Gov. Jerry Brown last week proposed the first substantive strategy to shore up the state's woefully underfunded teacher pension plan.
For more than a decade, lawmakers have ignored the increasing shortfall. Consequently, the California State Teachers' Retirement System is now $74 billion underfunded, holding only 67 percent of assets it should have.
Brown now wants to start paying down the debt this year. But he would stretch the installments until 2046, meaning it would take 32 years to restore full funding and that the debt would continue growing for the first 12 years.
That's not fiscally responsible; it's merely less irresponsible than what lawmakers do now. Some legislators don't get it. Senate President Pro Tem Darrell Steinberg, D-Sacramento, on Wednesday suggested lengthening -- not shortening -- the repayment period.
CalSTRS serves 868,000 public school educators and their families. To pay pensions, the retirement system depends on contributions from employees and employers, in this case the state and school districts, and investment returns on that money.
When the assets fall short, more contributions should be injected. But, unlike other pension systems, CalSTRS cannot increase those contribution rates on its own. It must go begging to the state Legislature and governor to do so, politicizing what should be an actuarial decision.
Since the start of the century, lawmakers have ignored the need to raise rates as CalSTRS funding has slipped further behind. Because of that underfunding, benefit increases just before the turn of the century and investment losses during the dot-com bust and the Great Recession, the system has declined from full funding around 2000 to the current 67 percent.
The "unfunded liability" is a debt, money that should already be in the system to invest and help fund future pension benefits workers have already earned. Just as we should pay teacher salaries when they work, we should also set aside sufficient money to pay for the benefits they earn at the same time.
But we haven't. Now we're stuck with a gigantic bill. The question is what to do about it.
In the pension world, unfunded liabilities are treated like huge loans. The amortized payments are calculated and usually added to the existing contribution rates. In this case, the governor proposes spreading the debt payments over 32 years and splitting the cost.
Teachers who now pay 8 percent of their earnings toward their pensions would face a phased increase to 10.25 percent by fiscal year 2017. School districts, currently paying 8.25 percent of payroll to pensions, would ratchet up to 19.1 percent by 2021. And the state share would increase from 3 percent to 6.3 percent by 2017.
But there are problems.
First, even with the higher rates, the debt would continue to grow until 2026. That's because the amortization over 32 years means the payments would essentially not even cover the interest costs for the first 12. Only then would they start to whittle away at the principal.
That's why most pension systems -- but not CalSTRS and the larger California Public Employees' Retirement System -- amortize their unfunded liabilities over 20 years or less. That's also why the state's actuarial advisory panel last year recommended 15-20 years.
The longer the repayment schedule, the more costly it is to taxpayers. While a 30-year mortgage might make sense for homeowners because their properties provide shelter during that time, amortizing a debt for past labor costs over three-plus decades is fiscally unsound.
Second, the entire plan hinges on CalSTRS achieving its forecast 7.5 percent annual return on investments -- a goal the pension system predicts it has less than a 50 percent chance of achieving for the next decade. If the investment returns fall short, even more money would be needed. But it's unclear how the governor's plan would be adjusted to account for that.
To be sure, Brown deserves credit for pressing the issue. It remains to be seen whether legislators will improve his plan or keep kicking the can down the road.
The bigger question, of course, is why CalSTRS has to beg lawmakers to raise rates. Real reform would end that. Let CalSTRS set the rates.