Summary of LAO Findings and Recommendations on the 2010-11 Budget

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	Program	Budget Issue	LAO Finding Or Recommendation	Last Updated
Go Back	State Teachers' Retirement System	Budgeted contributions to CalSTRS in 2010-11.	Mandatory General Fund contributions to CalSTRS will be $6 million above those reflected in the Governor's budget package. Additional mandatory payments exceeding over $100 million per year likely will commence in 2011-12--not in 2010-11, as we expected previously.	6-04-10

Detailed Narrative
As described below, the state's General Fund will have to contribute $6 million above the amount reflected in the Governor's budget to the California State Teachers' Retirement System (CalSTRS) in 2010-11. Previously, it also appeared likely that an additional $111 million General Fund payment to CalSTRS--also not reflected in the Governor's budget package--would be required in 2010-11. That extra payment (or a slightly larger one) now apparently will not be required until 2011-12. Even larger required state payments loom in future fiscal years. Moreover, other funding or benefit changes probably will be required in the future to address CalSTRS' unfunded obligations, which now appear to be approaching $60 billion. *Background.* The state, districts, and teachers and school administrators each make contributions to CalSTRS to support statutorily prescribed pension benefits for certificated employees of school and community college districts. The state’s contributions also are specified in statutes. Typically, the state pays over 4 percent of statewide teacher payroll each year (based on CalSTRS’ calculation of eligible, or “creditable,” teacher compensation from two fiscal years ago). Currently, the state also is making additional, court-ordered payments resulting from a 2003-04 budget action that withheld a $500 million state appropriation from one CalSTRS program—an action that the courts found to be unconstitutional. The statutes and/or case law provide that the state’s contributions to CalSTRS are contractually enforceable. This means that there is no viable method for the costs to be avoided or deferred unless comparable (and, generally, costly) new advantages are provided to CalSTRS members. *$6.1 Million of Mandatory Costs Not Reflected in the Governor's Budget.* The law requires that the state’s 2010-11 payments to CalSTRS be based on certain percentages “of the total of the creditable compensation of the [2008-09] fiscal year.” In October 2009, CalSTRS reported that teacher creditable compensation earned in 2008-09 was $28.012 billion. The Governor’s January budget proposal used this figure in estimating that the state’s 2010-11 contributions to CalSTRS would be $1.251 billion. The May Revision does not update this amount, although the system now reports that creditable compensation earned in 2008-09 was $28.146 billion, an increase of $134 million. Based on this updated creditable compensation report, the law requires the state to pay $1.257 billion to CalSTRS in 2010-11, an increase of $6.1 million from the total reflected in the Governor’s budget package. Accordingly, we previously recommended that the Legislature amend Item 1920-011-0001 (an informational item in the budget act) to reflect the state’s current 2010-11 CalSTRS funding obligations of $1.257 billion. We understand that the Department of Finance is making these changes to the budget package as a technical adjustment (without the need for legislative action). Conforming, technical adjustments may result in other budget or non-budget-act items related to this changed level of state payments. *Larger Required State Contributions Likely, Beginning in 2011-12.* Like all other major pension systems, CalSTRS suffered massive declines in the value of its assets during 2008. These declines will be incorporated into actuarial valuations of CalSTRS funding over the next several years. Two provisions of state law—subdivisions b and f of Section 22955 of the Education Code—require the state to make additional contributions to CalSTRS when an unfunded liability emerges on the portion of system benefits that were in place before July 1, 1990. (Below, we refer to these additional contributions as the "1990 benefit contributions.") The 1990 benefit contributions, like certain other General Fund contributions to CalSTRS, are continuously appropriated through the Education Code, as opposed to being appropriated in the annual budget act. Previously, we noted that the unfunded liability described in Section 22955 was most likely to emerge and require the state to make 1990 benefit contributions beginning in 2010-11. On June 4, however, we were informed that CalSTRS staff believes they will not be able to technically request the beginning of such payments until 2011-12. Accordingly, we now estimate that the required 1990 benefit contributions will equal $110.6 million or more beginning in 2011-12 (0.524 percent of prior-year teacher payroll for at least three quarters of the fiscal year). In subsequent years, the 1990 benefit contributions likely will increase pursuant to the terms of Section 22955. In or before 2016-17, the 1990 benefit contributions may grow to equal 1.505 percent of teacher payroll, or over $425 million of General Fund expenditures per year. Our office's budget forecasts already reflect assumed state spending in the future for these 1990 benefit contributions.

Detailed Narrative

As described below, the state's General Fund will have to contribute $6 million above the amount reflected in the Governor's budget to the California State Teachers' Retirement System (CalSTRS) in 2010-11.

Previously, it also appeared likely that an additional $111 million General Fund payment to CalSTRS--also not reflected in the Governor's budget package--would be required in 2010-11. That extra payment (or a slightly larger one) now apparently will not be required until 2011-12. Even larger required state payments loom in future fiscal years. Moreover, other funding or benefit changes probably will be required in the future to address CalSTRS' unfunded obligations, which now appear to be approaching $60 billion.

Background. The state, districts, and teachers and school administrators each make contributions to CalSTRS to support statutorily prescribed pension benefits for certificated employees of school and community college districts. The state’s contributions also are specified in statutes. Typically, the state pays over 4 percent of statewide teacher payroll each year (based on CalSTRS’ calculation of eligible, or “creditable,” teacher compensation from two fiscal years ago). Currently, the state also is making additional, court-ordered payments resulting from a 2003-04 budget action that withheld a $500 million state appropriation from one CalSTRS program—an action that the courts found to be unconstitutional. The statutes and/or case law provide that the state’s contributions to CalSTRS are contractually enforceable. This means that there is no viable method for the costs to be avoided or deferred unless comparable (and, generally, costly) new advantages are provided to CalSTRS members.

$6.1 Million of Mandatory Costs Not Reflected in the Governor's Budget. The law requires that the state’s 2010-11 payments to CalSTRS be based on certain percentages “of the total of the creditable compensation of the [2008-09] fiscal year.” In October 2009, CalSTRS reported that teacher creditable compensation earned in 2008-09 was $28.012 billion. The Governor’s January budget proposal used this figure in estimating that the state’s 2010-11 contributions to CalSTRS would be $1.251 billion. The May Revision does not update this amount, although the system now reports that creditable compensation earned in 2008-09 was $28.146 billion, an increase of $134 million. Based on this updated creditable compensation report, the law requires the state to pay $1.257 billion to CalSTRS in 2010-11, an increase of $6.1 million from the total reflected in the Governor’s budget package.

Accordingly, we previously recommended that the Legislature amend Item 1920-011-0001 (an informational item in the budget act) to reflect the state’s current 2010-11 CalSTRS funding obligations of $1.257 billion. We understand that the Department of Finance is making these changes to the budget package as a technical adjustment (without the need for legislative action). Conforming, technical adjustments may result in other budget or non-budget-act items related to this changed level of state payments.

Larger Required State Contributions Likely, Beginning in 2011-12. Like all other major pension systems, CalSTRS suffered massive declines in the value of its assets during 2008. These declines will be incorporated into actuarial valuations of CalSTRS funding over the next several years. Two provisions of state law—subdivisions b and f of Section 22955 of the Education Code—require the state to make additional contributions to CalSTRS when an unfunded liability emerges on the portion of system benefits that were in place before July 1, 1990. (Below, we refer to these additional contributions as the "1990 benefit contributions.") The 1990 benefit contributions, like certain other General Fund contributions to CalSTRS, are continuously appropriated through the Education Code, as opposed to being appropriated in the annual budget act.

Previously, we noted that the unfunded liability described in Section 22955 was most likely to emerge and require the state to make 1990 benefit contributions beginning in 2010-11. On June 4, however, we were informed that CalSTRS staff believes they will not be able to technically request the beginning of such payments until 2011-12.

Accordingly, we now estimate that the required 1990 benefit contributions will equal $110.6 million or more beginning in 2011-12 (0.524 percent of prior-year teacher payroll for at least three quarters of the fiscal year). In subsequent years, the 1990 benefit contributions likely will increase pursuant to the terms of Section 22955. In or before 2016-17, the 1990 benefit contributions may grow to equal 1.505 percent of teacher payroll, or over $425 million of General Fund expenditures per year. Our office's budget forecasts already reflect assumed state spending in the future for these 1990 benefit contributions.