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California's Prop 30 Gains Could Be Eaten Up By Crisis In Teacher Pension System

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CALIFORNIA PROP 30
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SAN FRANCISCO -- When a majority of California voters approved Proposition 30 last year, they did so under the assumption that the $6.8 billion per year generated by the temporary tax increase would go directly toward staving off cuts to schools.

However, a recent report from the state's nonpartisan Legislative Analyst's Office found a $70 billion shortfall in state teachers' retirement plans -- and that deficit has the potential to suck up a significant amount of Prop 30 revenue.

In its own report to the legislature, the California Teachers' Retirement System, or CalSTRS, said it hopes to completely close this funding gap within the next three decades by increasing the government's annual overall contributions into the system by $4.5 billion for the 2014-15 fiscal year. The contribution will gradually increase from that amount.

Prop 30 hiked both sales and top marginal tax rates for the next seven years in the state. Increasing contributions to CalSTRS sooner rather than later would create an overlap with money coming from Prop 30, but whether closing the gap with Prop 30 funding specifically remains to be seen. As of now, no proposals are on the table. A decision on the issue would ultimately be made by the state Legislature and Gov. Jerry Brown.

"More than $30 billion over the next seven years will go to the service of a debt that wasn't disclosed before the voters were asked to approve the tax increase," predicted former CalSTRS board member David Crane in a recent Bloomberg editorial. Crane was reportedly ousted from the board about a decade ago for warning that the system's growth forecasts were too rosy and that a large shortfall loomed.

CalSTRS, which currently has $160 billion on hand, manages the retirement accounts of some 862,000 California educators and administrators, along with their families and other beneficiaries. The second-largest public pension system in the nation, CalSTRS serves 2 percent of all California residents and, because joining into a public pension system makes one ineligible to receive Social Security, is the sole source of retirement income for a large portion of its members.

In a video detailing the findings of the report, LAO Senior Fiscal and Policy Analyst Ryan Miller called the CalSTRS' unfunded liability "perhaps California's most significant long-term fiscal challenge."

As of June 2012, the program had an unfunded liability of $70 billion. Unless some significant changes are made, either through a reduction in benefits or an increase in funding, the pension system's resources will be completely depleted by 2044. If that happens, the state of California would be required by law to pay the entirety of the shortfall out of pocket.

Since the liability presented by CalSTRS' mountain of debt is projected to grow quickly over time, the LAO recommended taking action as soon as possible. "The longer we wait to increase contributions to CalSTRS, the more costly it will be generally to erase the unfunded liability," said Miller. "While waiting will mean more resources available for programmatic spending or taxpayer relief in the near-term, it will also mean significantly fewer resources available for these purposes in the longer-term."

It's unlikely that the cuts with which schools were threatened prior to Prop 30 will be enacted, even if money has to start going to close the CalSTRS budget gap. Schools are already benefiting directly from the passage of Prop 30. As the California Teachers Association told HuffPost last month, the measure is a major reason fewer teachers have been laid off this year. While 20,000 teachers were let go in 2012, only about 2,400 have lost their jobs this year.

"Had that not passed, we would have seen layoffs from the same category," CTA President Dean Vogel said at the time.

Joy Resmovits contributed to this report.

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