The report commissioned in January 2007 by the Howard Jarvis Taxpayers Association criticized the prudence and fiscal soundness of California public pensions. As one of the public pension systems assessed in the report, CalSTRS would like to add important context and factual clarity to the discussion.

The Association puts public employee benefit payments "in perspective" by comparing them with total state income tax revenues for a select period of time. This comparison erroneously implies a relationship between tax revenues and benefit payments. Such comparisons only serve to further the misunderstanding about how CalSTRS is funded and how retiree and survivor benefits are paid.

The vast majority of benefits paid to our members come from their own contributions and investment returns, not from taxes. The state's contribution to public retirement benefits represents only a small portion (about 8 percent) of the resources available to pay benefits. More than 75 percent of the resources to pay benefits are derived from member contribution and from investment revenues. In 2003-04, the state contributed slightly more than 2 percent of teacher compensation to the system, constituting a mere 9 percent of the total amount paid in retirement and survivor benefits to all CalSTRS members that year.

State Contributions Have Decreased
Contrary to the report's assertions, state and local governments in California are not paying ever larger dollar amounts to finance public employee retirement systems. In fact, they are paying far less into CalSTRS than in past years. Prior to 1998, the state contributed 4.3 percent of teacher compensation to the CalSTRS Defined Benefit Program. By 1998, CalSTRS' investment performance had resulted in near full-funding that triggered an immediate reduction in the state's contribution rate to 3.102 percent. The state's contribution was further reduced in 2000 to the current level of 2.017 percent. Consequently, while benefit payments, salaries and inflation increased, the state's contribution to CalSTRS was reduced by more than half. This reduction has saved the state a total of nearly $2.7 billion in contributions through 2004-05 that otherwise would have been paid to CalSTRS.

Demographics Drive Modest Benefit Cost Increases
The claim that CalSTRS benefit payments more than doubled from 1995 to 2004 illustrates a disturbing trend of selective analysis without context found throughout the report. In the late 1990's, the Legislature did enact some benefit enhancements in direct response to a very strong financial status. These enhancements were designed to encourage experienced educators over age 60 to stay in the classroom teaching. The total cost of this program, as a percentage of pay, is still less than it was prior to 1987.

Furthermore, the average teacher salary increased from 1995 to 2004 by 35 percent, which directly resulted in an increase in total benefits paid as these teachers retire. Purely as a function of demographics and normal retirement patterns, the number of members and beneficiaries receiving benefits increased by 32 percent over that same period. Incidentally, the California Consumer Price Index reflects an inflation rate of 27 percent for those years. Therefore, though total benefits paid appear to have doubled, the actual increase in individual member benefits, adjusted for inflation, was less than 30 percent.

Sadly, the "increased" benefit payments earned by the average CalSTRS member retiring in 2005-06 was less than 65 percent of final pay. Since CalSTRS members do not earn Social Security for their years in the classroom, this amount represents the only source of guaranteed retirement income.

Faulty Methodology Muddies Picture
The report's flawed logic continues with the assertion that an increase in benefits being paid to survivors of members is an additional increase in the fund's liabilities. Survivor benefits are pre-funded by the member's pension check in the form of reduced income while the retired member is still living. In other words, the member chooses to receive a lower monthly payment to provide for their loved ones in the event of their demise. Therefore, there is little or no additional cost for more survivor benefits because these payments are offset by reduced payments already due to retired members.

The report cites the decline in the CalSTRS funded ratio from 104 percent in FY 1998-99 to 86 percent in FY 2004-05 as evidence that "California public employee retirement systems are on much less solid financial condition that just a few years ago." Again, by choosing to analyze only this narrow five-year period, what the Association conveniently fails to include is the historical data showing CalSTRS' overall improvement in funding status, ignoring the "big picture" of the system's fiscal health. Historically, CalSTRS has been funded at both higher and lower ratios than the current 86 percent.

Using selective data, from the only period in CalSTRS' history that saw a decline in funding status since we began collecting it, is spurious at best. By doing so, the Association draws a long-term conclusion from a short-term trend that has already reversed. The funding ratio has steadily improved from 29 percent in 1975 to 110 percent in the year 2000, falling back to 82 percent in 2003 and again rising to 86 percent in 2005. Despite the claims otherwise, CalSTRS has been providing pension security for California's educators since 1913 and remains a strong, stable organization serving 795,000 members and their families.

To its credit, the Association correctly points out that during this select five-year period CalSTRS' obligation went from a surplus of $3 billion to a liability of over $20.3 billion. This change was due to the major reversals in the stock market that affected all investors. Because investment returns make up the bulk of the Retirement Trust Fund, fluctuations in the stock market impact our funding status. The magnitude of that impact on the fund is undeniable. Had CalSTRS earned just 1.5 percent for each of the three years that the stock market faltered, the Defined Benefit Program would have been funded at 100 percent within the predetermined 30-year funding period.

Lower than expected investment returns got us here, but positive investment returns alone cannot get us out. CalSTRS believes that the unfunded actuarial liability merits serious consideration; and for this reason, CalSTRS has been exploring alternatives since 2004 that would return the program to full-funding.

The selective data parsing and clouded arguments offered by the Association's report fail to provide salient information to the taxpayers they claim to serve. All taxpayers, including those who spend their careers in the classroom, deserve all the facts viewed in context using real world economic models. The truth is the unfunded actuarial liability is a long-term, manageable issue; CalSTRS can fund benefits for next 60 years without any action. However, the longer we wait to address it, the higher the cost to do so. The Teachers' Retirement Board has taken action to pursue solutions to reach full funding and welcomes well-considered, well-researched ideas that further this discussion.