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What should LAUSD do about its ballooning benefits costs?

L.A. Unified School Board candidate Nick Melvoin (left) and incumbent board president Steve Zimmer listen during a recent candidate forum.
Kyle Stokes/KPCC
L.A. Unified School Board candidate Nick Melvoin, left, and incumbent board president Steve Zimmer listen during a recent candidate forum.

It's impossible to talk about the financial elephants on the back of the Los Angeles Unified School District, a blue ribbon panel concluded in 2015, without bringing up two things: pension and healthcare costs.

By 2018, the district projects it will spend $1 billion on health care. By 2020, L.A. Unified's obligations to the two state-run agencies providing pensions to its employees will gobble up one out of every $10 that flows into the district's general fund.

Now, with the May 16 run-off elections for two L.A. Unified School Board seats just weeks away, the question of how district leaders ought to handle these ballooning costs has surfaced in the campaign debate.

In a recent forum between candidate Nick Melvoin and incumbent board president Steve Zimmer, Melvoin suggested district officials need to consider altering pension benefits for teachers and employees L.A. Unified hires in the future.

"This is something in the last eight years, last 10 years, we should’ve been fixing," said Melvoin, who hopes to replace Zimmer in the seat representing West L.A. "We should’ve started with incoming teachers to the district to retool pension benefits so we don’t have to touch existing teachers’ and retirees’ benefits, which we may have to do" if costs continue to rise, he said.

Debate moderator Fernando Guerra, a professor at Loyola Marymount University, asked Melvoin to clarify: "You're saying new teachers should have a different pension system than existing teachers?"

"I think," Melvoin replied, "to not consider it is so irresponsible."

(Full disclosure: Guerra is also a KPCC board trustee.)

When Guerra pivoted to Zimmer, he replied that the district should not consider "changing systems that we have promised all of our employees" — but also didn't rule out tweaking the benefits package it offers to future employees.

"Especially as it relates to health care, we need to look at a lot of things," Zimmer said. District officials project spending around $873.6 million on health care this year.

But above all, Zimmer stressed that any changes to benefits must be negotiated with the unions representing L.A. Unified employees. Zimmer has said the district is headed for a "UAW moment" with these labor groups.

"It is possible we — together with our labor partners — will have an agreement that will save us money, and save us jobs," Zimmer said. "But again, we do it together. We do it through trust."

Pension costs LAUSD hundreds of millions

L.A. Unified is a member of two state-run employee pension funds, the California State Teachers Retirement System, or "CalSTRS," and the California Public Employee Retirement System, or "CalPERS," which covers school workers without teaching credentials.

This year, L.A. Unified officials project the district will pay a combined $675 million out of its general fund into both CalSTRS and CalPERS.

But its total contribution to both CalSTRS and CalPERS is higher. That's because this figure doesn't include contributions from teachers who are paid out of funds other than the general fund; teachers paid with bond money or Title I dollars, for instance.

An L.A. Unified spokeswoman said exact totals weren't readily available, but the general fund contribution represents about 83 percent of what the district spends on pensions.

Next school year, L.A. Unified will pay even more from its general fund for state pensions: more than $738 million.

Those increases will come as part of a push from the state to reduce massive shortfalls in both pension funds. In 2014, California lawmakers set in motion a series of rate hikes that, by 2020, will double the amount school districts are contributing annually to CalSTRS. L.A. Unified also projects its CalPERS rates will climb.

In November 2015, the Independent Financial Review Panel — the district's blue-ribbon panel — reported these rising pension and healthcare costs were the driving factors behind the district's long-term deficit projections.

At the debate Sunday, neither Zimmer nor Melvoin expressed a desire to alter the benefits it offers existing employees or retirees. Melvoin, however, is worried a fiscal crisis may force the district to consider it and criticized district officials for, he said, failing to head off rising benefits costs.

Zimmer disagreed.

"The Board of Education of LAUSD did not cause the Great Recession," Zimmer said. "To say that somehow … we were not stewards of extreme responsibility during that time may be politically advantageous, but I challenge Nick, anyone else given the circumstances we were dealing with: how else could we have balanced that budget?"

'You've got to move the math'

In the near-term, district officials are cautiously optimistic about L.A. Unified's fiscal health. District officials project closing out this school year with a surplus. They also project L.A. Unified will at least break even in 2017-18 — so long as officials are able to implement a plan to "realign" how the district spends on English learners, foster youth and low-income students.

Still, even the district's rosiest projection has L.A. Unified slipping into a $395 million operating deficit in 2018-19. (If the "realignment" plan falls through somehow, the bottom really falls out; in that event, the deficit would top $1.6 billion in 2018-19.)

David Crane, a Stanford University lecturer and former CalSTRS board member, questioned whether cutting pension benefits for employees yet to be hired will be enough to improve L.A. Unified's long-term budget picture.

Here’s why: Though the headlines about sinking pension funds tend to mention CalSTRS and CalPERS, Crane explained the entity ultimately responsible for fulfilling these pension obligations is L.A. Unified.

Crane said L.A. Unified’s pension payments will keep rising — both because of the increases lawmakers ordered and, he contended, because the pension fund’s managers are way too optimistic in their investment forecasts. That means changing new employees’ pensions doesn’t alter the obligation that’s driving up costs in the first place: the district’s promises to current employees and retirees.

"You’ve got to move the math in a sizable amount if you’re really going to reduce pension costs," he said — which probably means slashing benefits for existing employees or retirees. Crane pointed to reforms of Rhode Island's pension fund. In that state, officials froze to cost-of-living adjustments and introduced a hybrid of defined benefit and defined contribution plans. Crane didn't stake a position for how he would change retirement benefits here.*

And pensions aren’t the only cost the district will face. L.A. Unified offers lifetime health care coverage for retirees. The district currently spends around $327 million per year retiree health benefits. But it also has an unfunded health benefit liability of more than $13.6 billion.

"If you just change benefits for new employees — that might make sense anyway, on its own, so its not something to poo-poo," said Crane. "But far more important is to address the existing deficit."

Crane noted he's been making this point about rosy investment forecasts at pension funds to officials around California for years. In 2006, The Los Angeles Times reported Democratic lawmakers kicked Crane off the CalSTRS board because they disagreed with him.

Last February, though, the CalSTRS board did adopt a more conservative investment forecast — a move that, EdSource reported, will cost teachers hired after 2013 an extra $200 per year, on average, in pension payments.

Crane is also president of Govern for California, which he describes as a "network of political philanthropists." The group spent more than $2.1 million in election campaigns in 2016, mostly for state legislative candidates, several of whom were also supported by the California Charter Schools Association's political arm.

Crane disclosed he contributed personally to the campaigns of both Melvoin and Kelly Gonez, who's running against Imelda Padilla for the school board seat in the east San Fernando Valley. Both Gonez and Melvoin received the charter association's endorsement.


* UPDATE: The text of this piece was updated at 9:30 a.m. to clarify Crane's position on pension reform.