The district can’t pay its teachers because it’s buried under retirement costs that were predictable, avoidable, and arguably unconstitutional.
Last week, I tuned into a webinar for parents anguished about the strike at the San Francisco Unified School District. Speaker after speaker expressed frustration: at the district, at the union, at the seemingly impossible math of paying teachers what they deserve while closing a $100 million budget deficit.
No one mentioned the real reason SFUSD doesn’t pay its teachers more. District spending on pensions and other retirement costs has grown at nearly five times the rate of school revenues, squeezing out funds needed for teachers’ salaries.
Since 2006, the district’s total revenue has risen 123%, from $537 million to $1.2 billion. But pension spending has surged 538%, from $31 million to $198 million, and spending on retiree health benefits has jumped 450%, from $8 million to $44 million. Together, those two line items consume nearly $250 million a year, money that flows not to working teachers but to retired employees.
The United Educators of San Francisco demands raises of 9% over the next two years. The district says it can afford 2% annually. Both are telling partial truths. The district could afford to pay current teachers far more if it weren’t hemorrhaging money to service retirement obligations it never should have incurred at this scale.
The increase in pension spending was predictable and avoidable. I know, because as a board member of the State Teachers Retirement System in 2006, I predicted it and told the board how to avoid it. Instead, the state Senate kicked me off the board.
At that time, STRS based upfront pension contributions on the assumption that it could earn 8% or more per annum on its investments. I said STRS should not assume a return of more than 6.2% and that school districts would face huge deficits if it continued to assume more. Today’s teachers, students, and taxpayers are paying the price, because those higher returns have not materialized. Had STRS adopted a more reasonable approach, SFUSD’s pension spending would not have soared, and we likely would not be in the midst of the city’s first teachers strike since 1979.
To add insult to injury, pension spending is rising even higher. That’s because even though the S&P 500 has returned 650% in the last 20 years, STRS is less well-funded than it was back when the system set its faulty investment return assumption. STRS kept promising returns it couldn’t deliver, and the gap between what was promised and what was earned has compounded year after year, like an unpaid credit card balance. And yet, STRS and its sister pension fund CalPERS are still creating more debt.
I think this is a form of fraud. The California Constitution prohibits the Legislature from creating any debt or liability exceeding $300,000 without voter approval. Yet every time the state makes a new pension promise to an employee based on an investment return that isn’t guaranteed, the Legislature is creating a liability — potentially a massive one — without asking voters. When pension funds fall short of their assumed returns, taxpayers are on the hook for the difference, no vote required. Over the last decade alone, the state has had to cover more than $100 billion in pension shortfalls created by this practice. That’s not an accounting disagreement. It’s a constitutional violation dressed up in actuarial jargon.
Here’s how the deception works in practice. Since 1999, CalPERS and STRS have earned respectable compound annual growth rates of 6.45% and 7.2%, respectively — returns most investors would envy. But the pension funds based their upfront contribution calculations on an expected return of 8.25%, meaning they collected less from employees and employers than they needed. The gap between what they assumed and what they earned created unfunded liabilities that have so far cost school districts, state agencies, and local governments at least $593 billion. That’s more than half a trillion dollars that could have gone to teacher salaries, smaller class sizes, and functioning schools. Instead it went to cover a bet that the pension funds’ own board members were warned they would lose.
This is not unique to San Francisco. The Los Angeles Unified School District is spending $3.15 billion this year on debt service and retired employees, more than 15% of its annual budget, leaving too little for current staff. Across California, the pattern is identical: rising revenues consumed by rising retirement costs, with current teachers and students left holding the bag.
The tragedy is that the people on the picket lines and the parents scrambling for child care have a common enemy — and it isn’t each other, or the school district. It’s a pension system that has operated for more than two decades on assumptions its own board members knew it could not support.
Until school districts and Sacramento confront the retirement spending crisis honestly, every future contract negotiation in every school district in California will play out exactly like this one: teachers demanding raises the district can’t afford, not because there isn’t enough revenue, but because too much of it is already spoken for by underfunded retirement promises. The strike at SFUSD is a symptom. The disease is a pension system built on a fraudulent premise.
David Crane is a lecturer in public policy at Stanford University and president of Govern for California
