CalSTRS Gets New Power to Set State, School Rates

Categories: California Developments
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Calpensions  by Joshua Rauh, February 8, 2016

As its pension debt soared after the financial crisis, CalSTRS struggled for years to get legislation needed to raise rates — meeting with legislators, looking at suing the state, and even issuing a $600,000 public relations contract to help sway lawmakers.

“Pay now or pay more later” was the refrain.

Actuaries calculated that during each year of delay, the total cost of the rate hike needed to project full funding in 30 years was growing at a rate of roughly half of one percent of pay.

But the century-old California State Teachers Retirement System was helpless for historical reasons, lacking a key power held by most California public pension systems. It could not set annual rates that must be paid by employers.

Then two years ago, after nearly a decade of CalSTRS pleading, the Legislature and Gov. Brown enacted a record rate increase. School district rates will more than double by the end of the decade, while teachers and the state have smaller increases.

Little noticed at the time, the legislation (AB 1469) also gave CalSTRS some long-sought power to raise employer and state rates — a big step toward normalizing the teachers’ pension system and a rare loosening of legislative control over the state budget.

In what could be a major change, the legislation lifted a cap that limited the basic CalSTRS state rate to 3.5 percent of pay. Now the CalSTRS board has the new power, beginning next year, to raise the state rate up to 0.50 percent of pay each year.

Another change gives CalSTRS the power, beginning in 2021, to raise the rate paid by school districts and other employers up to 1 percent of pay a year. But these rates are limited to a range of no less than 8.25 percent of pay and no more than 20.25 percent.

But like other California public pension systems, CalSTRS expects earnings from its large investment fund (valued at $186 billion last Dec. 31) to provide about two-thirds of the money needed to pay pensions in the future.

So, there also is a possibility that if the critics are right and investment earnings fall well short of the 7.5 percent annual long-term average expected by CalSTRS, new rate increases will be needed to fill the funding gap.

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