MARCH 28, 2019

CalSTRS Pension Proposals
PRESENTED TO:Senate Budget Subcommittee No. 1 on Education
Hon. Richard D. Roth, ChairL E G I S L AT I V E A N A LY S T ’ S O F F I C E

Background on California State Teachers’
Retirement System (CalSTRS)CalSTRS Administers Pension Benefits for Teachers and Other
Certificated Employees System covers 950,000 active employees, retirees, and beneficiaries.

CalSTRS Receives Funding From Four Sources
 Districts make contributions from their local operating budgets.
 The state makes contributions through an annual non-Proposition 98

General Fund appropriation.
 Employees make contributions through payroll deductions.
 Contributions are invested and generate investment returns over time.

CalSTRS Historically Has Been Underfunded For most of its 100-plus year history, contributions to CalSTRS havebeen insufficient to pay for pension benefits as employees earn them.
 The estimated gap between the cost of future benefits and theassets available to pay for those benefits is known as an unfundedliability. Estimates of the unfunded liability rest on many assumptions(including investment returns and life expectancy).
 The unfunded liability grew notably during the 2000s, primarily

due to (1) benefit increases approved in the late 1990s, (2) large
investment losses during the Great Recession, and (3) less optimistic
assumptions about future investment returns.

Underfunding of CalSTRS Has Notable Drawbacks
 Costs are shifted to future generations.
 Pension benefits are more expensive to provide in the long run.

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Background on 2014 Funding Plan
State Enacted CalSTRS Funding Plan in 2014
 Intended to pay down the CalSTRS unfunded liability by themid-2040s.
 Phased in higher contribution rates for districts, the state, andGraphic Sign Off

employees. For districts, the plan set forth a statutory scheduleSecretary
increasing rates over a seven-year period.
Analyst

MPA
DeputyARTWORK#190185
 Reflected the results of several years of hearings examining possible
options.
Template_LAOReport_mid.ait

Funding Plan Reflects a Significant Accomplishment

 Dramatically improved the outlook for CalSTRS funding over the next

several decades.

CalSTRS' Funding Outlook
Assets as Percent of Accrued Liabilities
100%
CalSTRS' Projection After Funding Plan
80

60

40
CalSTRS' Projection Before Funding Plan
20

2015

2020

2025

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2030

2035

2040

2045

2

Update on CalSTRS Unfunded Liability
Graphic
Sign OffCalSTRS
Has an Unfunded Liability of About $107 Billion
Secretary CalSTRS currently estimates it has about 63 percent of the assets
Analystneeded to pay pension benefits earned to date.
MPA Currently about two-thirds of the unfunded liability is assigned toDeputy

ReportSmall_Template.ait
ARTWORK#190185
districts and LAO
one-thirdto thestate. These sharescan fluctuate
overtime. (A small share is not assigned to either party.)

Current Allocation ofCalSTRS Unfunded Liability
As of June 2017
State Share($35 Billion)

District Share($71 Billion)

Unassigned Share($523 Million)

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3Update on District Rates and Contributions
District Contributions Have Increased More Than $3 Billion
Since Adoption of the Funding Plan In 2013-14, district contributions were set at 8.25 percent of payroll.

The associated costs were $2.3 billion.
 Under the statutory schedule established by the plan, district

contributions have risen to 16.28 percent of salary in 2018-19. The
administration estimates district CalSTRS costs have grown to$5.4 billion.

District Contributions Are Likely to Increase Another $1.4 Billion
Over Next Two Years
 Rates are set to increase to 18.1 percent in 2019-20 and 19.1 percentin 2020-21.

After 2020-21, the District Contribution Rate Can Fluctuate After 2020-21, the funding plan allows the CalSTRS board to increaseor decrease the district rate by up to 1 percentage point per year.
 Under the plan, the district rate is capped at 20.25 percent.

District Pension Costs Are Affected by Local Payroll Decisions
 A district’s pension costs are affected by its decisions about salaries

and staffing levels.
 Districts with the largest increases in salary and staffing areexperiencing faster increases in their pension costs compared withother districts.

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4Governor’s Proposals
Designates $700 Million for District Budget Relief Over the Next
Two Years
 Allocates about $350 million per year in 2019-20 and 2020-21.
 District contribution rates would be 1 percentage point lower thanunder current law (17.1 percent in 2019-20 and 18.1 percent in2020-21).
 Proposal would reduce pension costs paid out of local budgets andfree up funds for other district priorities.

Allocates $2.3 Billion for Paying Down District Share ofUnfunded Liability
 According to CalSTRS, this payment would reduce the district

contribution rate by about four-tenths of a percentage point beginningin 2021-22. The exact rate reduction depends upon a number offactors and is likely to fluctuate from year to year.

Both Proposals Would Be Funded With Non-Proposition 98
General FundL E G I S L A T I V E A N A LY S T ’ S O F F I C E

5Assessment of District Budget Relief Proposal
Administration Proposes District Budget Relief When School
Funding Is at Historic High Proposition 98 minimum guarantee has grown nearly $22 billion(37 percent) from 2013-14 through 2018-19.
 Under the Governor’s budget, funding per student would increase

3.8 percent from 2018-19 to 2019-20.
 Adjusted for inflation, school funding per student is at an all-time

high.

Consider Modifying Proposal to Provide Relief During Next
Economic Downturn State could set aside funding now but not immediately adjust district

rates.
 Later, during a downturn, state could use the additional funds to pay

a portion of district pension costs. This approach could reduce theneed for pension increases in future years when school funding is flator declining.
 Though districts view rising pension costs as difficult to manage

today, these difficulties could become much more pronounced duringa downturn.

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6Assessment ofDistrict Unfunded Liability Proposal
Proposal to Pay District Share of Unfunded Liability Involves
Trade-Offs Among Various Debts and Liabilities The Governor’s budget estimates the state has a surplus of around$20 billion. Using a portion of that surplus to address retirement
liabilities is prudent. Setting money aside today will reduce pension
costs in the future.
 Under the Governor’s proposal, the state would pay a greater shareof the CalSTRS unfunded liability than assigned to it under thefunding plan.
 The state has many other debts and obligations, including unfundedliabilities associated with pension plans for its own employees.

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