How shoring up California school pensions puts budget pressure on districts

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Pension policy decisions made to improve funding levels are putting financial pressure on school districts around California.

Some pension hawks blame the districts for the state of affairs but much of it is beyond their control.

At the San Francisco Unified School District, for example, combined pension and other post-employment benefit spending rose to more than $97 million in 2017 from less than $47 million in 2012, according to district financial statements. The massive Los Angeles Unified School District has seen its employee benefits cost increase to more than $2 billion in the 2017-2018 budget year, from just under $1.4 billion in 2013-2014.

School district representatives said that they have very little ability to tackle their rapidly rising retirement costs.

“The only way you can reduce your pensions is if you don’t have your staff,” said Reeta Madhavan, SFUSD’s chief financial officer. “Every school district in California is facing the same situation.”

Public school teachers in California are covered by the California State Teachers' Retirement System.

Madhavan noted that CalSTRS’ contribution rates are set by state statute, and are currently slated to rise to 19.1% of payroll in July 2020 from an 8.25% rate four years ago. The increase was established by 2014 legislation designed to eliminate the CalSTRS liability over several decades. The plan phased in higher contributions from the state, districts, and teachers over several years, but districts bear the heaviest increase on a percentage basis.

School districts around the state are contributing $4.9 billion to CalSTRS, more than double what they paid four years ago, according to the state's Legislative Analyst's Office. That figure will rise to $7.4 billion within three years, according to the LAO.

The 2014 legislation was enacted in response to projections that CalSTRS was projected to run out of money in the mid‑2040s.

Madhavan said that school districts lobbied Sacramento not to push liabilities down to the district level, but were unsuccessful. SFUSD expects that its pension costs will rise further, she said, because in addition to the changes to the required contributions the district is actually attempting to staff up and increase pay rather than reduce its workforce or cut salaries.

“It’s natural that our pension contributions would increase,” said Madhavan. “As your compensation goes up your pension liability goes up.”

An LAUSD spokesperson said the district is making a variety of efforts to attack its retirement liability despite the fact that it can do nothing about the rates the legislature sets for CalSTRS or which the CalPERS board sets for that system.

“The district has implemented recommendations from a blue-ribbon panel to right-size the central office, in light of the district’s declining enrollment; re-negotiated health and welfare benefits; and, continue with ongoing efforts to identify efficiencies that will reduce contribution/support from the general fund to other funds,” LAUSD's spokesperson said.

The district has also implemented attendance and enrollment incentive programs and launched campaigns aimed at improving attendance, the spokesperson said.

School districts are among the government entities increasingly shouldering the burden of both pension and OPEB costs as the major statewide retirement systems roll back the assumed rates of return, or discount rates, on their investments.

Both the California Public Employees' Retirement System and the CalSTRS, the two largest public pension plans in the United States, have reduced their discount rates. While bond rating agencies generally like those moves, the result is some rather daunting numbers on school district financial statements.

David Crane, a lecturer at Stanford University and president of Govern for California, a political group that offers support to state legislative candidates it views as putting citizens before partisanship, has a less forgiving take. In a piece published earlier this week, Crane accused the SFUSD of a “coverup” in claiming that a parcel tax proposal headed to the ballot in June is mainly about teacher pay rather than its ballooning pension and OPEB costs.

“Absent action, the tax measure is the equivalent of applying a bandaid to a cancer,” Crane wrote. “Yet the tax measure does not disclose those facts to voters or that retirement costs can be reduced.”

Crane told The Bond Buyer that SFUSD has the ability to attack its pension costs more aggressively and shouldn’t just be throwing up its hands and saying the costs are beyond its control. Crane noted that SFUSD spent some $41 million on OPEB last year, a benefit not controlled by the pension systems.

“That is completely within their control,” Crane said. “They don't need the state's help to effect reforms. Not all school districts even offer OPEB benefits.”

Most school districts in California offer retiree healthcare benefits, particularly the large ones, according to the LAO. As of 2015-2016, two-thirds of the state's school districts, representing about 90% of all school employees, provided retiree health benefits.

But 78% of the districts that offer retiree health benefits only do so until age 65, according to the LAO, in order to cover retirees in the years before they become eligible for Medicare.

Crane noted that Glendale's school district moved retirees to Obamacare exchanges.

The San Francisco district could also ask local lawmakers to propose legislation allowing school districts to modify benefits for years not yet worked and to suspend cost of living and purchasing power adjustment increases until pension costs are brought to heel, Crane suggested.

“We all need to stop giving a pass to school board members who don't at least fight the battle for today's children and teachers,” Crane said.

S&P Global Ratings analysts Benjamin Geare and Todd Tauzer said that every district in California is dealing with the pressure of rising retirement costs, but that from their perspective the changes the systems have made creating that pressure are generally viewed as good steps. The liabilities always existed, so adjusting discount rates to more accurately convey that liability is better than pushing it far into the future where it will be even larger and more difficult to deal with, the pair said.

“We view a lot of the changes at the plan level as really a positive,” said Tauzer.

Geare said the ratings impact on each district varies according to many factors, but the pressure of rising pension and OPEB liabilities is one S&P is watching whenever it evaluates a school district credit.

“It’s one piece of a credit analysis,” he said. “It does impact a lot of different parts of our rating analysis potentially.”

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Public pensions Pension reform School bonds Los Angeles Unified School District Calpers California