Diversion of Pension Funds Riles Teachers

February 12, 2007

A proposal by Gov. Arnold Schwarzenegger to divert $75 million a year from a pension fund is alarming elderly retired teachers, who rely on that fund to supplement their meager retirement payments.

State workers in California have some of the best retirement benefits in the nation. The pension plan for teachers is less generous, particularly for those who retired before a benefits increase in 1999.

A growing number of retired teachers with pensions eroded by years of inflation, now about 54,600, receive supplemental payments that keep their pensions from falling below 80 percent of their initial purchasing power.

Schwarzenegger's budget writers say the plan to cut $75 million from the annual contribution to the $2.75 billion supplemental fund is carefully calculated to trim a growing surplus.

Last year, the fund took in $551 million and paid out $221 million. Many of the elderly retired teachers who receive the supplemental payments are women, who have longer life expectancies than men.

The proposal to reduce the flow of money into a fund regarded as a virtual lifeline for some teachers, particularly those in their 80s and 90s, is strongly opposed by the California Retired Teachers Association.

Mary Jo Leap, 82, an elementary school reading specialist who retired from the Escondido Union School District in 1984, said her small pension is based on what was a top salary at the time, $26,000 a year.

“My retirement wasn't that much,” Leap said. “I had other jobs after that. Then when they had the supplemental, that really helped a lot. It's amazing they would even consider not returning that money to that fund. They don't understand teachers' retirement.”

Advertisement Leap bought part of a duplex long before real estate prices soared. She doesn't have to make house payments now, but she still has utility and tax bills.

“If I ever get to the point where I need to go to a retirement home – I looked at what they charge,” she said. “There isn't any of them that I could afford to go into. Fortunately, I'm in pretty good health now.”

Vera Wilson, who retired from Escondido in 1993 after teaching for 34 years, expects inflation to drop her pension to 80 percent of its original purchasing power in a few years, qualifying her for supplemental payments to prevent a deeper drop in value.

Wilson said many retired teachers are “grossly, grossly underpaid.” She knows of about a dozen retired teachers in the Escondido area who are in their 90s and many others in their 80s who are still active.

“Our retired teachers meet once a month,” Wilson said. “Most of the women who have been retired for more than 20 years do not come because they cannot afford the $15 cost of the luncheon.”

Wilson said the pension of one of her friends is $900 a month. She suspects that some retired teachers receive food stamps but are “too proud” to tell others.

“We put these women who have dedicated their entire careers to teaching out to pasture,” said Wilson. “And then to try to come in the back way – saying the fund has the money to pay and therefore we are going to take it from the teachers – is ludicrous.”

The apparent surplus in the fund, formally known as the Supplemental Benefit Maintenance Account, is an attractive target for lawmakers who have been struggling to close a chronic deficit in the state budget for the past six years.

When the last budget signed by former Gov. Gray Davis cut $500 million from the annual contribution to the fund in 2003, the State Teachers' Retirement System filed a lawsuit to restore the money and won in the lower court. The state is appealing the ruling.

The Schwarzenegger administration says its proposal to cut $75 million from the annual contribution is based on an actuarial analysis in 2005 that shows the supplemental fund “has more than enough money to provide purchasing power protection for current and future retired teachers.”

The proposed cut, which helped the governor submit a $143.4 billion spending plan precariously balanced with $20 million to spare, is opposed not only by the retired teachers association but also by the California Teachers Association, one of the most powerful political players at the Capitol.

“We are opposed – have been and will continue to be,” said Sandra Jackson, a teachers association spokeswoman. “We are opposed to anything that will reduce the supplemental retirement for teachers who already are not receiving enough in their retirement.”

A big increase in pensions in 1999, a move to address a teacher shortage by encouraging teachers to work until age 60 or longer, boosted some benefits by one-third.

A report in 2004 to the retirement board said teacher pensions at age 62 after 30 years of work are “among the highest” monthly benefits when compared with 10 other government pension plans.

The report said that for teachers without a health plan and a substantial savings account “retirement before age 60 may not be feasible for members in most cases, unless a member plans to engage in post-retirement employment.”

Teachers who retired before 1999 did not receive the benefits increase and still have “an inadequate retirement benefit” paid from the State Teachers' Retirement System, according to the Web site of the California Retired Teachers Association.

A sore point for many teachers is that they receive lower overall retirement benefits than a typical state worker covered by the California Public Employees' Retirement System, which includes a number of cities and counties.

“We do recognize that we get less than (CalPERS),” said Jackson, the spokeswoman for the teachers association.

State workers in CalPERS can retire at age 55 with 2 percent of their highest annual salary for each year served. For teachers, the basic retirement is 2 percent of the highest salary at age 60.

State workers receive Social Security in addition to their pension payments from CalPERS. Teachers do not receive Social Security in addition to pensions earned while working for school districts.

Under current federal law, receiving a California state teacher pension can reduce Social Security payments earned on summer jobs and cut Social Security survivor benefits when a spouse dies.

“We are hopeful this year we can finally get rid of those penalties with the Democrats in control of Congress,” said Ed Ely, a spokesman for the California Retired Teachers Association.

The lack of health coverage is another major difference between state worker and teacher retirement benefits.

A typical state worker retiree receives health coverage for themselves and their dependents. That has created a huge debt for which the state has failed to set aside an estimated $40 billion to $70 billion needed for future obligations.

A study done for the California State Teachers' Retirement System in 1999 found that 70 percent of all retired teachers in the system receive “no or a minimal contribution toward health insurance from their former education employers.”

When Schwarzenegger made an ill-fated pension overhaul proposal two years ago, he cited the soaring annual cost of state contributions to CalPERS, which jumped from $160 million to $2.6 billion in five years. The CalPERS board sets the annual state contribution rate.

The annual state contribution to the teachers retirement system, currently $959 million, is set by the Legislature. The system has an investment portfolio worth about $158 billion, with an estimated $20 billion shortfall in the amount needed to meet future obligations.

The teacher retirement board, in keeping with strict obligations to maintain the financial health of the system, has begun a push to get the Legislature to increase contributions to erase the “unfunded liability.”

The retirement board, which has not yet taken a position on the governor's budget proposal, has made no recent moves to increase payments to elderly teachers with eroded pensions worth only 80 percent of their original purchasing power.

Neither the retirement board nor lawmakers have proposed using the surplus, if there is one, to boost supplemental payments to maintain teacher pensions at more than 80 percent of their original value – for example, increasing the guarantee from 80 percent to 85 percent or 90 percent.

The teachers retirement system in September broke ground on an estimated $186 million headquarters building, a 13-story high-rise that some expect to be a landmark building on the west side of the Sacramento River .