Teacher fund is warned on cuts

Retirees tell CalSTRS reducing benefits is not way to resolve its funding shortfall.

By Gilbert Chan -- Bee Staff Writer
Published 2:15 am PST Thursday, February 2, 2006
Story appeared in Business section, Page D1

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Sell billions of dollars in pension obligation bonds. Slowly raise retirement contributions. Increase the number of years required to amortize the pension obligation.

But don't cut retirement benefits.

That's the message more than a dozen retired schoolteachers and administrators delivered Wednesday to trustees of the California State Teachers' Retirement System as the 12-member board began the task of crafting a strategy to bridge a long-term funding gap of $24.2 billion.

Union representatives for educators and teachers also urged CalSTRS leaders to guard against harsh solutions that could erode benefits for the fund's 776,000 members and future teachers.

"We would not support benefit cuts and go back to a time where the benefits were not adequate," said David Walrath of the California Retired Teachers Association.

"This is one of the world's best retirement systems. It has taken us a long time to get there. I would hate to see it destroyed in a matter of months," said retired teacher Don Maxwell.

One by one, teachers called on trustees to act slowly during their first face-to-face public meeting about possible remedies for the unfunded liability.

In December, officials of the $137.1 billion fund - the nation's second-largest public pension fund - outlined a laundry list of options for trustees to consider in the coming months. Those range from the sale of pension obligation bonds to eliminating various benefits that could reduce monthly pension checks anywhere from $81 to $504. Teachers, school districts and the state also could be asked to increase their share of retirement plan contributions.

"We're looking for a way out of this," trustee Beth Rogers said.

Like other pension funds, the bear stock market in the early 2000s left retirement programs with steep losses and subpar returns and wiped out most pension surpluses. CalSTRS officials aren't counting on investment returns to bridge the gap entirely - despite double-digit investment gains in 2004 and 2005.

Nationally, about 80 percent of large public pensions are underfunded. CalSTRS has enough assets to cover 83 percent of its future retirement benefits. Put another way, officials said the fund has enough money to pay benefits for about 60 years.

The longer the issue goes unresolved, however, the more expensive it will get to erase the deficit. Officials predict the gap would grow to $212 billion in 30 years if nothing is done.

However, unlike funds such as the $200 billion California Public Employees' Retirement System, the teachers' board cannot raise contributions or eliminate most benefits without legislation. As a result, trustees must get a plan approved by the Democrat-controlled Legislature and Republican Gov. Arnold Schwarzenegger.

CalSTRS trustees plan to discuss the issue Friday and could push for legislation this year. But officials said a proposal would need to emerge around April for any bill to get through the Legislature this summer. If not, the board would have to wait until January to introduce a measure.

By far, most teachers at the hearing opposed eliminating a 2 percent annual cost-of-living adjustment and creating a two-tier benefit program. Selling pension obligations bonds, raising contributions gradually, increasing the amortization period and requiring school districts to make pension payments for retired educators hired back to work won some support.

WEIGHING THE OPTIONS

CalSTRS trustees are considering a number of proposals to help meet a $24.2 billion unfunded liability in the future. Most benefit changes would apply to newly hired teachers. The options include:

* Pension obligation bonds. Trustees must figure out whether the state can sell these bonds without voter approval. Local school districts could issue the bonds and use the proceeds to cover any future increase in pension contributions.

* Increase the amortization period to up to 40 years, from 30 years. While this reduces the annual costs, the overall bill to provide benefits would be larger.

* Base pensions on highest compensation over three straight years, compared with 12 consecutive months. This would reduce monthly benefits by $134.

* Take out a career factor used to calculate benefits, which would result in a loss of $378 a month in benefits for each teacher.

* Reduce age calculations for teachers who are 60 years old and older, which would result in a loss of $504 a month in benefits for each teacher.

* No longer allow unused sick leave in the retirement formula, which would cut benefits by $146 a month for each teacher.

* Drop a 2 percent teacher contribution to a supplemental benefit, which would drop benefits by $81 a month for each teacher.

* Reduce or drop the employer contribution to the supplemental benefit for teachers working extra duties. Cut: $54 a month.

* Eliminate the annual 2 percent inflation adjustment. This could affect current teachers, cutting benefits by $93 a month in the first year.

* Incorporate the state's annual payment for a special account to offset inflation for older retirees into the regular pension fund. This year, the state payment is $581 million.

* Don't extend Medicare premium payments for teachers who retire after July 1, 2006. This would increase each teacher's health costs by $393 a month.

* Impose employer contribution for teachers who work after retirement. The total annual cost to districts would be $15 million.

About the writer:

• The Bee's Gilbert Chan can be reached at (916) 321-1045 or gchan@sacbee.com.