Governor’s Budget Proposes Changes to SBMA

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The governor’s recently released budget proposes several changes to the Supplemental Benefit Maintenance Account (SBMA).

The SBMA is funded from a 2.5 percent state contribution that is made each July 1. To the extent that there are sufficient funds to do so, CalSTRS pays a quarterly benefit to maintain the purchasing power of current Defined Benefit Program benefits at 80 percent of the purchasing power of the original benefit.

In 2003-04, the state reduced its SBMA contribution by $500 million. The Teachers’ Retirement Board successfully sued the state to compel payment of the $500 million, plus interest, and the state paid $500 million in September. An additional amount is owed for interest, which must be appropriated by the Legislature.

The governor’s budget proposes the following changes with respect to the SBMA:

  1. As proposed last year, the budget would guarantee payment of the 80 percent purchasing power benefit, and reduce the state’s contribution from 2.5 percent of the DB Program compensation to 2.2 percent. This would reduce the state’s contribution by about $80 million in 2008-09 and a projected $84 million in 2009-10. New this year, and in addition to reducing the contribution rate, the state’s contribution would be paid in two installments, on November 1 and April 1, rather than July 1 of each year. In addition, the rate would be adjusted as necessary to maintain full funding of that guaranteed benefit.
  2. The budget proposes to pay the interest owed on the $500 million over a three-year period, beginning in 2008-09. In 2008-09, $80 million would be paid, an additional $84 million would be paid in 2009-10, and a final payment of $46 million, for a total of $210 million, would be paid in 2010-11.

The Teachers’ Retirement Board will be evaluating the fiscal and legal implications of this proposal in the coming months to determine an appropriate response to it.