Recent Developments Suggest a Funding Plan is Within Reach

Blog entry Jack Ehnes

Several developments suggest a funding plan for CalSTRS is a top priority for the Governor and Legislature this year. In addition to Governor Brown’s call for development of a funding plan in his budget proposal, the Legislature has begun the process of crafting a permanent funding solution for the Defined Benefit Program. As this process takes shape many significant issues will be examined. The importance of staying focused on funding issues relevant to CalSTRS is paramount.

An article by the Legislative Analyst’s Office thoughtfully frames many of the financial aspects which need to be considered in developing a long-term solution to sustain the fund. As the LAO suggests, the CalSTRS unfunded liability can be calculated using either the actuarial value or market value of assets.  Both methods correctly reflect the difference between CalSTRS assets and liabilities and both are reported in CalSTRS’ valuations. An unfunded liability exists when the present value of the projected cost of future pension benefits earned up to that point in time but not yet distributed exceeds the assets available for the payment of those benefits.

Regardless of whether a market or actuarial value is employed in determining CalSTRS’ unfunded liability, the long-term contribution rate increase required to fully fund the program is the same. Acting to increase contributions in 2014 to a level that would fully fund the program over 30 years would translate to an additional 15.6 percent of payroll or a projected $4.5 billion in the first year. In addition, one thing is distinctly clear; swift action – whether to initiate a funding plan or to fully execute it – reduces the total cost of the increased contributions that will need to be made. CalSTRS staff presented to the Teachers’ Retirement Board the financial implications and increased risk of further delays in implementing a funding plan at the board’s February meeting.

The first in a series of legislative hearings on CalSTRS’ funding called for by the Assembly Committee on Public Employees, Retirement and Social Security will take place later this month. Updated information on the report CalSTRS submitted to the Legislature last year pursuant to SCR 105 will serve as a starting point for policymakers as they work to enact a sustainable funding strategy.

The Governor and Legislature’s desire to enact a full funding plan for the Defined Benefit Program demonstrates leadership and upholds the state’s promise to California’s educators. Both actions give direction and energy to work with all stakeholders this coming year to finalize a plan. CalSTRS will continue to provide information to the Legislature and Governor and stands ready to work with them as they craft a responsible funding plan, which only they have the authority to enact.


Current retrees who get benefits from CALSTRS

I'm happy this is being taken seriously, and that action may come in the near future. It's important for teachers going forward, and even more pressing given the longer life expectancy of future retires. I just PRAY that this will not affect benefits of those of us already retired! COULD IT?

As stated in the CalSTRS

As stated in the CalSTRS report to the Legislature, there have been no suggestions to adjust benefits of current retirees. However, current law states that contribution rates and core benefits are contractual rights of current and retired CalSTRS members. These could only change under one circumstance and that is if a comparable offsetting advantage is offered. One such example, laid out in the CalSTRS report to the Legislature, is to guarantee the Annual Benefit Adjustment of 2 percent, which is currently not a guarantee. The Education Code allows this adjustment to be reduced or eliminated to address the long-term funding needs of CalSTRS. Changes could apply to both current and retired educators. Thus, an increase in the employee contribution rate could be accompanied by removing the Legislature’s authority to reduce or eliminate the annual 2 percent benefit adjustment. In the example provided by CalSTRS to the Legislature, the impact to current retirees is not anticipated to have a direct impact other than to guarantee a benefit they currently receive without a guarantee. Keep in mind, this is an example only, and any decision must come from the Legislature and the Governor.

"translate to an additional 15.6 percent of payroll"

Am I understanding that this means a potential 15.6 percent additional increase in contributions? In other words, if we are contributing 8.25% now, we'd be contributing 23.85%. If so, that seems to be a pretty radical increase all at once for CalSTRS members.

Increase in our contribution

The STRS report shows several alternatives, but none that show members bearing the whole cost. Currently it is 8%, 8.25%, and 6%. The employee, employer, and the state will share the increase. The increase will happen over time, giving all parties a chance to adjust spending. One recommended option has employees @ 10.6%, employers at 16.11%, and the state at 7.1%. Note that the increased employer part means less money available for raises. This in effect keeps down the employee's final benefit. The 40 page report is worth reading.

STRS Shortfall

Outrageous, and completely caused by the Legislature playing games with the retirements of hundreds of thousands of teachers. Teachers and districts have consistently paid their fair share for decades, and now we teachers are going to be asked to pay even more? This mess was caused by the Legislature reducing its contributions starting back in 1998, and spending that money on other pet programs more interesting to the politicians. Naturally STRS had to rely more on the stock market returns to make up the difference, and the result is what we see today. The districts should not be asked to shoulder this extra cost, either. The additional cost to the districts will result in lower salary increases for teachers over the decades (or even salary cuts), and that will also impact teachers' retirement income. Teachers should demand that the Legislature find the additional $4.5 billion annually on its own. The Democrats have a two-thirds super majority in both houses - we need to demand that the Democrats use this to increase taxes on the wealthy to raise the $4.5 billion. The rich would not even feel it, and the problem would be solved.

The person who responded to

The person who responded to this question on February 19 displays a good understanding of the aggregate example provided. Three entities make up the contributions that fund the CalSTRS Defined Benefit Program – employees, employers and the State of California. In order to close the $71 billion funding gap, CalSTRS would need an additional aggregate 15.6 percent of a payroll contribution increase. This example is an overall amount of increases needed to close the funding gap and does not allocate how the increase occurs. That decision rests with the Legislature and the Governor as only they have authority to determine how an increase is allocated.

San Jose Pension Reform Bill

How would passage of Chuck Reed's Pension Reform Bill affect present retirees in Cal STRS? Also, what would the effect be on active members of Cal STRS?

Any comment on potential

Any comment on potential pension reform language would be premature. However, any legislation that seeks to change the contractual rights of current and retired members would be subject to legal challenge and rigorous judicial review.

unanswered questions and concerns

Please find someone on your staff to respond promptly to questions and concerns and to update obsolete information to avoid false rumors, confusion, worry, and even panic. Jack Ehnes' statement was posted on February 7th, 2014. Legitimate questions were posted by members within a few days. Today, on March 2nd, the questions are not answered and the concerns are not alleviated, though that could be done easily with brief responses plus links to other pages on this website. Remember, not everyone has followed these issues closely for the last few years. Also, it is very hard to find clear, succinct, and up-to-date facts and analyses on the unfunded obligation/liability issue on the CalSTRS or the CalRTA sites. Multiple, undated sites with similar, but evolving information impede clear communication. If pages with obsolete elements must be retained, clarifications with links would be welcome.

7/1/14 - 6/30/15 Employer/Employee Contribution rates

Has there been a determination made as to what the contribution rates, for both employer and employee, starting 7/1/14 will be? If so when will that information be made available?

7/1/14 - 6/30/15 Employer/Employee Contributin rates

I'm responding to my own request by asking my question again....does anyone out there know if contribution rates are increasing effective 7/1/14??

STRS funding

Mr. Ehnes, When will you and Gov. Brown address the STRS funding issue SERIOUSLY? Thanks Paul

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