CalSTRS - California State Teachers' Retirement System is Insolvent

The time bomb of retiring teachers has gone off. Few admit it yet, but a pension reform group in California understands the problem, and taxpayers are on the hook.

Please consider California teachers' pension system headed toward insolvency

As California school districts anticipate possibly the worst budget crisis in a generation, many will try to lighten their burden by enticing older teachers into retirement. But as more and more teachers retire -- with a pension averaging 55 percent to 60 percent of salary -- they will be straining a system that already can't meet its obligations.

The California State Teachers' Retirement System is sliding down a steep slope toward insolvency. The threat isn't to teachers who have retired or plan to, but to the people of California. Taxpayers, who already pick up 23 percent of CalSTRS expenses, will be increasingly burdened as the giant pension system fails to meet its obligations.

"We're on a path of destruction," said Marcia Fritz, president of pension-reform group California Foundation for Fiscal Responsibility.

And merely rejiggering formulas for new employees won't rescue the system, she said. Simply put: "We overpromised."

Among those promises, "Californians have typically given their public employees richer retirement benefits" than have other states, according to the nonpartisan Legislative Analyst's Office.

Despite the looming disaster, CalSTRS is like an ocean liner that's slow and complicated to change course. Gov. Jerry Brown hasn't mentioned overhauling the system that benefits one of his major supporters, the teachers union. Nor has the Legislature taken up the issue.

Although CalPERS has imposed higher contributions, reformers say CalSTRS' formulas can be revised only by legislation, a statewide initiative or possibly a constitutional amendment and litigation -- not to mention immense political will. Courts have ruled that retirees are guaranteed the pensions promised them when hired.

Any move to pare benefits or collect more from employees would affect only future teachers, not current employees. That's why Fritz thinks a constitutional amendment to reduce benefits for current teachers is necessary.

CalSTRS' formula, which is based largely on employee salary, age and longevity, tends to reward retirement at age 61½. For example, a teacher who has worked for 35 years, making $90,000 in her final year, could retire at age 62 and reap a $75,600 annual pension -- 84 percent of salary. Teachers can add to their pensions by "buying" additional years.

A pension reform group has drafted a proposal that would cap the state share of future benefits at about 11 percent of salary.

In contrast to the proposed overhaul, teachers' pensions on average currently amount to 55 percent to 60 percent of their salaries, CalSTRS counselor Dave Gillies said.

The pension reformers hope to find a sponsor for their legislation soon, said Dan Pellissier of California Pension Reform. And if the Legislature doesn't pass a bill by mid-May, the group will circulate a petition to put it on the state ballot, he said.

"We have seen polls that 80 percent of likely voters know something needs to be done," said Fritz, an accountant and former CalPERS consultant. "They're listening."

CalSTRS is not "headed" for insolvency. It "is" insolvent.

I support all moves to rein in this system. The first step is to kill defined benefit pension plans entirely for all new hires. However, that alone would be insufficient. A legal way needs to be found to address those already in the system.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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