Brown Pinches Schools With California Teacher Pension Fix

California is flush with cash amid a recovering economy, and pinched public schools are starting to collect money from a tax increase championed by Governor Jerry Brown.

Yet the state’s superintendents may still have some lean days ahead, after going through years of cost-cutting brought on by the recession. They will see their responsibility for teacher pensions double within seven years under a plan the 76-year-old Democrat proposed to prop up the underfunded California State Teachers’ Retirement System.

California school districts, which owe almost $80 billion for general-obligation debt, will pay 70 percent of the $5.3 billion annual cost of Brown’s plan. Next fiscal year, the expense will absorb $347 million of the funding growth schools are guaranteed by law, or 13 percent, and the share won’t peak until 2020.

“The pain districts had to go through to survive to get where they are today is still at epic proportions,” said Steven Ladd, superintendent of Elk Grove Unified School District, with 62,000 students outside Sacramento.

The state’s fifth-largest district, Elk Grove cut expenses by $110 million in the past five years. The higher contribution rates that the governor recommends will add to payroll and benefits costs that already exceed $400 million a year, out of a $583 million budget.

Hopeful Districts

“School districts were hopeful that there might be some additional funding to offset some of those needs,” Ladd said.

California’s $183 billion teacher’s pension is the second-biggest public retirement fund in the U.S. The fund has $74 billion less than it needs to pay promised benefits after investment losses from the recession that ended in 2009. At current funding levels, the fund projects it will run out of money in three decades, at which point taxpayers will be on the hook to pay those benefits. The expense equaled 10 percent of the state’s almost $97 billion general fund last year.

Brown and lawmakers are under pressure to erase a gap that is growing by $22 million a day and accounts for 22 percent of the state’s long-term liabilities, including health-care costs and budget loans. The governor, with the help of teacher unions, raised taxes temporarily in 2012 to generate about $7 billion annually, promising that the money would head off cuts to schools.

Teachers’ Needs

School districts will see their annual contribution to the pension fund double to 19.1 percent of payrolls from 8.25 percent. That’s $3.7 billion more each year by 2020, in addition to the $2.2 billion they are already paying.

“This is what it takes to educate our kids,” Brown told reporters May 13. “The pension has to be paid for.”

Brown is willing to let school districts ease into the higher rates over seven years. He says that economic projections show that constitutionally guaranteed funding for public schools will rise an estimated $11 billion by 2018.

Fitch Ratings said this month that the cost of Brown’s teacher pension plan could pressure school budgets if the economy slumps after the temporary sales and income-tax increases expire by 2018, especially if new spending mandates exceed revenue growth or crowd out other expenditures.

“It seems like we had shored things up and were moving forward and the districts were finally getting their houses in order,” said Kelly Wine, executive vice president at RH Investment Corp., a bond-trading company in Encino, California. “This sounds like it’s going to be quite a hit.”

Debt Burden

California schools owe about $77.4 billion on general-obligation debt, data compiled by Bloomberg show. They have voter approval to issue another $37.5 billion according to the California Debt and Investment Advisory Commission, a unit of the treasurer’s office.

With benchmark municipal interest rates at 11-month lows, investors can find extra yield on the school bonds.

General obligations issued by Long Beach Unified School District and maturing in August 2029 have traded this year with an average yield about 1.7 percentage points above benchmark munis, data compiled by Bloomberg show. Moody’s Investors Service rates the tax-free bonds Aa2, third highest.

Unlike other government workers and employees of private companies, teachers don’t pay into or collect social security benefits when they retire. The average teacher pension in California is about $47,000 a year, according to Calstrs, as the pension fund is known.

Pain Distribution

Teachers share the pain under Brown’s plan. Along with other school employees, they would contribute 10.25 percent of their paycheck within three years, instead of the current 8 percent. The state would boost its contribution to 6.3 percent from 3 percent by July 2016. California also will continue to pay an additional 2.5 percent annually for inflation protection.

“The frustration is really understandable,” said Bob Blattner, a Sacramento-based consultant who helps districts with their finances. “For five years, the education system has been starving and now when they finally get to the front of the line, somebody elbows their way in front.”

Calstrs administers pension and health-care benefits for almost 870,000 people, or about 2 percent of state residents.

Payout Plan

Employees and school districts each paid a little more than $2 billion into the fund last fiscal year, while the state shelled out $1.3 billion. The fund paid out about $11.5 billion in benefits last year.

Unlike the California Public Employees’ Retirement System, which at $291 billion is the nation’s biggest, the teachers fund’s governing board isn’t permitted to raise contribution rates when investment returns sag. Only lawmakers can do that. The rate hasn’t changed for employees since 1972, and for school districts in more than two decades.

“We are concerned about the size of the increase,” said Dennis Meyers, assistant executive director of government relations for the California School Boards Association. “Districts were expecting to invest in programs, invest in kids and close achievement gaps and this added cost does nothing to do that.”

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