Pension Sustainability: California
Pensions Policy
Analysis of California's policies
As of June 30, 2015, the most recent date for which an actuarial valuation is available, California's pension system for teachers is 68.5 percent funded, an increase of 1.5 percentage points since NCTQ's last report, and has an infinite amortization period. This means that even if the plan earns its assumed rate of return of 7.50 percent and makes its full actuarially determined contribution payments, the state will never pay off its unfunded liabilities. Its current pension debt exceeds $12,000 per pupil throughout the state.
California currently commits excessive resources toward its teachers' retirement system. The mandatory employee contribution rates effective July 1, 2016 for "2% at 60 Members" and "2% at 62 Members" are 10.25 percent and 9.205 percent, respectively. These rates are reasonable, given that teachers and local districts are not also contributing to Social Security.
The current base employer contribution rate is 8.25 percent for local districts, plus an additional 6.18 percent increase effective July 1, 2017 pursuant to Chapter 47, Statutes of 2014 (AB 1469-Bonta). The total school district rate of 14.43 percent is excessive, even after considering that local districts are not also contributing to Social Security. Further rate increases are scheduled in subsequent years, and the school district rate will eventually increase to 19.10 percent, effective July 1, 2020.
The state also makes a base contribution of 2.017 percent in addition to a State Supplemental Contribution Rate of 4.311 percent and 2.50 percent to fund the Supplemental Benefit Maintenance Account. In total, the state's contribution rate to the DB program is 8.828 percent effective July 1, 2016. The supplemental rate will be adjusted by the retirement board in future years.
Taken together, the state and employer rates (23.26 percent combined) are unreasonably high and threaten to crowd out resources that could be used for other areas of classroom instruction.
Recommendations for California
Ensure that the pension system is financially sustainable.
The state needs to ensure that its pension system is financially sustainable. The state would be better off if its system had an amortization period of 30 years or less and a system that was more that 95 percent funded to allow protection during financial downturns. California, however, should consider ways to improve its funding level without raising the contributions of school districts and teachers. In fact, the state should work to decrease employer contributions. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention and crowd out funding for other areas in education. Improving funding levels necessitates, in part, systemic changes in the state's pension system. The goals on pension flexibility and pension neutrality provide suggestions for pension system structures that are both sustainable and fair.
State response to our analysis
California was helpful in providing information that enhanced this analysis. California corrected the employer contribution rate so that it only included district and not state contributions.
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California
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Delivering Well Prepared Teachers
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- Elementary Teacher Preparation
- Elementary Teacher Preparation in Reading Instruction
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- Early Childhood
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Identifying Effective Teachers
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- Evaluation of Effectiveness
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Retaining Effective Teachers
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Pensions
Research rationale
Teacher salaries are just one part of the compensation package that teachers receive. Virtually all teachers are also entitled to a pension, which, upon vesting, provides compensation for the rest of their lives after retirement. In an era when retirement benefits have been shrinking across industries and professions, teachers' generous pensions remain fixed. In fact, nearly all states continue to provide teachers with a defined-benefit pension system, an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers.
Under defined benefit systems, states have made an obligation to fund fixed benefits for teachers at retirement. However, the financial health and sustainability of many states' systems are questionable at best. Some systems carry high levels of unfunded liabilities, with no strategy to pay these liabilities down in a reasonable period, as defined by standard accounting practices. Without reform, these systems are a house of cards, vulnerable to collapse as funding cannot keep up with promised benefits. And it is taxpayers who will have to pay if it all tumbles down.
Pension plans disadvantage teachers early in their careers by overcommitting employer resources to retirement benefits.
Pension Sustainability: Supporting Research
NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.