The Canary in the Coal Mine for California's Public Pensions

Charter schools now teach about 10 percent of K-12 students in California, up from 2 percent in 2002. (Disney)

California has 87 public pension systems, 10 of which are state-level programs. Since 2012 they have become a serious financial burden to the state as they try to catch up with their losses and growing unfunded liabilities by raising charges.

This problem has surfaced again this year as Californian charter schools are avoiding or outright leaving the pension system due to high costs and sustainability concerns.

Aspire Public Schools, an organization that runs 36 schools in the state, is already in talks with the California Public Employees’ Retirement System (CalPERS) to withdraw from the fund. Its board of directors voted unanimously to leave this system.

Affording the new fees has become a challenge for charter schools attempting to attract the best teachers and personnel with their limited budgets. Even though Aspire previously remained in the California State Teachers Retirement System (CalSTRS), which pays their teachers’ retirement benefits, other charter-school organizations have struggled to afford this one. For example, Tri-Valley Learning Corporation, which operated schools in Livermore, closed in June 2017 and was unable to pay $50,000 owed to CalSTRS.

In 2015, only 67 percent of California charter schools offered retirement benefits through CalSTRS, down from 90 percent in 2004. The increase in the employer-contribution rates accounts for this change. Ten years ago, schools had to pay CalSTRS about 8 percent of employees’ wages, but now the charge is 14.4 percent, and it is set to climb to 19 percent.

The California Policy Center (CPC) has revealed that both retirement systems are already struggling. CalPERS is 68 percent funded, and CalSTRS is only 64 percent funded.

To keep them afloat, the CPC estimates that contributions for the pension systems will have to double, from $31 billion in 2018 to $59 billion in 2024. Naturally, these will fall on the shoulders of state and local governments, who then collect from taxpayers.

Given that unions lobby for the highest possible contribution rates from employers, state and local governments face a persistent problem. They were already unable to afford their fund liabilities before the housing crash in 2008. Now their liabilities are two or three times greater.

Underfunding is just one factor that affects the sustainability of the public pension funds. The Californian population is getting older: the share of residents 65 years or older has jumped from 9 percent in 1970 to 13 percent in 2013, and estimates indicate that it will grow to 17 percent by 2025.

Birth rates have slightly declined during the same period, so fewer workers will contribute to the funds. This puts the public pension systems in a situation akin to a Ponzi scheme, since it needs new paying members to avoid an inevitable downfall.

Predictably, public officials have been asking taxpayers to chip in for the cost, even through deception. Sacramento Mayor Darrell Steinberg, for instance, wants a tax raise that would bring in $66 million, but he won't say it's to cover the funds. Daily News columnist Dan Walters unmasked the charade and highlighted that the additional revenue is roughly the same amount the city needs to pay for its annual pension costs. 

The new tax would not only not bring any new improvements to the city, it would kick the debt can further down the road.

Californian charter schools are already seeing through the attempts to keep these doomed schemes afloat, and they understand that offering retirement benefits through CalPERS and CalSTRS is not how they are going to entice the best teachers.

More organizations are bound to follow suit, sending clear warning signals to state and local governments in California: they should halt the monopolized and cartelized defined-benefit public pension systems and look for safe alternatives in the private sector.

Daniel Duarte contributed to this article.

Sign up here to be notified of new articles from Paz Gómez and AIER.

Paz Gómez

Paz Gómez has been a contributor to the AIER blog since September 2017, and she is a policy analyst with Antigua Report. She is also the cofounder and academic coordinator of Libre Razón, a think tank in Quito, Ecuador. Follow @PazenLibertad.