Pension Transparency: California

Analysis of California's policies

Teachers, policymakers and taxpayers deserve accurate and reliable information about the costs and benefits of the public pension systems they support.

Just as teachers can easily obtain their salary schedules, they should have access to information about pensions so that they can make informed decisions about their career and retirement futures. While California provides teachers with an annual benefits statement, the report includes very limited information about the value of pension benefits. California does not provide teachers with information on how their benefits accrue for each year of service, the amount contributed each year by teachers and employers on behalf of teachers, or the projected value of a teacher's contributions based on different assumptions about the rate of return expected (e.g. 4%, 6%, and 8%). California also does not provide teachers with transparent information about the opportunity cost of leaving contributions in the system by reporting how much might be earned if teachers were to put contributions into a personal retirement savings account.

Teachers in California enroll in a final-salary DB plan, which means that employee and employer contributions should be sufficient to pre-fund the employee's pension. As California has a multi-tier pension system, contributions that exceed the normal cost may be used to fund other teachers' benefits (so-called legacy costs). California, however, does not provide teachers with clear information about how their contributions are being used, including the extent to which current employer contributions are being used to subsidize the retirement benefits of teachers under other tiers as well as how benefits are distributed across teachers of different cohorts and teachers with different career lengths.

Public disclosures on teacher pensions in California also lack transparency. While California reports projections for future contributions required to fully amortize the system's total unfunded liabilities, it should also report these projections under a range of assumptions about the rate of return on investments, not just under the system's own assumption. Doing so would allow stakeholders in California to appropriately assign risk to the system's obligations and provide clarity about potential unfunded liabilities facing taxpayers.

The Government Accountability Standards Board (GASB) requires public retirement systems to disclose who makes employer contributions, and the proportion of total contributions for which each contributor is responsible. Although all states' pension systems collect this information, California does not make these data readily available.

California, like most states, reports the portion of total pension contributions that is normal cost and the proportion that is amortization cost. However, the state does not report information about whether it has taken on debt in order to pay for current or future retiree benefits (e.g. through pension obligation bonds or other instruments for raising capital). Even if the state has not taken on debt, it should disclose this information to the public as it is an important indicator of the state's overall health and stability.

Citation

California State Teachers' Retirement System, Defined Benefit Program Actuarial Valuation as of June 30, 2015. California State Teachers’ Retirement System, Comprehensive Annual Financial Report, A Component Unit of the State of California, for the Fiscal Year Ended June 30, 2015.

Recommendations for California

Provide teachers with the information necessary to understand their retirement benefits.
California should provide much more detailed information to teachers about how their benefits accrue at different points during their careers, as well as information about the opportunity costs related to any contributions made into the system. Because the system has multiple tiers, the plan should also disclose to teachers how their contributions are being used (i.e. whether they all are directed at prefunding their own retirement, or whether a portion of their contributions are used to help pay for retirement benefits of other members). Moreover, California could provide detailed information about how employer contributions are used - e.g. to what extent the employer contributions for an individual teacher are used to subsidize teachers in different tiers and teachers with different tenure.

Report to policymakers and the public data that give a complete representation of the system's financial health.
California should also report projections for future contributions necessary to pay off its unfunded liabilities under a range of assumptions about its discount rate. GASB requires systems to disclose who makes the employer contributions, and California should make this report available on its web site. Finally, the state should disclose in its reports whether or not the system has taken debt service to pay for retirement benefits.

State response to our analysis

California was helpful in providing information that enhanced this analysis. California noted that it does not issue pension obligation bonds, "so there is not information to report." The state also questioned why it was identified as not providing teachers with information on the amount of contributions made by the employee and the employer, when contribution rates are identified elsewhere in the analysis. California added that members receive a personalized annual retirement progress report, and they have access to general information about benefit accrual via CalSTRS publications.

Last word

The fact that no pension obligation bonds have been issued is itself important information to disclose to the public and policymakers as they judge the overall health of the system. As for information provided to teachers, the recommendations in this goal stress providing teachers detailed and individualized information.