Pension Sustainability: California

Retaining Effective Teachers Policy

Goal

The state should ensure that excessive resources are not committed to funding teachers' pension systems.

Meets in part
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Sustainability: California results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/CA-Pension-Sustainability-9

Analysis of California's policies

As of June 30, 2009, the most recent date for which an actuarial valuation is available, California's pension system for teachers is 78 percent funded and has an infinite amortization period. This means that if the plan earns its assumed rate of return and maintains current contribution rates, the state will never pay off its unfunded liabilities. Without a change  to funding levels and/or benefit structure, the system projects that funds will be depleted in 2044. Neither California's funding ratio nor its amortization period meets conventional standards, and the state's system is not financially sustainable according to actuarial benchmarks.

California does not commit excessive resources toward its teachers' retirement system. The mandatory employee contribution rate to the defined benefit plan is 8 percent, and the current employer contribution rate is 8.25 percent for local districts. These rates are reasonable, considering that teachers and local districts are not also contributing to Social Security. The state is required to contribute an additional 2.017 percent plus additional funds up to a total of 3.522; increases are only made if there are unfunded liabilities or normal cost deficits based on benefits in place July 1, 1990. According to the most recent valuation, no additional contribution by the state was needed based on these criteria.

Citation

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.

State response to our analysis

California was helpful in providing NCTQ with facts that enhanced this analysis.

The state further maintained that the California State Teachers' Retirement System (CalSTRS) continues to work with the California legislature to solve the long-term funding gap, and that the authority and responsibility to resolve the funding gap lies with the legislature and governor—not CalSTRS.

Research rationale

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.

For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Robert Costrell and Michael Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute (2011).

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see Joshua Furgeson, Robert P. Strauss, and William B. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy (Summer, 2006).

For examples of how teacher pension systems inhibit teacher mobility, see Robert Costrell and Michael Podgursky, "Golden Handcuffs," Education Next, (Winter, 2010).

For additional information on state pension systems, see Susanna Loeb, and Luke Miller. "State Teacher Policies: What Are They, What Are Their Effects, and What Are Their Implications for School Finance?" Stanford University: Institute for Research on Education Policy and Practice (2006); and Janet Hansen, "Teacher Pensions: A Background Paper", published through the Committee for Economic Development (May, 2008).

For further evidence supporting NCTQ's teacher pension standards, see "Public Employees' Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit and Defined Contribution Retirement Plans." The Segal Group (2010).