CalSTRS and the May Revise

Written by Ann Katzburg (Communications Committee) and Guy Moore (Retirement Committee)

CalSTRS – Why are we in this predicament?  Why is there not enough money to fully fund teacher retirements?   California State Teachers Retirement System (CalSTRS)  was at 110% of funding in 2000 which guaranteed sufficient funds  for current and future  retirees. The unfunded liability is currently somewhere to the tune of $70 billion dollars.   Since the early ‘70’s, employees have contributed 8% towards CalSTRS,  and districts have been contributing 8.25% -  16.25% of your gross pay is contributed to CalSTRS.  And it’s not enough.

The number of retirees is large … and increasing.  Baby boomers are retiring.  And add in this: teachers in California have the highest longevity of any industry group in the state.  Teachers don’t smoke; we’re educated; we eat right; we live a long time.

But the real reason for the current shortfall is the GREAT RECESSION.  It hit us hard!  Between the dot.com bust of 2001 and the 2008 world economic turmoil, CalSTRS’ diversified investments took a huge hit.  Know this.  Politically, there are many forces that would like nothing better than to see California abandon all defined benefit pensions for government employees and teachers.  Many years ago, corporate America promoted the 401(k) plan, a supplemental retirement account designed to work in conjunction with corporate defined benefit plans.  Then, corporations discovered that they would be better off getting rid of defined benefit plans completely.  When a defined benefit plan is underfunded, this is a huge liability to a corporation.  Corporate America jettisoned defined benefit plans.  Now, teachers and government employees are still covered by defined benefit plans.  Now, corporations do not look as appealing as the government or teacher professions in terms of retirement security.  Corporate America is not pleased with this state of affairs.

But teachers are.

Teachers NEED a defined benefit program to guarantee a secure retirement. It is one of the main assets provided to our profession.  Teachers do not make a lot of money, nor do we participate in Social Security. But we do contribute to our State Retirement System.  However, because of the recent decline in our economy, CalSTRS finds itself with an underfunded liability that is increasing exponentially every day.  Experts are predicting that the fund will fail in 2040 … unless we do something to fix it.

We need to save the system for retirees, future retirees, people entering the profession and the future of public education. CalSTRS and CTA have been working on solving this problem for 10 years.  We have a HUGE opportunity right now.  The governor and the state legislators are finally able and willing to tackle the situation in ways that benefit teachers and their families.  The current economic situation in California and political environment have aligned to make this the time to confront and solve this difficult issue. 

What is happening?  In the governor’s May Revised Budget Proposal, Gov. Brown has outlined a formula to tackle the unfunded liability.

The State currently contributes 3.04% to CalSTRS.  The proposed agreement is to boost this contribution to 6.3%.  CTA was astonished by this generous increase in the state’s contribution; it exceeds all expectations.

Members currently contribute 8% of their gross salary. Over time, the contribution will increase to 10.25%. 

The employer, the school district, currently contributes 8.25%.  That percentage will increase to 19.1% over the next 7 years.

The CalSTRS overhaul was the big surprise of the May Revision.  No one expected the governor to tackle this at this time.  While this was unexpected, the timing makes sense. Our state revenues continue to grow.  Gov. Brown believes that the time has come.  CTA agrees.  The highest rate of increase to districts per year over the next seven years is 1.6%.  As not every employee is a member of CalSTRS, the anticipated impact on most districts is below 1.6% per year.

This opportunity to save our pensions is essential to the survival of our profession and to public schools as we know them today.  As the budget conversation evolves with our legislators, we will be informing you of any new developments.

When we know it, you’ll know it.