CalSTRS Releases Summary of Pension Changes and Funding Resolution
Anti-Spiking Tools Valuable but Funding Plan Still Needed
CalSTRS has conducted an initial assessment of AB 340, the California Public Employees’ Pension Reform Act of 2013, and its impact on CalSTRS members and operations and outlined key changes.
A detailed analysis is expected to be released by next week. However, the most significant reform issue for CalSTRS continues to center on closing its $64.5 billion funding gap. Although a specific funding plan is not included as part of AB 340, CalSTRS is encouraged by the approval of Senate Concurrent Resolution 105 (SCR 105), which states the Legislature’s intent to take action to address the long-term funding needs of CalSTRS in the 2013-14 legislative session.
“We have been working for some time to raise awareness of our funding shortfall, the cost of waiting to address it and the ultimate risk failing to do so presents to the state General Fund,” said CalSTRS Chief Executive Officer Jack Ehnes. “SCR 105 establishes a framework for the development of a funding solution and we are hopeful legislation that addresses the long-term funding needs of CalSTRS will be enacted in the 2013-14 session.”
Impacts of AB 340
The total impact of the new legislative changes may not be fully realized for decades to come. CalSTRS analysis of the proposed changes has identified three key areas:
- Future CalSTRS members will be required to work longer to receive full retirement benefits.
- A valuable anti-spiking tool will further enhance existing CalSTRS safeguards against pension spiking.
- The strength and appropriateness of CalSTRS current plan design is validated.
1. New CalSTRS members required to work longer
Changes in the normal retirement age from 60 to 62 with a 2 percent age factor will mean that new employees will need to work until age 62 to receive full retirement benefits compared to the current allowable age of 60. CalSTRS estimates the total fund savings from the changes to the benefit formula to be $22.7 billion over 30 years.
Primary savings to the fund reflect:
- A reduced benefit formula.
- A required final compensation based on three years.
- A cap on compensation allowed to calculate a defined benefit, otherwise known as creditable compensation.
Initial changes to the normal, ongoing cost of benefits are estimated to result in a contribution rate of 8 percent of payroll for new employees. Based on legislative changes set forth in AB 340, which requires that employees pay at least 50 percent of normal costs, a normal cost of 15.9 percent of payroll is projected for future members. This represents a reduction from the existing plan structure projected normal cost, for those same future members, of 18.51 percent. Normal cost is the present value of benefits attributed by the pension formula to employees.
2. Valuable anti-spiking tool enhances existing safeguards
AB 340 establishes a limit on compensation that is counted toward calculating a member’s pension which will further enhance existing CalSTRS safeguards against pension spiking. For new CalSTRS members (starting on or after January 1, 2013), who like existing members, are not covered by Social Security, the initial limit is 120 percent of 2013 Social Security wages, which will be approximately $132,000. Preventing pension spiking is a priority for CalSTRS. Since last fall CalSTRS has made aggressive changes to strengthen its anti-spiking efforts, including creating a toll-free Pension Abuse Reporting Hotline and a dedicated Compensation Review Unit to investigate suspected pension spiking cases.
3. CalSTRS plan design validated
Overall, the changes as set forth in AB 340 recognize the appropriateness of the existing CalSTRS plan design. CalSTRS administers a comprehensive, hybrid system that includes a defined benefit plan, a cash balance plan similar to a 401(k) but with a minimum earnings guarantee, and a defined contribution plan. CalSTRS members earn a reasonable benefit for the service they provide to California’s students. They receive on average about 55 percent of their final salary and retire at nearly age 62 having performed more than a quarter century of service. What cannot be measured is the potential impact the new pension changes will have on the attractiveness of public education as a profession.
The CalSTRS $64.5 billion funding shortfall can be managed with thoughtful action. With the Legislature’s approval of SCR 105 on August 31, plans are underway to work with affected stakeholders to develop three alternative plans as requested in the resolution. The plans will consider gradual, incremental increases in contributions to address the long-term funding needs of the Defined Benefit Program. Once completed CalSTRS will submit the plans to the Legislature early next year as outlined in the resolution. The Legislature has expressed its intent to address the long-term health of the fund in the 2013-14 legislative session.