California’s Pension Debt Takes Money From Classrooms and Students

The California State Teachers’ Retirement System (CalSTRS) recently reported a 26 percent increase in early teacher retirements in the second half of 2020 relative to the previous year. CalSTRS officials suggest that the COVID-19-driven spike in retirements will not affect the pension plan’s long-term solvency. But even if that holds true, CalSTRS is currently only 66 percent funded and has $100 billion in unfunded benefits. The costs associated with paying off this pension debt are skyrocketing and siphoning hundreds of millions of dollars from classrooms each year.

Like many states, California has made decades of legally ironclad promises to teachers regarding retirement benefits that, for a variety of reasons, have become massively underfunded.  The most notable factors contributing to growing debt are underperforming investments, inaccurate actuarial assumptions, and politicians’ longstanding preference to spend money on sexier things than retirement plans. When a public pension plan accrues debt, states and school districts need to start paying down that debt in addition to covering the normal operating costs associated with pensions. While California’s ledger would indicate it has been making pension debt payments, CalSTRS funding has only gotten worse over the last decade.

The rising cost of pension debt—which now accounts for 57 percent of every dollar contributed to the pension plan by CalSTRS employers—crowds out the education budget, diverting funds away from classrooms. To its credit, CalSTRS has prudently begun to lower its expectations regarding future investment returns and has taken other steps in the right direction to adopt more realistic actuarial assumptions that will benefit the plan by more accurately estimating costs.

But additional reforms are needed to ensure that the past promises made to generations of teachers do not continue to devour the future of California’s public schools via the rising costs of servicing pension debt. The K-12 pension crowd-out effect is already considerable in California. A 2019 Pivot Learning study found that school districts in the state paid approximately $500 per pupil in 2013 for employee pension costs. This cost rose to $1,600 per pupil in 2020, despite no significant change to the benefit design. Rather, this period coincided with years of escalating pension costs associated with adopting actuarial assumptions more in-line with reality.

Further, the study, in interviews with school district officials across the state, discovered a range of ways that unfunded pension costs have forced school administrators to decrease services provided to lower-income students, English-learning students, and other high-need student populations, along with other impactful changes. For example, more than 30 percent of California school districts have increased class sizes and a similar number have cut enrichment programs in order to deal with pension costs. And more schools are expected to make similar changes in the near-term. Additionally, 19 percent reported reducing counseling and mental health support services, with another 22 percent planning to do so in the next few years. Many school districts also reported cutting afterschool services, sports, music, and other programs.

California’s pension situation isn’t sustainable. It will require compromise, consensus, and an even greater financial commitment to keep paying down current pension debt as fast as possible. It will also take stakeholder buy-in to create new and innovative retirement benefit design options for future teachers—including less risky pension designs—that move away from one-size-fits-all approaches of the past, meet the retirement security needs of the modern workforce and are financially sustainable.

The state is paying more and more for teachers of the past while it increasingly struggles to educate the kids in today’s classrooms. Unfortunately, there is no way to solve chronic pension underfunding without a larger financial commitment to the system. Additionally, to best protect California’s employees, retirees and taxpayers, the state should continue to make the right systemic pension reforms to avoid the risk of future debt.

A version of this column first appeared in the Los Angeles Daily News.