April 24 (Bloomberg) — Most Californians would be surprised to learn that 100 percent of education’s share of the tax increase proposed by Governor Jerry Brown will go to pensions instead of classrooms. But that would be no surprise to longtime observers of the California State Teachers’ Retirement System, which administers teacher pensions.
Here’s why: After retirement, teachers are unconditionally guaranteed lifetime pensions by their school districts. Everything works out fine if Calstrs, as the retirement system is known, earns the investment returns it forecasts and from which upfront contributions are derived.
But if they fall short, school districts must make up the difference. Because of compounding, the failure to earn forecasted earnings translates into huge deficiencies down the road.
Unfortunately, “down the road” is where school districts are now. Because Calstrs has earned only 60 percent of its forecasted investment return since 1999, it needs school districts to boost contributions by more than $100 billion. Worse, Calstrs waited so long to seek more contributions that its request is now for an extra $4.5 billion a year, almost double the $5 billion a year it already receives in contributions.
School districts can’t come up with such a large amount of money without harming classrooms. And while they could defer the request (Calstrs has enough cash to meet current pension obligations for now), doing so would be very expensive because every year that a contribution is deferred increases the required contribution amount by 7.5 percent, compounded. For example, for every $4.5 billion not contributed now, more than $9 billion would be required 10 years from now. Thus it’s much cheaper, and much fairer to future generations, to increase contributions now.