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Lawmakers Examine Options for Closing CalSTRS Shortfall

Mar 21, 2013

When state lawmakers were beating their chests last year about the need to reduce pension liabilities, they didn’t actually do anything about the largest liability of all. 

The California State Teachers Retirement System – known as CalSTRS – is facing a projected $70 billion shortfall.   KPCC’s Julie Small attended a sobering hearing Wednesday on the state’s options for closing the gap.

California shares the cost of teachers’ retirement with employees and school districts. CalSTRS invests the money and uses the returns to cover most of the costs.  But when returns on investments dropped during the recession, the fund could not compensate by increasing contribution rates without approval from the legislature and the governor.

That hasn’t happened in the past decade.  Now, CalSTRS Chief Executive Officer Ed Derman says rates need to rise by 15 percent to make the fund whole.  The price tag?

“If you were trying to fully fund it over a 30-year period and immediately increase the contribution rate, the total increase contribution rate would be about $4.5 billion a year,” says Derman.

Why 30 years? That’s when the fund at its current level is projected to run out of money. The rate increase would mean partners pitching in an additional $121 billion. But under current law, the state would end up covering most of the cost.

The members of the joint committee on public employee pensions absorbed this news with somber faces. They asked whether the state should delay contribution increases, roll them out more slowly, or bet on the market staying robust.  Marianne O’Malley—a senior legislative analyst--told them no, no and no.

From our standpoint as fiscal advisors we will tell you it will cost less if you put more funds in on an earlier basis, you’ll be in a much better position to withstand the inevitable next economic downturn, and from a public policy standpoint you avoid the problem of passing on costs that were incurred yesterday to our children and our grandchildren,”says O‘Malley.

There’s no legislation crafted yet to raise CalSTRs rates. Almost two percent of California’s population is enrolled in the pension fund.