Rising pension costs will pose a tremendous burden to California’s public schools for years to come.
The California Public Employees Retirement System, or CalPERS, voted in December to reduce its long-term, annual investment return assumption from 7.35 percent to 7 percent over the next two years. This month, the California State Teachers’ Retirement System, or CalSTRS, did the same, reducing its assumed rate from 7.5 percent to 7 percent. The practical consequence of these decisions will be higher contributions by taxpayers, leaving less funding available for actual services.
Public employee pensions are funded through three primary sources: government contributions, employee contributions and investment returns. The higher the assumed rate of investment returns, the better funded pension funds are assumed to be and the less taxpayers and government employees are expected to contribute. For years, it has been known the pension systems have been using investment assumptions that are unrealistically high, leading to underfunding and making it easier for politicians to promise lucrative pensions that weren’t being adequately funded.
The practical impact of the pension problem has been observed across the state, in cities like Stockton and San Bernardino which filed for bankruptcy in part because of mounting pension costs, and in most cities that have pitched a tax hike in recent years. But now the problem will become increasingly clearer in schools.
According to a recent report from the state’s nonpartisan Legislative Analysts’ Office, between fiscal year 2014 and fiscal year 2021, school districts statewide will have seen their combined CalPERS and CalSTRS pension contributions grow from $3.083 billion to $9.445 billion. State contributions to CalSTRS will nearly triple over that same time period as well, from $1.36 billion to $3.589 billion. In the current fiscal year, school districts are paying just over $5 billion towards pensions, and so should expect to see contributions nearly double to $9.445 billion in the next four years.
Some districts have been hit harder than others. According to Bloomberg, since 2013, Los Angeles Unified, San Diego Unified and Long Beach Unified have seen their pension costs grow between 74 and 78 percent, with Long Beach Unified impacted the most. Combined, the three districts have a net CalSTRS liability over $5 billion.
A considerable amount of this problem is a result of the tendency of politicians refusing to govern responsibly. For years, the LAO raised the alarm over the fact that CalSTRS was underfunded by as much as $4 billion annually. It was only in 2014 when the state finally decided to properly fund CalSTRS, forcing taxpayers to play catch-up to the detriment of practical, tangible services.
This pension burden will be one taxpayers will bear for years to come. Until taxpayers understand the extent to which they are being ripped off, this will only continue to get worse.
Taxpayers are now in a position where they are handing more of their money away to the government, but getting less for it, while politicians continue to do nothing about mounting obligations too politically inconvenient to take on.
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