8-3-07 Post-Employment Benefits Commission Meets to Discuss Schools

On Friday, July 27, 2007, the Governor’s Public Employee Post-Employment Benefits Commission met in San Diego to receive information from various presenters on postemployment benefits for school employees. Of the postemployment benefits surveys that the Commission sent out to school agencies in California, approximately 25% of K-12 school districts and 50% of community colleges have responded thus far.

The Commission had received testimony from Public Employees’ Retirement System (PERS) representatives at an earlier meeting that focused more broadly on state and special district employees. At Friday’s meeting, State Teachers’ Retirement System (STRS) representatives provided information on the STRS basic retirement program for school employees. Of the funding available within the STRS defined benefit program, for the ten year period from 1984-85 to 1995-96, these were the sources:

Source	Percentage
Investment earnings	63%
Member contributions	14%
Employer contributions	15%
State contributions	8%

The employee contribution rate of 8% of creditable compensation has been in place since 1972. The employer contribution rate of 8.25% has not changed since 1990. The state currently contributes 2.017% of compensation. These contribution rates are specified in the Education Code, so any adjustments to these requires legislative action.

STRS assumes an investment earnings rate of 8% over the long run. During the first few years of this decade, actual earnings fell well below 8%—in fact, as with many investments at that time, the earnings were negative. However, there have also been years during which the earnings have been in the double digits, such as the 21% realized for the year just ended.

In the late 1990s the STRS defined benefit program was fully funded on an actuarial basis. At that time, the state’s contribution was reduced by approximately half, and additional benefits were provided through the program. STRS cites the investment losses early in this decade as the primary reason that the defined benefit plan is no longer fully funded. However, the reduction in state contributions and the increase in retirement benefits served to add to the problem. As of June 30, 2006, the plan was 87% funded and the shortfall was $19.6 billion. According to STRS, the shortfall will grow to $158 billion in 30 years if corrective action is not taken quickly.

In light of this, STRS staff is expected to develop a proposal that would grant the STRS board authority to adjust contribution rates within certain parameters, rather than waiting for legislative approval. STRS representatives suggested that employer contribution rate increases be limited to ½ of 1% per year, up to a maximum of 13%, and that the employee contribution rate be limited to a maximum of 8.5%.

The Commission’s meeting schedule can be found at: www.pebc.ca.gov. The Chairman of the Commission, Gerald Parsky, announced that the Commission will begin to formulate solutions and recommendations at its next meeting on August 23, in San Jose.