CVIndependent

Wed08122020

Last updateMon, 20 Apr 2020 1pm

California’s public schools have enjoyed a remarkable restoration of funding since the bone-deep cuts they endured during the recession—but many are now facing a grave financial threat as they struggle to protect pensions crucial for teachers’ retirement.

Over the next three years, schools may need to use well more than half of all the new money they’re projected to receive to cover their growing pension obligations, leaving little extra for classrooms, state Department of Finance and Legislative Analyst’s Office estimates show. This is true even though the California State Teachers’ Retirement System just beat its investment goals for the second straight year.

Some districts are predicting deficits, and many districts are bracing for what’s to come by cutting programs, reducing staff or drawing down their reserves—even though per-pupil funding is at its highest level in three decades, and voters recently extended a tax hike on the rich to help pay for schools.

At the same time, some districts are grappling with how to simultaneously afford raises for teachers who have threatened to strike. The situation could become even bleaker if California’s economy doesn’t keep growing.

If there’s another recession—which economists say is increasingly likely, given the record length of the expansion under way now—the higher pension payments scheduled could push some districts deeper into the red, Legislative Analyst’s Office data indicates.

“Many districts’ budgets would be upside down with expenses growing faster than revenues,” said Michael Fine, CEO of the Fiscal Crisis and Management Assistance Team, the state agency responsible for overseeing schools with financial problems.

School systems that saved money over the last few years will be able to use it to buy time, Fine said, but those reserves “won’t eliminate the impact or make that problem go away.” Tackling it will likely require new sources of revenue or an array of cuts.

“Building maintenance could suffer; grounds care could suffer; class size could suffer; instructional coaches could suffer; athletic programs could suffer; technology could suffer; intervention programs could suffer,” Fine said.

The problems stem from the state Legislature’s reticence to mandate steeper payments into the California State Teachers’ Retirement System. The system was badly underfunded and careening toward collapse four years ago when school districts, teachers and the state all agreed to pay more to reduce its unfunded liability, which now stands at $107 billion

Districts took on the greatest share of those new costs, agreeing to increase payments from 8 percent of their payroll in 2013 to 19 percent by 2020.

No matter how burdensome the larger and larger pension payments may be, actuaries say they’re necessary to protect teachers’ hard-earned retirement and prevent the system from running out of money. Teachers don’t get Social Security, and unlike firefighters or police officers, most retirees earn modest pensions of about $55,000 a year.

The Brown administration has directed an additional $20 billion to the state’s public schools since 2013 and says districts have had plenty of time to plan for the pension payments ahead. But many school leaders and advocates want the state to invest even more, especially since California still ranks near the bottom in per-pupil spending compared to other states.

“Knowing that these liabilities were growing, we provided districts with the resources they needed to plan accordingly,” said H.D. Palmer, a spokesman for the state Department of Finance.

Meanwhile, the state’s largest teachers union is downplaying the problem and encouraging its members to bargain for raises. California’s teachers may be among the nation’s most generously paid, but they say the money doesn’t go very far, because the state’s cost of living is so high.

School officials are left with a Gordian knot of politically charged problems, forced to make escalating payments into the pension fund while trying to elevate disadvantaged students’ sagging classroom performance, which remains among the country’s worst despite the state’s big investment in their learning through a policy championed by Brown.

“We need to graduate more kids and close academic achievement gaps, but we can’t move the needle when costs are rising like this,” said Dennis Meyers, executive director of the California School Boards Association, who stressed that his group is not seeking to reduce teachers’ retirement benefits.

“We simply need more revenue, and we’re out here waving the white flag, looking for relief.”

Each of California’s school districts is bound to tackle these challenges differently, so CALmatters visited three of them whose circumstances are emblematic of what others across the state are experiencing. During those visits, we spoke with the people working to solve the problem.

Fremont Unified devotes a greater share of its budget to salary than any other district in the state—69 percent. (The three Coachella Valley school districts devote either 55 or 56 percent. See the percentage devoted to salaries at each of California’s school districts here.) So when the largest pension payments are phased in, Fremont will be hit especially hard. That means the district’s budget could face cuts even as enrollment in the Bay Area school system grows.

Sacramento City Unified knew that larger pension payments were coming and saved money to prepare for them. Then the local teachers union criticized the district for hoarding cash and threatened to strike. Now the contested funds are being used to finance a raise that teachers say is long overdue—and that the county superintendent believes the district can’t afford.

In Los Angeles, growing demand for charter schools and a dwindling birth rate has led to declining enrollment in the district’s own schools, which means pension payments will rise even as the district’s state funding shrinks. School officials recently predicted that a quarter-billion-dollar budget deficit was just two years away.


Raul Parungao’s distinctive grin and his cheery demeanor belie his concern about Fremont Unified’s finances.

Situated between Oakland and San Jose in the pricey Bay Area, the school system pays its employees more than most. That makes it a desirable place to work, but also means it will be hit especially hard when the largest payments required under Brown’s pension plan are phased in.

“There’s this sense in the community that we’re flush with cash, but I try to remind people about the other half of the story,” said Parungao, the district’s chief business officer.

Even though revenue is rising because enrollment is growing, the district must hire and pay more employees to serve them. And over the next three years, while Fremont predicts its revenue will grow by $26 million, a 7 percent bump, it also expects its employee pension and health care costs to climb by $14 million, a 23 percent surge.

“Here’s the bottom line: the extra revenue we expect to get from the state won’t be enough to keep pace with our pension contributions,” Parungao said. “The problem hasn’t exploded big yet, but it will. It’s only a matter of time. I haven’t met another chief business official who isn’t concerned about this.”

Meanwhile, Fremont’s teachers just won a small raise after months of protracted negotiations.

The current pay scale is competitive, with veterans making $114,000 a year, but leaders of the local union say about half of the teachers still don’t make enough to live in the district and must commute from up to an hour away.

But no matter how tough it may be for the district to afford this 1 percent pay hike, teachers deserve one, said Victoria Birbeck, the union’s president

“The series of small raises we’ve received haven’t covered cost of living,” she said. “Besides, the district has known about the governor’s plan for a few years now. There should have been better planning.”

Parungao said planning isn’t the problem. The district stretched to offer teachers a raise last year and even had to shift its budget by millions of dollars to accommodate that 2 percent increase, which came after a 13 percent bump over the prior three years. Plans to upgrade students’ textbooks and computers were postponed, and class size for kindergarten, first- and second-grade students increased slightly.

Given the district’s rising pension and other fixed costs, the new agreement’s $7 million price tag will be tough to accommodate. Still, Michele Berke, one of the district’s board members, acknowledged that for many teachers, $1 spent on pensions isn’t as good as $1 spent on salary.

“As we negotiate with the union, STRS is the elephant in the room,” she said in an interview before the deal was finalized, referring to the acronym for the California State Teachers’ Retirement System. “We’re paying toward your future, but those payments don’t help put food on the dinner table.”

Sacramento Mayor Darrell Steinberg only worked with a few key players one weekend last fall when he helped broker a deal to avert a citywide teacher strike, and former school board president Jay Hansen was one of them.

Hansen had tried for months to negotiate the terms of a pay increase for the city’s 3,000 teachers, but the district and leaders of the local teachers union were far apart, and neither side would budge. An acrimonious relationship between the two camps was partly to blame for the impasse.

“It’s like the Hatfields and the McCoys,” Hansen said. “No one remembers why they can’t get along.”

At issue during the talks was the $81 million sitting in Sacramento City Unified’s savings account, a sum the district had built up over several years with spoils from California’s booming economy.

The union said the money should go toward class-size reduction and raises for teachers that would make the district a more attractive place to work. Sacramento educators are paid less than their peers in nearby districts, but they also receive more generous lifetime health benefits, records show. The district said it had saved the money to help cover rising pension and employee health care costs in the lean budget years ahead.

In the end, Steinberg helped craft an agreement that gives Sacramento teachers an 11 percent raise over three years. But just a few weeks after Steinberg announced the deal during a celebratory news conference on the steps of City Hall, Sacramento County Superintendent Dave Gordon delivered some bad news: The district can’t afford it.

“Based on the review of the public disclosure and the multi-year projections provided by the district, our office has concerns over the district’s ability to afford this compensation package and maintain ongoing fiscal solvency,” Gordon wrote in a December letter to the district.

The district’s own budget offers proof of Gordon’s concerns.

Over the next three years, the school system anticipates its revenue will grow by $6 million, a 1 percent increase, while its pension and health care costs grow by more than $18 million, an 11 percent increase. A popular summer program for struggling students has already been eliminated to save money

A second letter Gordon sent in January further underscores his concerns. He called the district’s plan to use one-time money to help cover the cost of the new contract a “poor business practice” that “only perpetuates the district’s ongoing structural deficit.”

“The pension contributions are putting a strain on everyone’s budgets,” Gordon said in an interview.

Even though Hansen had been the union’s adversary during months of stalled contract talks, he defended the district’s decision to offer teachers a raise, calling it “the right thing to do” despite the school system’s escalating pension and health care costs. “We did it anyway,” he added.

Steinberg echoed Hansen’s perspective.

“A strike would have been calamitous for everybody,” he said. And Sacramento isn’t the only place in California where teachers are thinking about a show of force: At least half a dozen other local unions fighting for higher wages have held labor actions in recent months.

In an interview with CALmatters that union leaders cut short after refusing to answer some questions, Executive Director John Borsos rejected any suggestion that the district won’t be able to afford the contract it recently signed or that it ever claimed to have needed the money stockpiled in its savings account to cover rising pension costs.

“They have more than enough to cover the pension increases,” Borsos said. “And they didn’t make that argument at the bargaining table.”


Gov. Jerry Brown promised his 2014 funding plan would shore up California’s teacher-pension system, but at least one young Los Angeles teacher, Josh Brown, says he’s not counting on it. The Oliver Wendell Holmes Middle School special educator is so worried about the system’s solvency that he has an alternative retirement plan: using a portion of his salary to invest in the stock market.

“I’m a fifth-year teacher. I’m 30 years old, and I’m paying into a pension system that may or may not be around when I retire,” he said. “If I were 65 years old and retiring soon, I would feel differently. Right now, I feel frustrated and worried.”

The largest payments required under the plan will be tough for many districts to manage, but they’re going to be especially vexing for large urban districts like Los Angeles Unified, which lost 100,000 students in the last decade and expects to shed more. (Here's the toll of that under-enrollment, school by school.) That’s a problem, because California’s schools are funded on a per-pupil basis, and fewer students means less money.

In Los Angeles, the swift enrollment decline is due to a dwindling birthrate and growing demand for charter schools, which are publicly funded but independently run, meaning their budgets are separate from that of the district.

Over the next three years, the district anticipates its employee pension and health-care costs will climb $90 million, a 5 percent increase, while its revenue dips about $270 million, a 4 percent decline. The result is a $258 million budget deficit in 2020 that the district can no longer paper over, push off or ignore.

“We’re going to have to tighten our belts to save our schools,” said Nick Melvoin, a board member whose stark views on district finances have been criticized by skeptical local union leaders and fellow board members. “We’re in a death spiral.”

The district plans to tackle the deficit with a one-time $105 million bailout from the state and central-office staff reductions. But observers says officials will soon need to consider some painful measures it has so far been able to avoid, like boosting high school class sizes or closing schools with dwindling numbers of students.

At least 55 schools across the district are under-enrolled by a quarter, and 10 of those are half-empty, a CALmatters analysis of building capacity and enrollment data shows.

“Our costs are rising, and as a result, there are hard choices and trade-offs to make each time we look at the budget,” said Scott Price, the district’s chief financial officer.

Parent Paul Robak fears that if the district doesn’t tackle its budget problems soon, it could be taken over by the state. At a recent board meeting, he urged the members to reject a health-care spending plan that would further squeeze the budget. The members listened and thanked him for testifying before approving the agreement.

“It’s as if the board members are prancing down the lane and covering their ears, pretending nothing’s wrong,” said Robak, who has been active on the district’s parent councils for a decade. “Everyone will lose if we fail to act.”

Board member Kelly Gonez also acknowledged the district’s budget woes and the pressure of rising pension and health care costs, but said officials should be trying to ease the pain by finding new sources of revenue, not by making cuts. All but one other board member declined to comment.

Even as a fiscal crisis looms, Los Angeles teachers are negotiating for a raise.

“Everyone who works in the district comes to work with an expectation they’re going to be treated fairly. They need to be treated fairly,” Austin Beutner, a former investment banker and the district’s new superintendent, told the Los Angeles Times. “How we strike that balance remains to be seen.”

United Teachers Los Angeles President Alex Caputo-Pearl declined CALmatters’ request for an interview. However, at a Pepperdine University event held before the state bailout was announced, he pledged to keep pushing for more money and predicted that the state would come through.

“If we take it off the table,” Caputo-Pearl said, “then we are acknowledging that the public district system is going to go off a fiscal cliff, which (is something) I’m not willing to acknowledge.”


Flooded with calls from anxious school officials, Sen. Anthony Portantino of La Cañada Flintridge and several other Democrats pushed earlier this year for a fix that would boost districts’ funding by $1 billion a year. In the end, Portantino convinced Brown to include about half as much in the state budget he signed a few weeks ago.

He insisted that the money be “flexible,” meaning districts may use it to cover rising pension costs or for anything else. But California’s schools are still underfunded compared to other states, and to better fulfill their responsibility to students and taxpayers, that must change, he said.

“In a few months, we’ll have a new governor with a new set of priorities,” Portantino said. “Is there more to do? Absolutely.”

CalSTRS’ first official report on the impact of districts’ growing pension obligations is due to the Legislature in the middle of next year, when school budgets will likely be squeezed the most.

In the meantime, Fine hopes a recession doesn’t strike soon and that districts can manage their budgets without needing to make cuts or send out pink slips. He was a deputy superintendent in Riverside during the Great Recession and remembers how painful it was to carry out round after round of layoffs.

“We lost one of the best counselors and some very bright teachers. I had to layoff someone who years earlier had taught my young children how to swim,” Fine said. “I remember their faces.”

CALmatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.

Published in Local Issues

Tax reform may not be much more than a glimmer in the eye of Republicans in Washington D.C., but their promise of lower rates and closed loopholes appears to be already affecting state and local finances.

Exhibit 1 comes in the form of a disappointing haul for California tax collectors this summer: In June, the most recent month for which figures were available, the state took in $361 million less than lawmakers planned for in the state budget.

While there are plenty of reasons for revenues to miss their projected mark—an unexpected economic cold snap, perhaps, or a forecasting model miss—the fiscal sleuths at the Legislative Analyst's Office suggest that something else could be afoot. They wrote in a recent report that “high-income taxpayers may be deferring income and/or tax payments to late 2017 or even 2018 in anticipation of a federal tax cut."

It’s a phenomenon that may be sweeping the nation: States such as New York and Massachusetts, both of which levy state income taxes, report lackluster receipts.

The evidence for California is incomplete, but compelling.

For one, state sales taxes actually came in higher than expected. So did withholding receipts—the money that gets taken out of your paycheck. That rules out the possibility that the state economy has taken an unexpected dip.

What came in under expectations are the estimated payments, made four times per year, that high-earners pay on income from capital gains, businesses, interest payments and dividends. Corporate tax payments also came in below the forecast.

More importantly, says Justin Garosi, an economist at the Legislative Analyst’s Office and one of the authors of last month’s report, estimated payments are only up 3 percent since last June, despite the S&P 500 stock index booming over 15 percent over the same period. Corporate America and Wall Street have had a blowout year, so where are their tax payments?

“For wages and salaries, it is generally not possible to have your employer delay a paycheck, so it gets recorded in 2017 instead of 2016,” said Garosi. But those who earn a living by, say, selling stocks, often have the luxury of picking their payday. These taxpayers also have the option to simply fork over whatever they paid last year as an estimate on current earnings and then make up the difference later, explains Garosi.

 “The puzzle we were talking about is that stock prices are up big over last year, but estimated payments aren’t,” he said. “This suggests that a lot of people are paying what they paid last year, even though they expect to eventually have more liability in 2017 than in 2016.”

One reason to do that: You expect to pay a lower tax rate next April.

It’s still too early to say whether that’s exactly what’s going on. The state’s high earners may be holding off on cashing out for a variety of reasons. More detailed information—about which types of taxes are being paid by which groups, and when—won’t be available until at least 2018.

“Even if we did have complete data on capital gains income, we couldn’t be certain how much the level of gains was affected by expectations of federal tax changes,” said state Finance Department spokesperson H.D. Palmer.

But what’s clear is that the stock market is soaring, and estimated payments are not, a trend that “would support the notion” that deferral is taking place, he said.

This wouldn’t be the first time this year that the premonition of lower taxes has been blamed for throwing a wrench into California finances. When it comes to taxes, expectations can be just as important as reality.

In the weeks after the election, the market for California municipal bonds—which are tax-exempt and fund most local development projects—took a dip. Some investment experts saw this as a sign that—with possible tax cuts on the horizon— the appeal of low-return but tax-free investments had worn thin. Prices have since come back up, but may dive back down if Congress gets serious about tax reform.

Similarly, affordable-housing developers across the state began complaining earlier this year that they were having a harder time raising cash from investors. These projects often are supported by the state’s Low Income Housing Tax Credit program, which allows banks and other big investors that put money into below-market housing projects to write off a portion of their tax bill.

But the election had a profound effect on the state housing market, said Matt Schwartz, president of the California Housing Partnership Corporation, a state-created nonprofit that provides financial and policy consulting on affordable-housing issues. He said in deals the corporation helped oversee or advise, within a few weeks of the election, prices dropped by more than 25 cents per dollar of credit. Investors indicated a diminished appetite for tax-saving investments.

Those prices have since come back up, but only slightly. He said offers are still 10 to 15 percent below the pre-election high. 

“We know of at least $10 million (worth of projects) where local governments pretty much had a gun put to their head and were told that they had to step up, or hundreds of homes ready to start construction would just fall apart,” he said. “Every one of those lost percentage points is huge in terms of how many fewer affordable rental homes will get produced.”

But investors can only make the argument that tax reform is on the way for so long. Nearly seven months into the current term, Congress has been short on major legislative accomplishments—a fact highlighted by its failure to repeal the Affordable Care Act. Rewriting the tax code, or just cutting top rates, can’t be done overnight.

As for the state’s finances, the future may be bright. If, in fact, high earners have been holding back on the hope of a friendlier tax code, the good news for the state is that these taxpayers can’t kick the can forever. “As high-income tax filers eventually take gains from investments and businesses and make delayed tax payments, these eventually would show up in state revenue collections,” wrote the Legislative Analyst’s Office.

No matter what happens in Washington D.C., the state of California could see a big payday next April.

Ben Christopher is a contributing writer at CALmatters.org, a nonprofit, nonpartisan media venture explaining California policies and politics.

Published in Politics