CalSTRS Retirement Enhancements May Be In Jeopardy Due To Shortfall In Projected Revenue Surpluses

September 14, 1999

CaLSTRS Retirement Enhancements May Be In Jeopardy
Due To Shortfall In Projected Revenue Surpluses

At a recent CaLSTRS board meeting, it was revealed that the $7 billion dollar surplus anticipated to improve retirement benefits for active and former educators may not fully materialize. The consulting firm hired by the CaLSTRS board to provide actuarial information admitted that they had made an error in projecting the cost of retirement benefits the Legislature approved last year. The highlight of last year's benefit package was the increase in the annual factor from 2% to 2.4% at age 63.

CaLSTRS board members are now expressing concern over exactly how much "excess" money there really is, and are calling for further study. According to a Sacramento Bee article, state Controller Kathleen Connell, a CaLSTRS board member, stated "we simply cannot be wrong at this level." Board members indicated that they would meet soon in closed session to discuss what action they might take in light of the consulting firm's admission of error. The firm has about two years left on its actuarial consulting contract with CaLSTRS.

The consulting firm has agreed to reimburse CaLSTRS approximately $10,000 for the flawed work it had done. Also, in an unusual move, the consulting firm said it would pay for the cost of a second outside firm to re-evaluate the work and correct the error. The outside firm that will be used is CaLSTRS's former actuary.

The CaLSTRS board is now planning on taking a more conservative approach to enhancing retirement benefits for its members. The board plan on advising the Legislature that CaLSTRS's first priority is to use the excess money to pay off the $2 billion shortfall caused by last year's benefit increases. Its second priority is to use $2.7 billion of any excess earnings to pay for various benefit increases for California's oldest and lowest paid retired teachers.

Those increased benefits are proposed to be allocated as follows:

$1.1 billion to boost the minimum annual pension to $15,000 for retirees with at least 20 years of service credit. About 23,000 retired teachers now get a pension of $10,000 or less annually.
$1.2 billion for a one-time pension increase for retirees based on their years of service.
$400 million to give teachers who retired last year the benefit increases the Legislature approved in 1998 but that did not take effect until January 1, 1999.

In anticipation of excess monies being available, more that 12 bills were introduced this year that would have increased retirement benefits. Most of these bills will not receive legislative approval. In fact, the CaLSTRS board wants to hold off on deciding how to use the remainder of any excess earnings until early next year. By then, they expect to be more confident about exactly how much "extra" money is left and the true cost of all of the benefit increases being proposed by CaLSTRS and teacher advocacy groups. This is the first year that CaLSTRS has identified any excess earnings. In the past, all teacher retirement benefit increases were funded directly by the state.

During last years development of the four bill package that enhanced retirement benefits for CaLSTRS members, there was some concern being expressed about the short and long-term viability of the "excess" earning. It now appears that those concerns were valid, and while increased retirement benefits may be appropriate, a more cautious approach may be needed by the Legislature and Governor regarding future benefit increases.

-- Arnold Bray