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In May Budget Revision, Gov. Brown Proposes Funding to Bolster CalSTRS, Pay Off Deferrals

May 15, 2014

Governor Edmund G. Brown Jr. released his May Budget Revision on May 13, which – among other proposals – called for the state, school districts and teachers to pay in billions of dollars more annually over the next three decades to fully funds the California State Teachers Retirement System (CalSTRS).

"This May Revision is good news for California," said Governor Brown. "It shows that California can afford to provide health care to many more people, while at the same time paying its debts and shoring up the long-troubled teachers' retirement system."

The Governor's revised budget plan comes on the heels of an agreement with legislative leaders of both parties to bring greater stability to the state's finances in the years to come. The agreement, based on the Governor's January proposal, establishes a Rainy Day Fund that allows the state to save for the future while paying down its debts and unfunded liabilities. The proposal is expected to go before voters in November.

For the budget year (2014-15), the May Revision sets aside $1.6 billion to make the final payment on the Economic Recovery Bonds and another $1.6 billion for the Rainy Day Fund.

The May Revision reflects more than $2 billion in added costs over and above the January budget. This includes higher spending to provide health care coverage under Medi-Cal for a million more people, emergency drought assistance, added funding to meet the Proposition 98 guarantee for K-14 schools, caseload increases in the In-Home Supportive Services (IHSS) program, and added staffing to administer California's unemployment insurance program, in addition to more funding for CalSTRS.

When Governor Brown took office, the state faced a massive $26.6 billion budget deficit and estimated annual shortfalls of roughly $20 billion. These deficits, built up over a decade, have now been eliminated by a combination of budget cuts, temporary taxes and the recovering economy.

Shoring Up Teacher Pensions

The May Revision proposes a plan of shared responsibility among the state, school districts and teachers to shore up the State Teachers' Retirement System (STRS). The increased contributions in the first year from all three parties total about $450 million, but would grow thereafter to more than $5 billion annually in 2020-21. The plan would eliminate the unfunded liability in approximately 30 years.

Implementing Federal Health Care Reform

Compared to what was projected in the January budget, 1.4 million more people will be covered through Medi-Cal, at a cost of an additional $1.2 billion. Enrollment is now expected to rise from 7.9 million in 2012-13 to 11.5 million in 2014-15, for a total cost increase of $2.4 billion.

Increased Money for Drought Response

The May Revision provides an additional $142 million ($121 million General Fund) in drought-related expenditures to reflect necessary spending on firefighting, emergency response, water management, wildlife preservation and food assistance.

Paying Down Debts and Liabilities

The Governor's January Budget proposes to reduce the Wall of Debt by more than $11 billion this year alone and fully eliminate it by 2017-18. The Budget will completely pay off all remaining deferrals to schools and the Economic Recovery Bonds this year. The May Revision includes an additional $100 million to repay a portion of existing mandate reimbursement claims that have been owed to local governments since at least 2004.

Additional details on the May Revision can be found at
State Superintendent of Public Instruction Tom Torlakson issued the following statement in connection with Governor Edmund G. Brown Jr.’s May Revision of the State Budget:

“Governor Brown’s May Revision reaffirms California’s commitment to local control over education dollars, and continues the state’s progress toward empowering local administrators, teachers, parents, students, and school communities to determine how best to serve our young people. It further frees our schools and districts to do this crucial work by lifting the weight of years of deferred payments.

“And, importantly, this budget takes another small but valuable step toward the kind of education that truly prepares students for the world they will encounter outside our classrooms. Already, nearly three million students have participated in the field test of modern new assessments, and we are learning a great deal about what our students and schools can do during this ‘test of the test.’ Governor Brown’s proposed $30 million to build up our high-speed connections will play an important role as we take what we learn this year and apply it to being ready to go operational next year.

“Finally, I appreciate the Governor’s willingness to tackle the issue of providing a secure retirement for California’s teachers, and I look forward to many conversations to come on this important part of education policy.”

New Assembly Speaker Toni Atkins (D-San Diego), who was sworn in the day before the Governor announced the May Budget Revision, said:

“The Governor’s revised budget provides a solid starting point for the final phase of our deliberations. I am particularly pleased the Governor has built upon the framework Assembly Democrats proposed for a CalSTRS solution earlier this year. That, and the Rainy Day Fund we are poised to pass this week, are two great steps forward to ensure California’s economic stability. As we finalize the budget over the next few weeks, we will also look to expand opportunity by combatting child poverty, improving access to higher education, increasing funding for transportation projects, and taking strides to expand affordable housing. Based on the Governor’s May revision and the more than 50 hearings the Assembly has already held, I am confident we are on track for another on-time, balanced budget – one that will help solidify the state’s fiscal position for years to come.”

The California School Boards Association (CSBA) issued a statement saying the organization is “pleased by today’s news that Governor Brown’s May Revision will continue to invest in California’s K-12 schools, including the Local Control Funding Formula (LCFF), deferrals, CalSTRS and high speed internet access.” The CSBA statement continued:

The May Revision maintains the Administration’s commitment to LCFF by allocating $4.5 billion for second-year implementation, eliminating more than 28 percent of the remaining funding gap. It was also announced that schools participating in Provision 2 or 3 of the National School Lunch Program are authorized to establish base-year student eligibility for free or reduced-price meal eligible student counts, and will be allowed to revise three-year rolling average unduplicated student enrollment percentage to use 2014-15 data in place of 2013-2014.

“We are pleased with the continued commitment and investment in LCFF to move all districts to their LCFF targets so school district and county leaders and board members can invest in programs to achieve academic success,” said Josephine Lucey, CSBA president and a board member in the Cupertino Union School District. “We are also encouraged that the Governor is maintaining the integrity of Proposition 98, addressed the challenges in accounting for unduplicated pupils for LCFF, and recognized the need to invest in improving internet connectivity.”

The May Revise also included an increase of $26.7 million for the K-12 High Speed Network to provide technical assistance and grants to local educational agencies to address the technology requirements necessary for successful Common Core implementation. “The modest investment is a step in the right direction in expanding high-speed internet access for those most in need, but we recognize there’s a greater need for additional investments so districts can be successful in implementing Common Core,” said Lucey.

The early repayment of inter-year budgetary deferrals will be made possible by a net increase of $742.2 million in one-time Proposition 98 General Fund attributable to the 2012-2013 and 2013-14 fiscal years. “We continue to support the Governor’s original plan to pay off deferrals over two years, as this would create the availability of one-time funds to be used in 2014-2015 for local educational agencies to implement the Common Core State Standards. CSBA will continue to advocate for greater investment in activities to support successful implementation of Common Core and in improved funding for home to school transportation.”

The Administration will increase the state’s contribution by $450 million in additional funding for CalSTRS, to help put it on a sustainable path and eliminate the unfunded liability in 30 years. “We appreciate the Governor recognizing the need to shore up CalSTRS in the near future, including increased contribution from state employers and teachers, however this increase could impact future increases in overall education funding which cries out for a need to discuss the adequacy of school funding,” Lucey said.

“Overall, this budget proposal demonstrates Governor Brown’s commitment to public education, however CSBA will continue to advocate that there needs to be a sustained investment in California’s education system to advance the education and well-being of our schools and students,” added Lucey.

The Association of California School Administrators (ACSA) also issued a statement offering largely favorable comments on the May Budget Revision.

“Governor Brown recognizes the importance to paying down the pension debt,” said Wes Smith, Executive Director of the Association of California School Administrators. “We want to be good partners in protecting our retirement system and quickly implementing this three-pronged approach is indicative of strategic collaboration.” 

Current CalSTRS contributions equal 19.3 percent of teacher payroll and will ultimately rise to 35.7 percent. This increase would eliminate the unfunded liability in approximately 30 years.

“The pension fund will be exhausted in 30 years if lawmakers ignore the problem year after year,” Smith said. “With a state revenue surplus, he recognizes that this is the time to create a solvent system.” 

On Sunday, the nonpartisan Legislative Analyst’s Office reported that revenue for FY 2013-2014 from the largest general fund sources was coming in $1.8 billion above projects. While the governor has been cautious about spending the increased revenues, he’s outlining a plan that pays down the state’s debt to educators.

California lawmakers have until June 15 to make changes to the Governor’s proposed spending plan and return a balanced budget to the Governor.

Sources:  Governor’s Press Office, California Department of Education, Assembly Speaker’s Office, CSBA, ACSA