Tag Archive for: CalSTRS

Pension Costs Are Not the Reason California’s Schools Fail the Disadvantaged

A recent guest editorial published by Bakersfield.com entitled “California’s defunding of public education” makes the case that a “pension contribution maneuver” has left school districts up and down the state with shrinking budgets.

The author, Shaohua Yang, gets many of his facts right. For example, he writes that “California 2019 per-capita income tax ranks the fifth highest in the U.S., and we also have high property, sales and business taxes. The lack of public school spending is not due to short revenue.” Yang is also right to observe that pension costs cannibalize funding for public services. But he’s only telling half the story.

The pension “maneuver” Yang refers to is the Public Employees’ Pension Reform Act of 2013, known as “PEPRA,” and pushed through the state legislature by Democratic Governor Brown. PEPRA was a last ditch attempt to rescue California’s public employee pension systems from insolvency. It was a compromise, balancing necessary increases to employer contributions with modest reductions in pension benefits, reductions that only affected new hires.

The result of PEPRA was a plan that, if CalSTRS investments can earn on average 7 percent per year, will finally achieve full funding by 2046, over 30 years later. Meanwhile, CalSTRS is on thin ice. Its still most recent available actuarial valuation, scandalously out-of-date, shows that as of 6/30/2018 the “amount of assets on hand to pay for obligations” stood at 64 percent. But did PEPRA reduce pension benefits or increase the member contribution rates? Not much.

Before PEPRA, teachers contributed 8 percent of payroll to their pension. Today, they contribute up to 10.25 percent. This must be compared to Social Security, to which employees have to contribute 6.2 percent of their earnings, and self-employed people have to contribute 12.4 percent of their earnings. Here’s how that plays out:

In return for 6.2 percent of lifetime earnings (or 12.4 percent, if you’re self-employed), the maximum Social Security benefit a private sector worker can expect, starting at age 62, and presumably after at least 30 years in the workforce, is $27,888 per year.

In return for 10.25 percent of lifetime earnings, after a 30 year career, here is what the average CalSTRS benefit is for retirees from the three “defunded” school districts that Yang mentions in his column:

Oakland Unified  –  $68,200 per year.

Bakersfield City School District – $70,778 per year.

Cupertino Unified – $82,749 per year.

It doesn’t take an actuary to see that something is wrong with this picture. If Yang, or anyone else who thinks public education is being defunded in California, is serious about getting more money to the school districts, they can call for pension reform that gives teachers the same deal as the taxpayers who support them: Social Security. That would save billions per year which could go right back into those “defunded” schools.

Or, to be completely fair, if these teachers, their unions, and the pension fund actuaries whose gospel-like prognostications have been so accurate so far, really think they can invest and earn 7 percent per year – 4.5 percent after adjusting for inflation – they can roll every dime of the $257 billion in CalSTRS assets into 401K plans for the teachers, so they can share in the risks and rewards of investing just like the taxpayers who support them. That too would immediately return billions per year to the public schools, money that taxpayers currently allocate towards paying down CalSTRS unfunded liability.

It’s not the money, though, it’s the management.

In his column, Yang goes on to highlight how “defunding” education has a disproportionate impact on the disadvantaged. This is only half true. Yang’s right that schools that serve low income communities do not perform as well as schools in high income communities. But he’s wrong to suggest more money is the solution. Notwithstanding the obvious fact that in general, higher income parents are more likely to impart higher academic expectations to their children, which inevitably means some disproportionality will always occur between high income and low income schools, it is management, not money, that harms students the most.

This was demonstrated in the Vergara case, an education reform lawsuit launched in 2013 that attempted to reform California’s union negotiated work rules. In his mesmerizing closing arguments, plaintiff attorney Marcellus McRae proved – citing testimony from witnesses called up by the defense – that rules granting early tenure, prioritizing seniority over merit in layoffs, and the near impossibility of firing incompetent teachers leads to a disproportionate negative impact on low income communities. Vergara was dismissed on a technicality, and California’s disadvantaged students are the ongoing victims.

While fixing these management issues would yield important incremental improvements, the solution that would save California’s system of public education is school vouchers. Give parents of K-12 aged children a voucher they can redeem at any school they choose. Public, public charter, private, religious, secular, homeschool, virtual school or micro-school. If the student bodies of these schools can pass the standardized academic achievement tests, they can continue to accept vouchers. It can be that simple.

To truly appreciate how much money California’s union controlled system of public education has been wasting, refer to a California Policy Center analysis published earlier this year that calculated the true, gross amount of per student spending in California in the most recent fiscal year to be over $20,000 per pupil. Shaohua Yang, who is a “system architect in the semiconductor industry in San Jose,” is invited to review the data to verify this figure for himself.

Imagine what a charter school or micro-school could do with all that money. A twenty student class would have a $400,000 per year budget, easily enough to lease a classroom, purchase educational materials, and hire an amazing teacher. Perhaps the voucher could be for $15,000, still more than enough, and the rest could be returned to taxpayers.

What Yang, and every other conscientious Californian who cares about social injustice should be doing is recognizing that the teachers’ union is the primary reason public education is failing the disadvantaged. They have made it almost impossible for principals to hold teachers accountable and terminate the incompetent. They have fought the expansion of charter schools and convinced reformers that so much as a discussion of vouchers is politically impossible. But that’s not the worst of it.

In an amazing inversion of everything they supposedly stand for, the teachers’ union has embraced one of the most reckless capitalist gamblers on earth, the California State Teachers Retirement System, as a full partner. The teachers’ union demands retirement benefits for their members that are literally twice as good as the Social Security benefits available to the taxpayers they serve, blind to the fact that CalSTRS, along with all the rest of these public employee pension funds, are among the biggest players on Wall Street.

If pension costs are indeed crowding out funding for public education, as Yang alleges, then at the least call it what it is: a Wall Street bailout, designed to reward a privileged class, with children as the victims.

This article originally appeared in the California Globe.

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The Real Reason Behind the Drive to Unionize Charter Schools

Want to know another reason California’s teachers unions are desperate to unionize charter schools? They want the leverage to force these schools to participate in CalSTRS, because CalSTRS charges all its participants the same pension contribution rates.

This is a truly amazing, grotesquely unfair, astonishing scam. It means that new schools have to pay for the every financial mistake that CalSTRS ever made, and they’ve made plenty. CalSTRS is only 64 percent funded. CalSTRS is $107 billion in debt – that’s $238,000 per active member. Better get more active members!

Even CalPERS, the largest public employee pension system in the U.S., and one that has engaged in its own share of accounting gimmicks, doesn’t make its financially responsible participants pay for the negligence of its financially irresponsible participants. Every agency that relies on CalPERS has its funded ratio individually calculated. If a local governing board managed to negotiate financially sustainable benefits, or increased their contributions, or otherwise managed to do something right, they have a higher funded ratio, a lower liability, and make lower payments.

Not so with CalSTRS.

A grim gallop through the latest financial reports for CalSTRS will vividly illustrate just how royally CalSTRS will abuse any newcomer to their system, and you don’t have to look very far. Page two of the report for 6/30/2018 has a table displaying the 38.7 percent contribution rate – expressed as a percentage of pension eligible payroll – that participants pay. Employers pay 18.13 percent, the state kicks in another 10.33 percent, and the members – through payroll withholding – pay 10.25 percent.

Altogether, taxpayers – that is, the local employer plus the state – pay 28.5 percent of payroll to fund CalSTRS. That’s a lot, and the reason it’s so much is because CalSTRS has to collect extra to pay down that $107 billion unfunded liability. How much of the contribution is for that?

Good question. On page 4 that question is answered in the section entitled “Normal Cost Rate for CalSTRS 2% at 62 Members.” The relevant passage reads: “As of June 30, 2018, the Normal Cost Rate for the CalSTRS 2% at 62 members is 17.863%. We recommend the board adopt this rate.”

Got that? If you are entering the CalSTRS system with a fresh set of employees, without the baggage of missed earnings forecasts, or the history of scandalously undercharged contributions, you should be paying 17.9 percent of pension eligible payroll into the pension system in order to deliver a “2% at 62” pension to your employees. If the employee pays half of that via payroll withholding (they’re paying 10.25 percent currently, which is more than half), then the employer only has to come up with 9 percent.

Instead, if you join CalSTRS as a new agency participant, the required contribution is 38.7 percent of payroll, or 28.5 percent for the employer after taking into account the 10.25 percent contributed by employees via payroll withholding. That’s a pile of money. It more than triples the employer’s pension contribution, from 9 percent to over 28 percent. For nothing.

The astute reader will note that a new local “agency” would not actually pay 28.5 percent, since the state government pays 10.33 percent of that. This is true, which means actually the local employer’s pension contribution only increases from 9 percent to 18 percent in order to pay for the past mistakes of CalSTRS. It only doubles. For nothing. But the employer contribution is paid for by taxpayers, whether those funds are sourced locally or from Sacramento. To fund teacher pensions, taxpayers are paying triple what they would be paying if CalSTRS had been managed responsibly. And, for that matter, why should an employer’s “normal” contribution be 17 percent? Why not 9.2 percent, which would constitute an excellent private sector retirement benefit – 6.2 percent for Social Security and a 3 percent matching contribution into a 401K?

It isn’t as if CalSTRS didn’t know what they were facing. Scroll down to page 47 of the 6/30/2018 financials for CalSTRS and have a look at the table entitled “Historical Aggregate DB [Defined Benefit] Program Contribution Rate.” This is damning evidence. In 2009 CalSTRS knew they needed to raise their contribution rate to 32 percent (the green line), but they kept their actual collected contributions barely over 15 percent, less than half what was needed. Over the next few years they raised their required contributions marginally, not breaking 20 percent until 2014, then suddenly ramping them up to 25 percent in 2015, and then finally they began to charge over 30 percent of payroll, but not until 2017, eight years after they knew they had a huge problem.

This dismal failure to face financial reality is reflected in the growth of the unfunded liability for CalSTRS, as disclosed on page 24 of their financials. Back in 2008, CalSTRS was 87 percent funded, but one year later, in 2009, it was only 78 percent funded. By 2010 that had dropped to 71 percent, and the fall continued all the way through 2017, when they bottomed out (hopefully) at 63 percent funded.

Why did CalSTRS wait so long? And why, when participating in CalSTRS is a choice that new charter schools still have, would any of them, anywhere, ever want to make that choice?

This article originally appeared on the website of the California Policy Center.

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Pricing A Taxpayer Bailout of California’s Pensions

Last month both of California’s largest government employee pension funds, CalPERS and CalSTRS, released their portfolio earnings numbers for the most recent twelve months. In a statement released on January 24th, “CalSTRS Calendar Year-End Investment Returns Show Slight Gains,” CalSTRS disclosed “Investment returns for the California State Teachers’ Retirement System (CalSTRS) ended the 2011 calendar year posting a 2.3 percent gain.” CalPER’s statement released on January 23rd, was titled “[CalPERS} Pension Fund earns 1.1 percent return for 2011 calendar year.”

These funds, and the rest of California’s many local government employee pension funds, are still clinging to long-term rate of return assumptions of between 7.5% and 7.75% per year. So how much would taxpayers be on the hook for if rates of return stay this low?

The first step towards determining this would be to estimate the average pension paid out to a state or local worker in California, based on recent retirees who have worked a full 30 year career. Despite the claim that “The average CalPERS pension is $2,220 per month” (made yet again in the final paragraph of their above-referenced press release), for a more accurate figure, one must look at the average pension awarded recent retirees, based on a full 30+ year career. The problem with the low figure used by CalPERS and others is that it includes people who retired decades ago when salaries and pension benefit formulas were much lower, and it includes people who may have only worked a few years for the government. Since we will be multiplying this average pension by the number of full time state and local government workers in California, we have to assume a full career when calculating the average pension, since for every worker who only worked 10 years, for example, two additional retirees will also be in the system who have themselves also only worked 10 years. To calculate the cost of a full-career pension, you have to add all three of these part-career retirees together. Here is what these pensions really average, based on CalPERS Annual Report FYE 6-30-11 (page 153), and CalSTRS Annual Report FYE 6-30-11, (page 149):

CalPERS average final salary for 30 years work, retiring 2010: $82,884
CalPERS average pension for 30 years work, retiring 2010: $60,894  –
Pension equals 73% of final salary (average of 25-30 year and 30+ year stats)

CalSTRS average final salary for 30 years work, retiring 2010: $88,164
CalSTRS average pension for 30 years work, retiring 2010: $59,580  –
Pension equals 68% of final salary (average of 25-30 year and 30-35 year stats)

If one extrapolates the CalPERS and CalSTRS data to the many independent pension funds serving local agencies – many of these are quite large, such as the one for Los Angeles County employees – it is probably conservative to peg the average pension going forward for full-career government workers in California at at least $60,000 per year, and at least 70% of final salary.

The next step in figuring out how much state and local government worker pensions could cost California’s taxpayers in the future is to establish the sensitivity of pension contribution rates to changes in the rate of return of pension funds. CIV FI has explored this question repeatedly, with a good summary in the July 2011 post entitled “What Percent of Payroll Will Keep Pensions Solvent?” Using the same financial assumptions as were used in that analysis, here is how the required pension contribution rates – expressed as a percent of payroll – change in response to lower earning rates for the pension funds. This is based on pensions averaging 70% of final salary, and assumes 30 years working, 25 years retired, and salary (in real dollars) eventually doubling between hire date and retirement date:

If the pension fund’s return is 7.75%, the contribution rate is 22% of payroll.
If the pension fund’s return is 6.75%, the contribution rate is 28% of payroll.
If the pension fund’s return is 5.75%, the contribution rate is 37% of payroll.
If the pension fund’s return is 4.75%, the contribution rate is 48% of payroll.
If the pension fund’s return is 3.75%, the contribution rate is 63% of payroll.

What the above figures quickly indicate is not only that the required payroll contributions go up sharply when projected rates of investment return come down, but that the lower the rate of return goes, the more sharply the required contribution rises.

To complete this analysis, one only needs to multiply the number of full time state and local government employees in California by the average payroll for these employees, and multiply that result by the various required contribution rates. Using 2010 U.S. Census data for California’s State Employees and for California’s Local Government Employees, one can quickly determine that there are 339,430 state workers earning on average $68,880 in base annual salary, and there are 1,185,935 local government workers earning on average $69,399 in base annual salary.

To sum this up, there are currently 1,525,365 full time (not “full-time equivalent,” which would be an even higher number, but those part-time employees may or may not have pension benefits) state and local government employees in California. They earn, on average, $69,284 per year in base pay. Here is how much pensions will cost for these workers each year based on various rates of return:

If the pension fund’s return is 7.75%, the state pays $23 billion to pension funds each year.
If the pension fund’s return is 6.75%, the state pays $29 billion to pension funds each year.
If the pension fund’s return is 5.75%, the state pays $39 billion to pension funds each year.
If the pension fund’s return is 4.75%, the state pays $51 billion to pension funds each year.
If the pension fund’s return is 3.75%, the state pays $66 billion to pension funds each year.

It is interesting to note that both CalPERS and CalSTRS failed to even achieve a 3.75% return in calendar year 2011, the lowest amount used in these examples and the lowest amount that can even keep pace with inflation.

When one takes into account the fact that only about five million households in California pay net taxes, the impact of the pension con job Wall Street brokerages have enlisted the support of public sector unions to foist onto taxpayers is even more dramatic. Because if, during the great deleveraging that likely will consume this economy for at least another decade, California’s pension funds only deliver 3.75% per year, instead of 7.75% per year, that will translate into $8,600 per year in new taxes for each and every taxpaying California household.