A Rent-Seeker Case Study
20 years ago, the California State Senate caved to pressure from public sector unions to remove me from the board of the California State Teachers Retirement System (CalSTRS).
The unions sought my removal because I had criticized the unrealistically-lofty level of CalSTRS’s investment return assumption used to set upfront pension contributions. The higher the investment return assumption, the lower the upfront pension contribution, which is split between employee and school district. That upfront contribution is the only contribution employees make to their pension plans. If the investment return assumption is not achieved, the school district alone must make up the deficiency.
After Governor Arnold Schwarzenegger appointed me to the board in 2005, I started warning that if upfront pension contributions were not fully funded using a more reasonable investment return assumption, school districts down the road would face a deluge of deficiencies that would cripple their ability to pay future teachers. The LA Times wrote about the dispute, asking, “Can State Win Its Pension Gamble?”
The State lost its pension gamble. Failure to adopt my recommendation saddled school districts with hundreds of billions of dollars of pension costs and unfunded liabilities. That is the reason teachers in San Francisco went out on strike and teachers in LA are planning to do so.
At my hearing, nearly a dozen public sector unions lined up to make nearly identical statements calling for my removal. Senators who fear nothing more than public sector unions shifted in their seats.
No one showed up at the hearing to support me. There weren’t — and still aren’t — powerful political organizations that fight for future teachers, students and taxpayers.
Governor Schwarzenegger had the nerve to appoint me to the board. But the Legislature did not have the nerve to keep me there, and even if I had been permitted to stay on the board, I would not have been able to command a majority of the board for my recommendation because more than a majority of the other members, including the State Treasurer, State Controller, and State Superintendent of Public Instruction, did not have the nerve to stand up to public sector unions.
This will not change until permanent political organizations representing taxpayers and the future are more powerful than public sector unions.
Feel free to wander through https://www.governforcalifornia.org/news/categories/fiscal-affairs to find proposals I've made over the years. It's time for some other people to step up.
Yup, the current investment return assumption is irrelevant to this discussion. In 2006 STRS was assuming 8% on a ~60/~40 stocks/fixed income portfolio. I said they should use 6.2% and fully fund contributions at that rate (they were also not funding the ARC). Because, unlike FASB, GASB allows public pension funds to discount liabilities at the investment return assumption, that also means STRS's liabilities accreted at the investment return assumption, which is a double whammy for the unfunded liability. In any event, it's too late for SFUSD, the damage was done long ago. The only thing your daughter might promote is elimination of OPEB.