Decade-long efforts to bridge the Defined Benefit Program’s current $73.7 billion funding gap conclude with a plan that fully funds the program within 32 years. Assembly Bill 1469, signed into law by Governor Edmund G. Brown Jr., as part of the 2014-15 budget, increases member, employer and state contributions over the next several years and sets the program on a sustainable course.
Shared, gradual contribution rate increases for members, employers and the state take effect July 1, 2014. Provisions of the bill are as follows:
Member Contribution Increases
AB 1469 increases member contributions on compensation that is creditable to the Defined Benefit Program, which previously had been set at a rate of 8 percent of payroll.
Prior Member Contribution Rate
Rate Changes Under AB 1469
2% at 60 Members
2% at 62 Members*
July 1, 2014
July 1, 2015
July 1, 2016
* Rate imposed on 2% at 62 members is based on the normal cost of benefits for the Defined Benefit Program. The contribution rate in future years assumes no change in normal cost.
CalSTRS members who performed creditable service on or after January 1, 2014, will have their existing 2 percent Annual Benefit Adjustment, also referred to as the improvement factor, guaranteed in exchange for their contribution increases. This includes members who retired in 2014. For members who retired prior to January 1, 2014, no change in benefits will occur.
Employer Contribution Increases
School employer contributions will increase from 8.25 percent to a total of 19.1 percent of payroll, phased in over the next seven years.
Prior Employer Contribution Rate
Increases Under AB 1469
July 1, 2014
July 1, 2015
July 1, 2016
July 1, 2017
July 1, 2018
July 1, 2019
July 1, 2020
July 1, 2046
Increase from prior rate ceases in 2046-47
State Contribution Increases
AB 1469 increases the state’s contribution attributable to the benefits in effect in 1990 but does not change the base rate of 2.017 percent. Thus, the state contribution rates, which in Fiscal Year 2013-14 were 3.041 percent, will increase over the next three years to a total of 6.328 percent. When contributions for purchasing power protection are included, the state’s total contribution rate in 2016-17 will be 8.828 percent.
Increased member and employer contributions under AB 1469 are only payable for compensation that is creditable to the Defined Benefit Program. Compensation creditable to the Defined Benefit Supplement Program will continue to be credited with member and employer contribution rates of 8 percent each.
Contributions CalSTRS receives for Defined Benefit Supplement compensation that are attributable to increases under AB 1469 will be returned to school district employers. School district employers will then return excess member contributions to their employees and the returned pre-tax contributions will be considered taxable income in the year they are received by the employee. This will occur regardless of when the contribution was initially paid.
AB 1469 grants the Teachers’ Retirement Board limited rate setting authority for contribution rates. Member rates will remain fixed in statute. Lastly, the bill requires CalSTRS to report to the Legislature on the fiscal health of the Defined Benefit Program every five years beginning on or before July 1, 2019.
This legislation represents a prominent milestone in CalSTRS’ funding history and demonstrates the leadership and commitment of the Legislature, Administration and our stakeholders. With a responsible funding plan firmly in place, CalSTRS is on target to meet the promise of a secure financial future due to California’s educators.
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