Today, California Common Sense released a report analyzing the California State Teachers’ Retirement System’s (CalSTRS) major $71 billion funding shortfall and the imminent risk it poses to California’s school district and overall operating budgets. The report found that the state Legislature – the only entity with the authority to adjust CalSTRS’s funding level – is primarily responsible for allowing the pension fund to descend into severely unfunded territory over the last decade.
Consequently, to regain financial stability, the pension fund now requires that school districts, state, and/or plan members contribute an additional $240 billion over the next 30 years, starting with $4.5 billion initially in 2015. Though this is the least expensive option CalSTRS proposes, it is nearly twice current contribution levels, presenting a clear funding challenge that school districts and state department budgets will likely bear going forward. And once again, last month, the Legislature began a four-month recess without addressing the issue.
The California State Legislature has dodged the CalSTRS problem for far too long and waiting has already had a price. Consider the impact $4.5 billion has on the K-12 and state budgets: It’s more than twice what school districts spend on books and supplies, and nearly as much as the state spends on the University of California and California State University systems combined.
But even the hefty $240 billion funding estimate may be overly optimistic. First, it assumes that CalSTRS will earn a 7.5% average rate of return on its investments over the next 30 years, a target CalSTRS missed over the last decade and one that the system’s consulting actuaries predict it will likely miss over the next three decades. Furthermore, it assumes that the Legislature will act within the next year. CalSTRS has required increased contributions since 2003, but the Legislature has consistently avoided implementing a funding solution. Given the body’s continued inaction and seeming apathy toward the problem, pursuing a solution within the next year appears increasingly unlikely.
Until now, failing to address the shortfall has delayed some short-term budget strains but ironically made California’s K-12 education system far more vulnerable to severe cuts in both the near- and long-term future. The longer the Legislature delays action, the more expensive the solution becomes. At current contribution levels and assumptions, the unfunded pension debt will grow by an average of $50 million each day for the next 30 years. At this pace, the plan will run out of assets in 2043, making the out-of-pocket annual cost of providing these legally guaranteed benefits enormous.
Whether or not the Legislature increases contribution levels into CalSTRS, the cost of providing benefits to plan members will inevitably go up. Starting now is simply the cheapest and most responsible route. The Legislature must take action immediately to fundamentally alter the fund’s financial trajectory and protect California’s school districts from a punishing downward spiral.
Read the full report (PDF).
Adam Tatum is the Research Director of California Common Sense (CACS), which is a non-partisan non-profit founded by Stanford students and alumni to open government to the public, develop data-driven policy analysis, and educate citizens about how their governments work.