Want to know another reason California’s teachers unions are desperate to unionize charter schools? They want the leverage to force these schools to participate in CalSTRS, because CalSTRS charges all its participants the same pension contribution rates.
This is a truly amazing, grotesquely unfair, astonishing scam. It means that new schools have to pay for the every financial mistake that CalSTRS ever made, and they’ve made plenty. CalSTRS is only 64 percent funded. CalSTRS is $107 billion in debt – that’s $238,000 per active member. Better get more active members!
Even CalPERS, the largest public employee pension system in the U.S., and one that has engaged in its own share of accounting gimmicks, doesn’t make its financially responsible participants pay for the negligence of its financially irresponsible participants. Every agency that relies on CalPERS has its funded ratio individually calculated. If a local governing board managed to negotiate financially sustainable benefits, or increased their contributions, or otherwise managed to do something right, they have a higher funded ratio, a lower liability, and make lower payments.
Not so with CalSTRS.
A grim gallop through the latest financial reports for CalSTRS will vividly illustrate just how royally CalSTRS will abuse any newcomer to their system, and you don’t have to look very far. Page two of the report for 6/30/2018 has a table displaying the 38.7 percent contribution rate – expressed as a percentage of pension eligible payroll – that participants pay. Employers pay 18.13 percent, the state kicks in another 10.33 percent, and the members – through payroll withholding – pay 10.25 percent.
Altogether, taxpayers – that is, the local employer plus the state – pay 28.5 percent of payroll to fund CalSTRS. That’s a lot, and the reason it’s so much is because CalSTRS has to collect extra to pay down that $107 billion unfunded liability. How much of the contribution is for that?
Good question. On page 4 that question is answered in the section entitled “Normal Cost Rate for CalSTRS 2% at 62 Members.” The relevant passage reads: “As of June 30, 2018, the Normal Cost Rate for the CalSTRS 2% at 62 members is 17.863%. We recommend the board adopt this rate.”
Got that? If you are entering the CalSTRS system with a fresh set of employees, without the baggage of missed earnings forecasts, or the history of scandalously undercharged contributions, you should be paying 17.9 percent of pension eligible payroll into the pension system in order to deliver a “2% at 62” pension to your employees. If the employee pays half of that via payroll withholding (they’re paying 10.25 percent currently, which is more than half), then the employer only has to come up with 9 percent.
Instead, if you join CalSTRS as a new agency participant, the required contribution is 38.7 percent of payroll, or 28.5 percent for the employer after taking into account the 10.25 percent contributed by employees via payroll withholding. That’s a pile of money. It more than triples the employer’s pension contribution, from 9 percent to over 28 percent. For nothing.
The astute reader will note that a new local “agency” would not actually pay 28.5 percent, since the state government pays 10.33 percent of that. This is true, which means actually the local employer’s pension contribution only increases from 9 percent to 18 percent in order to pay for the past mistakes of CalSTRS. It only doubles. For nothing. But the employer contribution is paid for by taxpayers, whether those funds are sourced locally or from Sacramento. To fund teacher pensions, taxpayers are paying triple what they would be paying if CalSTRS had been managed responsibly. And, for that matter, why should an employer’s “normal” contribution be 17 percent? Why not 9.2 percent, which would constitute an excellent private sector retirement benefit – 6.2 percent for Social Security and a 3 percent matching contribution into a 401K?
It isn’t as if CalSTRS didn’t know what they were facing. Scroll down to page 47 of the 6/30/2018 financials for CalSTRS and have a look at the table entitled “Historical Aggregate DB [Defined Benefit] Program Contribution Rate.” This is damning evidence. In 2009 CalSTRS knew they needed to raise their contribution rate to 32 percent (the green line), but they kept their actual collected contributions barely over 15 percent, less than half what was needed. Over the next few years they raised their required contributions marginally, not breaking 20 percent until 2014, then suddenly ramping them up to 25 percent in 2015, and then finally they began to charge over 30 percent of payroll, but not until 2017, eight years after they knew they had a huge problem.
This dismal failure to face financial reality is reflected in the growth of the unfunded liability for CalSTRS, as disclosed on page 24 of their financials. Back in 2008, CalSTRS was 87 percent funded, but one year later, in 2009, it was only 78 percent funded. By 2010 that had dropped to 71 percent, and the fall continued all the way through 2017, when they bottomed out (hopefully) at 63 percent funded.
Why did CalSTRS wait so long? And why, when participating in CalSTRS is a choice that new charter schools still have, would any of them, anywhere, ever want to make that choice?
This article originally appeared on the website of the California Policy Center.
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Edward Ring is a contributing editor and senior fellow with the California Policy Center, which he co-founded in 2013 and served as its first president. He is also a senior fellow with the Center for American Greatness, and a regular contributor to the California Globe. His work has appeared in the Los Angeles Times, the Wall Street Journal, the Economist, Forbes, and other media outlets.
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