California’s Pension Debt Will Eat Everything In Its Path
California discovered a $2.4 billion budget surplus from what it projected in January, but that money won’t be going to any new, exciting program. It won’t support the state’s transition to new academic standards. It won’t be going to expand kindergarten or offer pre-k to 4-year-olds. Governor Jerry Brown has other plans. He wants the money to go toward paying down the state’s debt, especially the $74 billion unfunded liability from the state’s teacher pension plan (CalSTRS).
To be clear, this is undoubtedly the right move for California. Governor Brown deserves credit for recognizing the problem and resisting calls for new spending when the state has such significant debts. Brown’s pension funding proposal is merely a plan at this point, and politicians don’t have a strong track record of fulfilling their pension promises. If Brown, future governors, or the state legislature aren’t able to stick to a long-term funding plan, the problems will only get worse.
The current debt, and the plan to pay it down, are simply staggering. In order to pay off the full debt over 30 years, Brown’s plan calls for increasing contribution rates across the board. Over a 7-year period, teacher contributions to the fund would rise from 8 to 10.25 percent of their salary. School district contributions would have to rise from 8.25 to 19.1 percent, and the state itself would contribute 8.8 percent, up from the current 5.5 percent. By 2021, nearly 40% of California teachers’ total compensation will go toward paying down the pension plan’s liabilities. (Due to the back-loaded nature of the pension plan’s design, many teachers will never see that money at all.)
These contribution rates are set by the state legislature, and all California districts are required to participate in CalSTRS and pay the mandatory contribution rate. Districts would have no option if they wanted to provide their staff a different mix of compensation, even if they’d prefer to spend more resources on higher teacher salaries, hiring more teachers or making other investments. California districts won’t be given that choice. Teachers won’t either, because, unlike local salary schedules, the pension payments are not locally bargained.
All told, school district pension contributions would rise to $5 billion a year. Needless to say, $5 billion is a lot of money. For example, it’s more than the state of California spends on transportation. It’s about what the state general fund spends each year on the University of California and the California State University systems combined. $5 billion would buy 10 million iPad Airs, more than enough to give one to each of California’s 6 million students. According to the NEA, California has 234,297 classroom teachers with an average salary of $70,126. The $5 billion would be equivalent to hiring 71,300 more teachers at current salaries or giving each current teacher a $21,340 raise*. Instead of having options on how they spend their money, school districts will have no choice but to withhold the pension funding.
California is a large and important state, but it’s hardly unique in this situation. As states deal with large unfunded liabilities, contributions have and will continue to rise. School districts in California and across the country will be forced to cinch their budgets ever-tighter, squeezing out money for teachers and classrooms.
*These are merely illustrative. Benefit costs would actually drive these figures lower.
This post originally appeared on TeacherPensions.org.