Retired Educators Win Big in SBMA Ruling

California's longest-retired educators depend on quarterly inflation protection payments that are largely funded by the Supplemental Benefit Maintenance Account. Retirees and their survivors receive the payments when inflation erodes their monthly benefit to below 80 percent of its original consumer purchasing power. In 2006-07, CalSTRS paid $230.3 million in supplemental benefits to nearly 55,000 recipients, including educators who retired in 1988 or earlier and survivors.

State fiscal crisis led to funding cut

The Supplemental Benefit Maintenance Account is funded primarily by annual contributions from the state General Fund. Cost-cutters targeted the contribution to that account during the state's fiscal crisis in the early part of the decade. In 2003, Governor Gray Davis signed Senate Bill 20, which withheld $500 million of the $558.9 million due for fiscal year 2003-04.

CalSTRS promptly filed suit to recover the funds for its retired members, claiming the state had a contractual obligation to pay the full amount. In May 2005, the Sacramento County Superior Court agreed and ordered the state to pay the past-due amount, plus interest. The state, in turn, appealed the decision.

Court of Appeal requires state to pay in full

On August 20, 2007, Sacramento's Third District Court of Appeal upheld the trial court ruling in a major victory for the state's retired educators. In addition to ordering the state to pay the $500 million due plus interest, the appellate court increased the prejudgment simple interest rate from 7 percent to 10 percent. CalSTRS estimates that accrued interest could exceed $200 million.

“The court spoke loud and clear today,” said Teachers' Retirement Board Chair Dana Dillon, responding to the decision. “The state cannot interfere with promised benefits to teachers. Our most vulnerable members are the true winners in this ruling.”

The state made a $500 million payment on September 10.

Supreme Court rejects state appeal

On October 9, 2007, the Department of Finance appealed the Court of Appeal's interest ruling to the California Supreme Court, disputing the increase in the prejudgment interest rate. On November 14, the Supreme Court declined to review the appellate court decision, leaving it to stand as issued. The $200 million interest payment will require a legislative appropriation.

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