Calif. Pension-Overhaul Plan Has Districts on Edge
Teacher-retirement share would see drastic increase
What the governor giveth, the governor taketh away.
At least that's how some California districts are viewing a bold plan by Gov. Jerry Brown to tackle the state's $74 billion in teacher-pension liabilities. Under his proposal, part of the revisions proposed to his fiscal 2015 budget request, districts' share of teacher-pension costs would increase to nearly 20 percent of payroll, up from about 8.25 percent.
Though administrators generally agree that putting the California State Teachers' Retirement System, or CalSTRS, onto more solid footing should take priority, they worry that the changes threaten to eat into promised new funding provided through revisions to the state's school financing formula, which the Democratic governor also supported.
The situation is illustrative, observers say, of the difficult choices more localities around the country are likely to face as teacher-pension obligations come due. But while the Golden State's situation isn't unique, the sheer size of CalSTRS and its liabilities makes its squeeze play more extreme.
"It's good that they want to put a down payment on it and have a long-term plan, but districts are just realizing the pain this mechanism will cause," said Chad Aldeman, a senior policy analyst who studies pensions at Bellwether Education Partners, an education consultancy based in Washington.
Though California's teacher-pension system has begun rebounding from devastating losses during the Great Recession, it is still only about 67 percent funded, and with increasing drawdowns from retiring teachers expected, worries about its financial health have been the topic of months of conversation in Sacramento. (In 2012, state pensions were on average 73 percent funded.)
Gov. Brown's plan seeks to make CalSTRS 100 percent funded within 32 years, with districts shouldering a much heavier role. Teachers and the state would also be expected to pony up more, though in proportionately smaller amounts.
Even phased in over the seven years called for in the plan, the district-required increases are large, observers say. Districts currently pay about $2.1 billion into the system. The plan would require them to pay an additional $350 million in 2014-15, rising to $3.7 billion annually by 2020-21. Over the next 30 years, districts would foot more than two-thirds of the plan's total projected cost of $237 billion.
"In terms of the magnitude, that's probably as large an increase I've seen," said Keith Brainard, the research director for the National Association of State Retirement Administrators.
One of the challenges to putting the California proposal into a national context is that cost-sharing arrangements for teacher pensions differ greatly by state. Historically, some, such as Texas and Maryland, have picked up nearly the entire tab. But that has begun to change. The Maryland legislature, in 2012, passed a law shifting half of pension costs to districts, in what's probably the closest state parallel to the California proposal.
To an extent, Gov. Brown's choice of funding mechanisms reflects the state laws governing California's system. CalSTRS does not adjust contribution rates based on changing economic or actuarial conditions, as other states do.
Dozens of states have made changes to their pension structure in recent years, sometimes by scaling back benefits paid or cost-of-living increases. But those options aren't on the table in California, because state case law establishes pensions as a form of contract in which teachers are guaranteed to receive the same benefits under the plan that were promised when they signed up.
Groups such as the California School Boards Association have praised Gov. Brown for finally tackling the system's pension debt, and for providing a $450 million down payment through the general fund rather than from the state's education funding stream. But many were taken aback that the increases kick in so fast: The first contribution increases under the plan are set to take place in the 2014-15 school year. And that has created problems for finalizing budgets.
"The employers' contribution rate was a bit of sticker shock," said Andrea Ball, a legislative advocate for the CSBA. "Districts were getting ready to pretty much put their budgets in final form for adoption, thinking they knew the parameters."
One of the wrinkles concerns the Local Control Funding Formula or LCFF, a state financing overhaul last year that did away with many smaller categorical programs and instead allocated money under a weighted formula that sent more to districts with many disadvantaged students, English-language learners, and students in the foster-care system. It was coupled with new cash provided through the voter-approved Proposition 30 income tax hike, much of which was earmarked for schools.
Under the overhaul, districts must craft plans on how they will use the funds to support all students and, specifically, the needs of those at-risk populations. In some cases, those plans will now have to be reopened.
"It's not lost on us that we have a hard time just going out to the community and having them take this [plan-revision] process seriously," said Edgar Zazueta, the chief external-affairs officer in the Los Angeles district. "To go back to them at this juncture has the potential of discrediting LCFF in its first year of implementation," he said, because other programming will have to be cut.
Coming up with an overall estimate of how heavily the new requirements will weigh is challenging because California districts run the gamut from the tiny to the enormous. And though all districts will be sharing in the pension pain, the weighted nature of the LCFF, coupled with differences in local property taxes, means not all are guaranteed to receive major per-pupil increases.
East of Los Angeles, costs among the 23 districts in Riverside County are expected to range anywhere from $70,000 to $2.7 million in additional costs in just the first year under the plan, said Patti Herrera, the executive director of government relations at the Riverside County office of education.
Some superintendents are vowing to keep reductions away from programming and to fill the holes in other ways.
"Kids didn't create this problem; it never crossed my mind that kids should be the ones to pay for it," said Scott Siegel, the superintendent of the 12,100-student Ceres district, south of Modesto. "It's an adult problem caused by adults, and benefiting adults, and they need to bear the costs of paying for the pension system."
His solution will likely mean teachers forgoing major wage increases.
"Roughly, it's an 11 percent increase in payroll costs; 11 percent has to come from somewhere, and it will be 11 percent of raises that our employees will not see," Mr. Siegel said.
The governor's proposal must still receive legislative approval, and groups like the CSBA are already lobbying for an appropriation that would help districts ease into the new expectations.
State legislative committees, meanwhile, have proposed halving the required contributions for teachers, the state, and districts for the first year of the plan.
A spokesman for the state's budget office said it was discussing the details with the legislature.
Vol. 33, Issue 35, Pages 24, 26Published in Print: June 11, 2014, as Pension-Overhaul Plan in California Has Districts on Edge