Recent Developments Suggest a Funding Plan is Within Reach

Blog entry Jack Ehnes

Several developments suggest a funding plan for CalSTRS is a top priority for the Governor and Legislature this year. In addition to Governor Brown’s call for development of a funding plan in his budget proposal, the Legislature has begun the process of crafting a permanent funding solution for the Defined Benefit Program. As this process takes shape many significant issues will be examined. The importance of staying focused on funding issues relevant to CalSTRS is paramount.

An article by the Legislative Analyst’s Office thoughtfully frames many of the financial aspects which need to be considered in developing a long-term solution to sustain the fund. As the LAO suggests, the CalSTRS unfunded liability can be calculated using either the actuarial value or market value of assets.  Both methods correctly reflect the difference between CalSTRS assets and liabilities and both are reported in CalSTRS’ valuations. An unfunded liability exists when the present value of the projected cost of future pension benefits earned up to that point in time but not yet distributed exceeds the assets available for the payment of those benefits.

Regardless of whether a market or actuarial value is employed in determining CalSTRS’ unfunded liability, the long-term contribution rate increase required to fully fund the program is the same. Acting to increase contributions in 2014 to a level that would fully fund the program over 30 years would translate to an additional 15.6 percent of payroll or a projected $4.5 billion in the first year. In addition, one thing is distinctly clear; swift action – whether to initiate a funding plan or to fully execute it – reduces the total cost of the increased contributions that will need to be made. CalSTRS staff presented to the Teachers’ Retirement Board the financial implications and increased risk of further delays in implementing a funding plan at the board’s February meeting.

The first in a series of legislative hearings on CalSTRS’ funding called for by the Assembly Committee on Public Employees, Retirement and Social Security will take place later this month. Updated information on the report CalSTRS submitted to the Legislature last year pursuant to SCR 105 will serve as a starting point for policymakers as they work to enact a sustainable funding strategy.

The Governor and Legislature’s desire to enact a full funding plan for the Defined Benefit Program demonstrates leadership and upholds the state’s promise to California’s educators. Both actions give direction and energy to work with all stakeholders this coming year to finalize a plan. CalSTRS will continue to provide information to the Legislature and Governor and stands ready to work with them as they craft a responsible funding plan, which only they have the authority to enact.