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CalSTRS is underfunded, lacks the typical public pension power to force employers to pay more, and is being told by lawyers that the Legislature should come up with a funding plan.
But a deadlocked Legislature faces historic budget cuts and a $19 billion budget gap this year, with similar forecasts for the future. So how does a pension fund not expected to run out of money for 34 years get a seat at the table?
One way might be a favorable ruling in a lawsuit demanding that the state live up to its obligation as the legal “plan sponsor” of the California State Teachers Retirement System, the nation’s second largest public pension fund.
Suing the state was not mentioned last week as the CalSTRS board received a briefing on the legal issues of the funding shortfall from Brian Bartow, the CalSTRS general counsel, and Harvey Leiderman, a pension law expert and veteran litigator.
But a repeated emphasis on the state’s legal requirement to ensure proper CalSTRS funding, and the board’s own “fiduciary” obligation to protect pensioners, seemed to suggest that suing the state is an option.
“In sum, it is clear that the State will ultimately be responsible for finding a way to fully fund the benefits that it has promised to CalSTRS’ members and their beneficiaries,” said a briefing paper presented by the two lawyers.
“The board has the authority and the fiduciary responsibility to demand that the state sufficiently fund the system to ensure a ‘financially sound retirement system…[with] stable and full funding over the long term.'”
The paper cites two cases that Leiderman said are precedents for the state being successfully sued to ensure proper CalSTRS funding: California Teachers Association vs. Cory in 1984 and Teachers Retirement Board v. Genest in 2007.
Whether suing the state makes sense politically would be something for the CalSTRS board to consider.
For example, a court order could deflect arguments that delaying pension payments is a lesser evil than devastating budget cuts now. But the arguments could be coming from powerful teacher unions.
The CalSTRS board also is getting conflicting legal advice on its funding strategy. Ian Lanoff, the CalSTRS fiduciary counsel, said he “respectfully disagrees” with the view that the board does not have the option of making a specific funding proposal.
“In my view one of the options that you have, in light of your fiduciary duty, is for you to do it yourselves and take the bull by the horns and look at everything that’s available and come up with a package of recommendations to the Legislature,” Lanoff said.
Lanoff said one of his clients, a New Hampshire public pension board, chose to remain on the sidelines as the Legislature came up with a “hodge-podge mess,” resulting in several lawsuits, one against the pension board.
“I wasn’t their lawyer at the time they decided that,” Lanoff said. “I’m their lawyer now, defending it against the litigation. We are trying to get them out of it on the grounds that it’s none of their business, sort of what Mr. Leiderman is saying.”
Bartow said he was aware of Lanoff’s view and had asked him to save it for closed session. Board member Carolyn Widener said she wanted to hear from Lanoff, who said Bartow told him he was the “independent” fiduciary counsel on this issue.
“What specific action you take,” Bartow told the board, “what responsibilities you choose to exercise and how you choose to exercise those have very real potential for litigation, and I would hope that we have most of that discussion in closed session because of the potential for litigation.”
Leiderman said Legislatures in several states have directed pension boards to come up with funding solutions, which then must be approved by the Legislature.
“That authority doesn’t exist in California,” he told the board. “You have a constitutional independence that prevents the Legislature from ordering this board to come up with proposed solutions.”
Another consideration, said Leiderman, is that the board has an obligation to all members of the retirement system, not just retirees, and should be impartial to all constituents.
“Once you go down the path of participating and initiating plan design choices you run a risk of picking and choosing among your membership as to who should get and who should give up,” he said.
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.
Some states view public pensions as “gratuities” that can be cut at any time, said the briefing paper given to the CalSTRS board last week. But a series of court decisions say California pensions can’t be cut unless replaced by something of equal value.
The paper said the teacher pension contribution, 8 percent of pay, can’t be increased without an offset of equal value. The only benefit that can be cut without an equalizer is a 2 percent annual cost-of-living adjustment for retirees.
California teachers do not have one of the more generous retirement packages. Their “2 at 60” pension formula is two percent of final pay for each year served at age 60. They get no Social Security and many, if not most, do not have retiree health benefits.
By contrast, most state workers have a “2 at 55” formula, receive Social Security in addition to their pension, and are eligible for cost-free retiree health coverage after 20 years of service.
State workers also are in the giant California Public Employees Retirement System, which unlike CalSTRS has the power to set rates paid by the state.
The annual state payment to CalPERS is $3.9 billion, up $600 million (18 percent) from last year. The state is paying an additional $1.4 billion for state worker retiree health care.
The state payment to CalSTRS this year is $1.2 billion. Actuaries told the board last week that CalSTRS needs an annual contribution increase of 14 percent of pay, about $3.8 billion, to be fully funded after 30 years.
A staff recommendation that CalSTRS lower its earnings forecast from 8 to 7.5 percent would push the contribution increase needed for full funding to 20 percent of pay, about $5.4 billion.
It’s a case of pay now or pay more later. If payments to the pension fund are not increased, the annual payment needed for full funding goes up. And without an increase, CalSTRS is projected to run out of money by 2044.
The system would revert to pay-as-you-go, with no investment earnings to help pay benefits, now about $9 billion a year. The CalSTRS consulting actuary, Milliman, said pay-as-you-go costs in 2044 would be about 50 percent of payroll.
To provide some perspective on CalSTRS’ situation amid widespread reports of troubled public pension funds, Nick Collier of Milliman mentioned a recent study of state pension funds.
“Some of these studies you have to take with a grain of salt, but it seemed like their assumptions were reasonable,” he said. “They said seven statewide systems were projected to run out of money by 2020.”
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