CalPERS has an unfunded liability of $1.4 trillion. Because of that cities are cutting law enforcement, road repairs and other basic services. Taxes are so high, that is not a route they can go anymore. Now we find that CalSTRS, the teachers plan is also a disaster. By 2020 teachers will pay 19.1% of their pay check to this collapsing agency—and the schools districts have to match it with 19.1% of their money. That means fewer teachers, lower pay, poor repairs and less technology. Government education will be even worse, thanks to CalSTRS.
“Californians’ taxpayer contribution into the state’s $196 billion teacher pension fund is expected to jump up by $153 million in the next fiscal year due to the fund cutting its projected returns on investment.
At their meeting earlier this month, directors of the California State Teachers Retirement Fund (CalSTRS) approved lowering the fund’s assumed investment return from 7.5 percent to 7 percent over the next two years, putting increased impetus on the state, teachers and schools to foot the bill.
So, the California taxpayers also lose another $153 million, while we “enjoy” a massive deficit. Plus they are looking at a 7% return on investment—and that is a lie. Last year CalSTRS had a return of 1.4%—guess the teachers will lose more money and students will lose an opportunity to a great education. Sad.
Taxpayers on the hook for skyrocketing teacher pension contributions
Kevin Truong, San Francisco Business Times, 2/8/17
Californians’ taxpayer contribution into the state’s $196 billion teacher pension fund is expected to jump up by $153 million in the next fiscal year due to the fund cutting its projected returns on investment.
At their meeting earlier this month, directors of the California State Teachers Retirement Fund (CalSTRS) approved lowering the fund’s assumed investment return from 7.5 percent to 7 percent over the next two years, putting increased impetus on the state, teachers and schools to foot the bill.
Staff recommended a reduction to 7.25 percent, but the directors chose to lower the expected rate of return further as part of an effort to give the fund more long-term viability. The rate will be dropped in two steps, first to 7.25 percent then further to 7 percent on July 1, 2018.
“The updated assumptions more closely match CalSTRS recent actuarial experience and provide an updated perspective of progress toward the long-term funding plan,” CalSTRS CEO Jack Ehnes said in a statement.
Last year, the fund’s investment return was only 1.4 percent net and a report from one of the fund’s consultants indicated that the CalSTRS had less than a 50 percent chance of meeting the 7.5 percent rate of return in the long run.
The rate decrease is part of a longer term effort by CalSTRS to decrease its more than $70 billion in unfunded liability and work its way back to fully-funded status.
Negotiations with the state legislature and Gov. Jerry Brown yielded the California Public Employees’ Pension Reform Act of 2013 in order to get the state’s taxpayer-backed pension programs under control.
Under the terms of this law, the state’s contribution into the fund would rise to 8.83 percent by fiscal year 2016-17, with annual increases afterwards then capped at half a percent.
With the new investment return expectations, the state’s contribution will increase to the legal limit for the foreseeable future. That means that the annual contribution from taxpayers will increase to an estimated $879 million after five years.
Additionally, the roughly 80,000 educators hired after 2013 will also have to contribute an additional half-percent of their pay, which could double to 1 percent when the rate is dropped further.
Governor Jerry Brown’s 2017-18 fiscal year budget sum has designated $2.8 billion in General Fund contribution to CalSTRS.
“The proposed funding is consistent with the funding strategy signed into law in 2014, and positions CalSTRS on a sustainable path forward, eliminating the unfunded liability in about 30 years,” the budget report said.
The move from CalSTRS mirrors a decision made in December by the California public employee pension fund CalPERS to cut their expected rate of return, also known as the discount rate, from 7.5 percent to 7 percent over the next three fiscal years.
Olivia Mitchell, the executive director of the Pension Research Council at the Wharton School said that the 7 percent discount rate is still too high.
She said high expected returns leads to a “vicious cycle” where funds choose riskier investments to meet those levels. Currently, roughly 57 percent of CalSTRS portfolio is made up of stock investments.
“Most experts think we’re not going to have the same high market returns on stocks over the next 30 years that we saw in the last 20 to 30 years,” Mitchell said.
She added that it would be more reasonable to set the discount rate at the rate of borrowing public money, around 4 to 5 percent. The problem in her eyes would be that these rates would balloon liabilities to a politically untenable degree.
Still, Mitchell said that for state-backed pension funds like CalSTRS to get their unfunded liability in check the solution is simple, but not easy: cut benefits or raise contributions even further.
“It’s hard to put reality and pensions in the same sentence,” Olivia said. “What I would say is that behooves everyone to properly record the nature of the rates and returns being made, the issue is that it’s been going on for years and years and years.”
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