California Governor Jerry Brown is trying to sell his tax hike to voters this November by saying it will go to schools. The dirty little secret is that the new revenues are needed to backfill the insolvent teachers pension fund.
That’s the news from an actuarial report presented to the board of the California State Teachers’ Retirement System this month indicating that pension contributions would have to increase by about 68% to pay down its $65 billion unfunded liability over the next 30 years. If investment returns are lower than projected—say, they average 5.8% annually instead of 7.5%—the actuarially required contribution would more than double. This means that school districts could be on the hook for an additional $3.5 billion to $10 billion annually over the next 30 years. Ouch.
School districts could choose not to pay the higher bill, in which case the retirement fund will run out of money. This sobering news should scare lawmakers and the unions into modifying pension benefits. A teacher can retire at 60 and receive a $54,000 annuity in perpetuity, having contributed only 8% of his salary.
Mr. Brown has proposed modest reforms such as raising the retirement age to 67 for future workers and shifting new hires to hybrid plans, which include a scaled-back annuity and a defined-contribution component. Democrats haven’t taken up his proposal because they don’t want to upset the public unions, so the minority Republicans have introduced it as legislation.
Democrats are in no rush to act since they’re counting on Mr. Brown’s tax to save the day. They’re promoting a ballot initiative this fall to soak millionaires—defined as anyone earning more than $250,000 a year—that’s projected to raise between $6 billion to $9 billion annually. Since state law requires that half of all general fund tax revenues go to education, schools are in for a $3 billion to $5 billion windfall if the initiative passes. But those new revenues won’t help reinstate arts education, sports programs or bus services.
Instead, schools will have to use the money to cover their pension bills, or alternatively, to pay teachers more to offset the higher contributions that teachers may be asked to make to their retirements. The state might also raise its $1.2 billion annual contribution to the teachers pension fund, which would allow schools to spend more of the new revenues on—no, not new textbooks—retiree health benefits. These costs are growing as fast as pensions.
At any rate, the tax hike won’t improve schools or even education-related services as Democrats suggest. It will merely postpone critical pension reforms that might otherwise take place. Maybe that’s the real plan.