CalSTRS Board Reaffirms Opposition to Bill to Close Current Pension Program
Proposed legislation deemed detrimental to members and fund solvency

News release

Sacramento, CA – The Teachers’ Retirement Board reaffirmed its opposition to Assembly Constitutional Amendment 23, authored by Assembly member Keith Richman (R-Northridge), after reviewing independent analyses at its meeting today. The proposed legislation would close the current CalSTRS defined benefit plan to public school educators hired after July 1, 2007. Newly hired employees would have a new defined benefit plan and an additional 401(k)-style account for their and their employers’ voluntary contributions.

The official vote today followed the board’s earlier opposition and subsequent request for further analyses and staff recommendations at the December 2005 meeting. The staff recommended opposing ACA 23, based on analyses provided by independent actuary, Milliman, and the board’s fiduciary counsel, Groom Law Group. Milliman concluded ACA 23 was “actuarially unsound” and Groom Law Group advised that based on the actuarial analysis, “the board could conclude it is required to object to ACA 23 on fiduciary and constitutional grounds.”

“The in-depth analyses from the consultants bore out the board’s initial impression of this new version of last year’s attempt to gut the retirement security of California’s teachers,” stated Carolyn Widener, board chair. “ACA 23 isn’t in the best interests of these dedicated professionals, neither those currently in the classroom nor those in the future.”

According to the independent actuary, ACA 23 is “actuarially unsound.” Milliman’s analysis concluded that the proposed changes to the contributions structure would detrimentally impact the solvency of the CalSTRS Defined Benefit Program because they would undermine the funding structure of current benefit programs.

Closing the current CalSTRS program to new members would undermine CalSTRS’ ability to fund the existing benefit obligation to its current 776,000 members and beneficiaries. In order to have sufficient cash to pay benefits in the future, a closed CalSTRS Defined Benefit Program would need to change the investment portfolio asset mix. This change is expected to lower the future investment returns, which would increase the projected benefit liability owed by the system.

Closing CalSTRS Defined Benefit Program would also impact amortizing CalSTRS’ $20 billion projected shortfall for benefits due the current members. The actuary found that using current contribution rates, the projected revenue on a declining membership base would never be able to amortize the projected shortfall.

Additionally, the board objected to the inadequacy of retirement benefits and lack of inflation protection provided by ACA 23. This was an important point to the board because teachers do not receive Social Security and must, therefore, depend on CalSTRS and their own savings for their retirement security.

Using the contribution and return figures in the proposed legislation, the independent actuary could not reproduce a retirement income that matched the benefit currently provided by the CalSTRS plan under average circumstances.

In order to achieve a retirement income near what is currently provided, ACA 23 assumes the teacher’s individual investment decisions would produce an unusually high average annual return of 8 percent over 35 years. Also, the new plan has no built-in benefit increase, as CalSTRS has, to protect against inflation.

“This proposal is not the answer to the pension debate raging across the nation. It is more a race to the bottom in relegating new teachers to second-class status with a different, lower retirement benefit,” stated CalSTRS’ chief executive officer Jack Ehnes. “I hope this is the year to put this idea to rest so we can turn our attention to finding sensible solutions that work for all concerned.”

With a $141 billion investment portfolio, the California State Teachers’ Retirement System is the second-largest public pension fund in the United States. It provides retirement, disability and survivor benefits to California’s 776,000 public school educators from kindergarten through community college.