Copyright © 2006 School Services of California, Inc.

Volume 26                          For Publication Date: September 1, 2006                             No. 18

STRS Board to Consider Options to Increase Funded Proportion
of Retirement Program 

As of its June 30, 2005, actuarial study, the State Teachers' Retirement System (STRS) Defined Benefit Program (otherwise known as the basic retirement program) was just over $20 billion short of its actuarial obligation, resulting in a funded proportion of 86%. With the fund activity over the last year, especially with investment returns of 13.2%, STRS expects that the funded proportion has increased. However, it will still fall short of full funding. 

Last December, the State Teachers' Retirement Board began discussing a number of options to reduce the unfunded proportion of the actuarial obligation in its Defined Benefit Program. At that time, there were 13 options under consideration, including issuing pension obligation bonds, stretching out the amortization of the unfunded actuarial obligation, reducing benefits for new members, and/or increasing state/employer/employee contributions. STRS conducted a survey of organizations representing STRS members and other stakeholders in order to garner input on the options to the Board.  

At this point, the original 13 options have been combined in different ways into nine strategies for consideration. Each strategy proposes to increase contribution rates from members, employers, and the state, and impose an employer contribution on the earnings of retirees. Each strategy includes different options to increase the contributions made to the program by members, employers, and the state, and the resulting financial impact of each option.  

Some of the major findings and recommendations in the staff report to the Board are: 

·                    It is important to get a determination from Legislative Counsel and the Attorney General on whether or not the Proposition 98 funding guarantee would need to be increased if the employer contribution rate is increased beyond the current rate of 8.25%

·                    An increase in the employer contribution rate could coincide with district actions to address the local postemployment benefits liability

·                    Eliminate the postretirement earnings limitation on retirees aged 60 or over, and for retirees under age 60 if they had not worked for at least 12 consecutive months after retirement, and impose an employer contribution on all postretirement earnings

·                    Do not reduce the benefit structure for current members

·                    Any increase in the contribution rate should fall more heavily on the school districts than the state, because local decisions (mostly through collective bargaining) determine most of the compensation for school employees and retirees

·                    Between employers and members, it is appropriate that more of the burden of the increased contribution rates falls to the employer than on the member, when comparing the two types of contributions to that of comparable retirement systems in other states

·                    Any increase in contribution rates imposed on members should be applied to all active members

·                    Increases in contribution rates imposed on members and employers should be phased in starting in July 2009, in order to provide time for employers to plan and fund the increase, and for any collective bargaining impacts to be resolved

·                    Contribution rate increases for any one group (employers, members, and the state) should be limited to ½ of 1% in a given year

·                    Provide the Board authority to adjust employer contribution rates in the future to reflect changes in actuarial requirements (similar to the authority that the PERS Board currently has), limiting any change to ½ of 1%t in any given year  

If these recommendations are adopted, the contribution rates for all active members would increase by ½ of 1% as of July 1, 2009, to make a total contribution of 8.5%. The state contribution rate could increase by up to 1.25% as of July 1, 2007. And employer contributions would increase by ½ of 1% per year, starting July 1, 2009, to a maximum of 13% to 14.25%, depending on the outcome of the Proposition 98 effect of these increases. Most notably, all of the strategies under consideration by the STRS Board involve these increases to contributions-so, unfortunately, school districts should plan on some additional costs in the future for STRS. 

Go to http://www.calstrs.com/About%20CalSTRS/index.aspx to see the Board agenda item and staff analysis, click on “Meeting Agendas,” and scroll to the full Board meeting agenda toward the bottom. 

-Sheila G. Vickers