New Legislation Stabilizes CalSTRS Funding
AB 1469 bridges CalSTRS funding gap through gradual contribution increases
WEST SACRAMENTO, Calif. – Governor Brown’s signing of Assembly Bill 1469 today, enacted as part of the 2014-15 budget, concludes a decade-long effort to bridge CalSTRS’ nearly $74 billion funding gap.
“For roughly the last 10 years our highest priority and our members’ most pressing concern has been to secure the long-term stability of the Defined Benefit Program,” said Teachers’ Retirement Board Chair Harry Keiley. “Educators in California do not receive Social Security for their CalSTRS-covered employment and the benefit they earn from years in the classroom serves as the cornerstone of their retirement income. Today’s actions further strengthen the Governor and Legislature’s commitment to uphold the state’s promise of a secure retirement to teachers.”
“Resounding applause is in order for enactment of this plan to fully fund the Defined Benefit Program in a manner consistent with sound actuarial and accounting practices,” said CalSTRS Chief Executive Officer Jack Ehnes. “This historic legislation alleviates the risk of a looming liability for the world’s largest educator-only pension fund and sets a course for its long-term viability. We believe this plan achieves the right balance of time, commitment and completeness.”
Increases in pension contributions for all parties take effect July 1, 2014, and will be phased in over the next several fiscal years. Contributions rates for all CalSTRS members will increase from 8 percent of payroll to 8.15 percent of payroll in the first fiscal year.
CalSTRS members hired prior to January 1, 2013, not subject to provisions of the Public Employees’ Pension Reform Act of 2013, will see their contributions increase by a total of 2.25 percent of payroll phased in over the next three fiscal years. Contribution increases for CalSTRS members hired after January 1, 2013, who are subject to the provisions of PEPRA, will be phased in over three years with their total increases capped at 1.205 percent.
CalSTRS members who were actively working on or after January 1, 2014, will receive a guarantee of the existing 2 percent Annual Benefit Adjustment, also referred to as the improvement factor, in exchange for their contribution increases. For members who retired prior to January 1, 2014, no change in benefits will occur.
Employer contributions currently at 8.25 percent will increase gradually by an additional 10.85 percent phased in over the next seven years, for an eventual total of 19.1 percent. State contribution rates, which are currently 5.541 percent, when the contributions for purchasing power protection are included, will increase over the next three years to a total of 8.828 percent by fiscal year 2016-17.
Other highlights of the new legislation include granting the Teachers’ Retirement Board limited rate-setting authority for contributions. Member rates remain fixed in statute. CalSTRS will also be required to submit a funding status report to the Legislature every five years to ensure the plan continues to sustain an appropriately funded benefit program.
Fortified with this new influx of contributions, CalSTRS remains steadfast in its dedication to meet investment assumptions. All together, the solution proves that defined pension benefit plans are viable, when funded properly and invested prudently.
“Success in enacting this plan would not have been possible without the sage leadership and support of the Legislature, Administration and our stakeholders, all of which were necessary in order to stabilize the program’s funding,” said Ehnes. “With a responsible funding plan firmly in place, CalSTRS members can be assured their future benefits will be there when they need them.”
The California State Teachers’ Retirement System, with a portfolio valued at $184.8 billion as of May 31, 2014, is the largest educator-only pension fund in the world. CalSTRS administers a hybrid retirement system, consisting of traditional defined benefit, cash balance and voluntary defined contribution plans. CalSTRS also provides disability and survivor benefits. CalSTRS serves California’s 868,000 public school educators and their families from the state’s 1,600 school districts, county offices of education and community college districts.