the supplemental cost-of-living adjustment was first approved by voters.

“The appellate court has denied the POB petition for rehearing,” Larry Barsetti, chair of Protect Our Benefits, said in a message last week on the website of the retiree group.

“Unless they made any changes to their ruling that we haven’t seen yet, as is possible with these things (and we won’t know that until we get the formal written denial from them, possibly Monday April 27th), the next step is to petition the California Supreme Court and attempt to have the ruling regarding the pre-1996 retirees overturned,” Barsetti wrote.

Retirees, scattered and no longer union members, might seem unlikely to be formidable, particularly when battling a cost-cutting pension reform backed by all 11 county supervisors, business and labor groups, and 69 percent of San Francisco voters in 2011.

The reform, Proposition C, was the milder establishment alternative to deeper pension cuts in Proposition D by Jeff Adachi, one of the 16 candidates for mayor on the San Francisco ballot that year, including the incumbent and winner, Mayor Ed Lee.

“The epitome of greed,” Gary Delagnes, president of the San Francisco Police Officers Association, told SF Weekly in 2012 when the retiree group began its legal challenge. Barsetti is executive secretary of Veteran Police Officers Association.

And it was the police association’s own retiree group, VPOA, that Barsetti said last week was “instrumental” in the birth of Protect Our Benefits, a political action committee financed by donations that has spent more than $225,000 on attorney fees.

Barsetti said an estimate that the supplemental COLA targeted by Proposition C would cost $300 million over the next two decades came from an actuary hired by a wealthy supporter of the measure.

“We don’t think it’s anywhere near that,” he said.

Of the nearly 27,000 San Francisco Employees Retirement System members receiving benefits last year, Barsetti said about 8,300 retired before voters approved the supplemental COLA on Nov. 5, 1996.

Retirees in the city-run pension system receive a basic COLA of up to 2 percent, depending on inflation. San Francisco voters approved a supplement on Nov. 5, 1996, that could boost the COLA to 3 percent of the pension amount.

The money for the supplemental COLA comes from pension fund investment earnings “in excess of the expected earnings on the actuarial value of assets” in the previous year.

The city pension system currently assumes investments will earn 7.5 percent a year, the same as California’s three large state retirement systems, which critics say is too optimistic.

Skimming investment earnings looks dubious after a recession and stock market crash left most public pensions underfunded. Growing pension costs are causing concern that too much money is being diverted from government programs and services.

But in the past, for example, “excess earnings” paid for a “13th check” pension bonus in San Jose and two CalPERS programs, the Investment Dividend Disbursement Account and the Extraordinary Performance Dividend Account.

All three of those programs have been discontinued. But 20 county retirement systems operating under a 1937 act can still use “excess earnings” for retiree bonuses, retiree health care or lowering employer contributions.

Barsetti’s response to criticism of skimming “excess earnings” is that the San Francisco pension system is different. Pension increases must be approved by voters, rather than bargained by unions and then approved by elected local or state lawmakers.

After initial voter approval in 1996, the supplemental COLA was strengthened by a vote in 2002 making the supplement permanent, not reducible once granted. Another vote in 2008 increased the supplement from 3 to 3.5 percent of the pension amount.

“I believe that the people who are paying the bill should have a vote,” said Barsetti.

Enjoying a surplus, the San Francisco pension system went without employer contributions from 1996 to 2004. The city became the model for requiring voter approval of pension increases in San Diego in 2006 and Orange County in 2008.

Big investment losses and a civil grand jury report in 2009 on soaring pension costs led to San Francisco voter approval of Proposition C in 2011, part of which required full or 100 percent pension funding the previous year to provide a supplemental COLA.

Because of retroactive salary and annual inflation adjustments, said the civil grand jury, pensions exceeding their highest salary on the job were being received by 60 percent of police and 55 percent of firefighters retired since 1998.

Last year the pension system was 94 percent funded using market value assets. This year employer contributions for police are 37 percent of pay, firefighters 44 percent and miscellaneous 19 percent. The aggregate employee contribution is 11 percent.

(In contrast, the California Public Employees Retirement System plan for state workers was 72 percent funded. Employer contributions are 47 percent of pay for the Highway Patrol, 25 percent for miscellaneous, and employee contributions are 6 to 11 percent.)

The grand jury report in 2009 said San Francisco employer costs, $178 million the previous year, were expected to soar to $520 million in 2011. The latest actuarial report expects employer costs to be $527 million this year, while employees pay $304 million.

In the court battle over Proposition C, the city said switching the supplemental COLA from “excess earnings” to a requirement that pensions be fully funded “clarified” voter intent in 2008 when the supplement was increased to 3.5 percent.

A superior court judge, agreeing with the city, said the “legislative history” of the previous votes showed that the supplemental COLA was tied to whether the pensions were fully funded.

“Indeed, were the Retirement Fund not fully funded in 1996, 2002 or 2008, it seems quite unlikely that the voters would have approved or extended supplemental COLAs, as they did,” the judge said.

In a 3-to-0 ruling March 27, a state appeals court overturned the superior court decision. The 2008 ballot materials “do not mention full funding,” said the panel, and Proposition C is clearly a pension cut violating “vested rights” under long-established contract law.

The appeals court also said retirees before Nov. 6, 1996, have no vested right to the supplement. The “contractual basis of a pension right” is an exchange for services, said the court, and those retirees left service before the supplement was offered.

Photo by ilirjan rrumbullaku via Flickr CC License

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