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Other Budget Issues

Last Updated: 5/17/2013
Budget Issue: Need to determine contractual parameters for "financially sound" funding plan
Program: CalSTRS
Finding or Recommendation: Recommend that Legislature ask CalSTRS board directly what a funding plan would have to look like--in its view and that of its actuaries--to fulfill the contractual commitment provided to teachers for a financially sound pension plan.
Further Detail

Financially Sound Retirement System Required by Law. Section 22001 of California's Education Code declares that the purpose of the California State Teachers' Retirement System's (CalSTRS) defined benefit plan is "to provide a financially sound plan for the retirement" of the state's public school teachers and administrators. Section 22955 of the Education Code states that "pursuant to Section 22001 and case law, members [of CalSTRS] are entitled to a financially sound retirement system." Section 22955 also provides that "it is the intent of the Legislature that this section shall provide the retirement fund stable and full funding over the long term."

It is generally understood that these provisions create a statutory contract with CalSTRS members for a financially sound retirement system. This term--"financially sound"--is not defined in statute, and while there have been other court cases regarding the soundness of California public pension funds, the definition of the financially sound system to which CalSTRS members are entitled is unclear. To our knowledge, the CalSTRS board has not clearly specified what funding requirements need to be met in the future for the system to be financially sound, in its view.

Prior LAO Recommendations Concerning CalSTRS Funding. On March 20, 2013, our office presented to legislative committees our recommendations concerning the long-term funding needs of the California State Teachers' Retirement System (CalSTRS). While recent stock market gains are likely to improve the funded status of CalSTRS--at least temporarily--additional funding is required from some combination of sources (the state, school and community college districts, and/or teachers) in order to address the system's substantial unfunded liabilities and preserve the pension plan's solvency in future decades.

We recommended that the state implement a plan that aims, among other things, to increase funding from some combination of sources so that CalSTRS' existing unfunded liabilities can be retired within about 30 years. This is consistent with what the CalSTRS board recently termed the "definitive approach" to the system's funding problem in its submission of several funding plan options to the Legislature earlier this year. Such a funding plan could involve a multi-year ramp-up to a higher state, local, or employee contribution level, as illustrated in the various funding plan options CalSTRS provided to the Legislature.

Recommendation to Legislature in May 17 Overview of May Revision Report. In our May 17, 2013 report, The 2013-14 Budget: Overview of the May Revision, we commented on the Governor's May Revision and discussed recommended "next steps" for the Legislature in considering CalSTRS' funding issues. In the Overview, we stated:

"We believe the next step for the Legislature should be asking the CalSTRS board directly what a funding plan would have to look like--in its view and that of its actuaries--to fulfill the contractual commitment provided to teachers for a financially sound pension plan. The Legislature then could evaluate that reply and begin the difficult task of figuring out how much more should be paid in the future by the state, school districts, and teachers, respectively."

We noted that there "may be a strong argument to prioritize addressing CalSTRS' liabilities over some items in the Governor's wall of debt, given the high effective interest rate of deferring payments on unfunded pension liabilities." On page 35 of the report (see Figure 16), we also showed how a plan to fully address CalSTRS' funding issues could affect the state budget in the next few years (if, as an example, the Legislature chose to have the state bear the entire additional cost of retiring CalSTRS' unfunded liabilities). Additional payment increases would be required after the years shown in Figure 16.