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CalSTRS is paying two public affairs firms up to $600,00 this fiscal year to help tell system members and legislators about the need to begin closing a huge funding shortfall.
The contract with Edelman and Lucas Public Affairs allows two top executives to bill at the rate of $250 an hour, three others at $225 an hour, two at $210 an hour, and three at $150 to $125 an hour. The firms also can bill CalSTRS for travel expenses.
Unlike most public employee pension systems in California, the California State Teachers Retirement System lacks the power to set the annual contribution rate that must be paid by government employers.
Instead, CalSTRS needs legislation to change the annual payments made to the fund by the state. But state lawmakers, two months into the new fiscal year, cannot agree on closing a $19 billion state budget gap, an annual deadlock over cuts vs. tax increases.
A deep recession has forced historic state budget cuts, despite a tax increase last year that was expected to yield $12 billion in new revenue. A state general fund budgeted at $103 billion two years ago plunged to $83 billion in the governor’s proposal this year.
In an era of widespread budget blood-letting, including teacher layoffs, CalSTRS knows that it won’t get a $4 billion annual contribution increase, the estimated amount needed to reach full funding after 30 years.
But CalSTRS wants to lay the groundwork for an increase. As state lawmakers face wrenching budget choices, there is no urgent need to spend more now to begin closing the CalSTRS funding gap.
A new report from an actuary, Milliman, to be presented to the CalSTRS board this week says that without a rate increase the pension fund, worth roughly $130 billion, is not expected to run out of money for 35 years.
But it’s pay now or pay more later. The new report says full funding after 30 years requires an annual contribution increase of 14 percent of teacher pay, unchanged from an estimate earlier this year.
A February report showed the cost of delay. An increase of 14 percent of pay costs $4 billion a year now. Do nothing for five years and the full-funding cost jumps to 16 percent of pay or $6 billion a year. Wait 15 years and it’s 22 percent or $12 billion.
“You begin to (get) this question at what point does it become unaffordable and the whole thing collapses unto itself,” Ed Derman, CalSTRS deputy chief executive, told the board.
CalSTRS began approaching lawmakers and teachers about the need for more funding three years ago, said the February report. A common response was that CalSTRS could “invest” its way out of the problem.
After all, CalSTRS had a low funding level in the 1970s, about 30 percent of what was needed for future obligations. Proposition 21 in 1984 lifted a lid that kept most pension money in bonds, allowing a shift to stocks and other risky investments.
A booming stock market and the Elder “full funding” plan (former Assemblyman Dave Elder, D-Long Beach) to increase state contribution helped boost CalSTRS funding to 110 percent by 2000.
As investment yields soared, the California Public Employees Retirement System lowered the state’s annual payment while sponsoring SB 400 in 1999, a major state worker pension increase setting a trend for local public pensions.
CalPERS told legislators investment earnings would pay for the benefits, leaving state costs unchanged for a decade. Now Gov. Arnold Schwarzenegger says soaring pension costs divert money from other programs and is demanding a roll back of SB 400.
Lesser-known legislation in 1998 and 2000 boosted CalSTRS pensions, mainly targeted at keeping experienced teachers on the job. In exchange, the annual state payment to CalSTRS was cut from 4.3 percent of pay to a little over 2 percent.
Derman told the board in February that Milliman actuaries found that the declining funding level, 78 percent in the new report, is the result of low investment yields and the stock market crash, not the benefit increase a decade ago.
If investments had hit their investment target during the last decade, an annual 8 percent average, CalSTRS would be 109 percent funded, he said. If returns during the last decade averaged 7 percent, CalSTRS would be 100 percent funded.
But CalSTRS had huge investment losses. The investment fund peaked at $180 billion in October 2007 and dropped to $112 billion in March of last year, before rebounding to about $130 billion.
Another change could drive up CalSTRS costs. Amid criticism that earning forecasts are too optimistic, concealing pension fund debt, the CalSTRS board is considering a staff recommendation to drop the assumed rate from 8 to 7.5 percent.
The board delayed action until November. If the annual earning forecast is dropped to 7.5 percent for the next 30 years, the increase needed for full funding jumps from $4 billion a year to roughly $5.6 billion or 20 percent of pay.
Yet another potential problem: If the employer contribution to CalSTRS is increased, would the Proposition 98 school-funding guarantee require more money for schools?
That would make the cost of a contribution increase even more expensive. Derman said the attorney general and the legislative counsel reached opposite legal conclusions on triggering Proposition 98 funding, one “yes” and the other “no.”
Who would make an increased payment to CalSTRS is not clear. In the fiscal year ending in June of last year, CalSTRS received $5.3 billion in contributions based on 8 percent of pay from teachers, 8.25 percent from districts and 4.5 percent from the state.
The CalSTRS board adopted a funding strategy four years ago, when the shortfall was smaller, that would increase contributions from districts and the state. A “modest” member increase would modify the 2 percent cost-of-living adjustment for retirees.
At the February meeting, the board was told that the average CalSTRS retiree receives a $4,200 monthly pension after 29 years of service, replacing 62 percent of the final salary.
A pension reform group lists 3,090 persons retired teachers and administrators receiving annual pensions of more than $100,000 from CalSTRS.
Unlike most state and local government workers, teachers in CalSTRS do not receive Social Security in addition to their pension, and many teachers do not receive retiree health care, which is negotiated with districts.
The funding strategy outlined in a report at the February meeting did not mention the hiring of public relation firms. But the board, on a split vote, increased the authority for the CalSTRS chief executive officer, Jack Ehnes, to approve non-investment contracts.
The previous limit of $500,000 was raised to $1 million. State Treasurer Bill Lockyer’s representative, Chris Solich, asked for a roll call vote, saying it was no reflection on Ehnes but no executive should have that authority in tough budget times.
Solich, and board member Harry Keiley voted “no.” Board member Carolyn Widener abstained. Seven board members voted in favor of the expanded delegation of authority.
The CalSTRS contract with Edelman-Lucas for up to $600,000 from June 28 through next June 30 was approved by chief of staff Christine Ford under Ehnes’ authority. The other bid came from another partnership, Ogilvy and Lincoln Crow.
“Contractor shall implement a coordinated, multi-layered outreach strategy with identified communications channels to educate and engage CalSTRS members, school district employers and members of the Legislature about the need for prompt action to address the Defined Benefit Program’s unfunded liability,” said the contract.
Among other things, said the contract, Edelman-Lucas “shall provide overall management of a grassroots effort/campaign and assist in developing internal competences in an engagement of up to three years.”
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com