Copyright© 2008 by School Services of California, Inc.

Volume 21                   For Publication Date: October 24, 2008             No. 22

Staff to Present Potential Legislative Measures to STRS Board

State Teachers’ Retirement System (STRS) staff will present six policy proposals to the Teacher’s Retirement Board at its November 7, 2008 meeting. The six proposals that Executive Staff have approved for presentation represent half of the policy proposals that were presented as an informational item at the September 5, 2008, Board meeting. The Board may vote to have some or all of the proposals introduced in the next legislative session as STRS’-sponsored legislation. Among the more interesting proposals:

• Extend the longevity bonus by six months from its current sunset of December 2010, to June 30, 2011, to coincide with the school year for administrative purposes

• Modify the basis on which interest is charged for a redeposit or purchase of service credit when paid in installments, to reflect the actuarially assumed rate of return on investments for all the assets in the Defined Benefit (DB) program as opposed to being based on fixed income returns

• For future contracts, this would translate into 8% interest

STRS staff will also present, as informational rather than action items, potential changes to STRS’ plan design. The potential changes to be discussed at the November 2008 Board meeting include two broad categories:

• Benefit Enhancements

• Return to Work Provisions

Under the category of benefit enhancements, staff will present three potential changes:

• Longevity Bonus Extension

• This would extend the sunset date (for either seven or ten years) for when members must reach 30, 31, and 32 years of service for purposes of the longevity bonus specified under Education Code Section 24203.6

• Age Bonus

• For those who do not qualify for the longevity bonus, would provide a monthly bonus for members who retire and are a certain age (63, 64, or 65), or have reached that age as of a sunset date (either seven or ten years)

• Address the changing demographics of the teacher workforce, helping mid-career teachers, and potentially helping to attract teachers for which there are shortages such as math or science teachers

• Age Factor Increases through Age 65

• Encourage members to work until they reach these higher age levels

Under the category of return to work provisions, the two potential changes to plan design that will be presented are detailed here.

Postretirement Employment

Current law limits the amount of postretirement income that may be earned by a retired STRS member. When a member of STRS retires and returns to work in a STRS-covered position, the member is subject to an annual postretirement earnings limit unless there is an applicable exemption. STRS members who earn in excess of the earnings limit experience a dollar-for-dollar reduction in their retirement allowances.

STRS had tried earlier this year to obtain consensus for a new earnings limitation proposal that was very different from what staff will be proposing next month. Because STRS was unsuccessful in getting consensus regarding the earlier reform proposal, it elected to continue the current law exemptions to the postretirement earnings limitation. The legislation necessary to extend the sunset on the exemptions was AB 2390 (Chapter 494/2008), which was signed into law September 30.

Under the new earnings limitation proposal that will be presented in November:

• The earnings limitation would initially be calculated in one of two ways:

• One half of the retiree’s total earnings from the 12 months prior to retirement
• One half of the retiree’s final compensation
• The earnings limitation would be adjusted annually according to California Consumer Price Index

• Retirees who are younger than age 60 would be required to wait six full months or until they turn age 60, whichever comes earlier, prior to performing any creditable service

• Retirees who are age 60 or older would not have to wait any time period prior to performing creditable service

• Retirees who return to work after 12 consecutive months without performing creditable service would not be subject to an earnings limitation

• Retirees who return to work and do not have a 12-consecutive-month break in service shall be subject to the earnings limitation

• Exemptions to the earnings limitation would be eliminated

• There would be no employer contribution to STRS made on behalf of the retired member who returned to work; this will, however, be discussed further

STRS has presented a great deal of data to the Board already about the postretirement earnings limitation, and will be presenting additional data on retirees who were working in 2006-07 and on members who retired in 2006-07 and returned to work within six months.

Phased Retirement Program

With the idea that phased retirement could help address teacher shortages, STRS staff will also present a proposal for a phased retirement program under which:

• Members age 60 or older could enter into a phased retirement benefit agreement with STRS and a STRS-covered employer

• Participants would phase out of work and into retirement on a proportional basis

• For example, a member who chose to receive 50% of his/her retirement benefit would be required to work 50% of a contract

• The initial retirement benefit would be the applicable percentage of the retirement benefit as of the effective date of the retirement

• The full benefit would be calculated in either of two ways

STRS already provides a type of phased retirement by allowing retired members to work while receiving a pension distribution. Calculating the difference between a member’s full service benefit under the phased retirement program and the benefit the member would receive if the member worked while receiving his/her normal retirement benefit is complicated, but STRS has prepared at least one example of the difference, which they will undoubtedly share with the Board in November.

Other Possible Legislation

The post-retirement earnings limitation, described above, is expected to be brought to the Board at its February 2009 meeting for Board action approving the introduction of STRS-sponsored legislation to reform current earnings limitation rules. Other potential STRS legislation that will be brought to the Board in February includes a proposal to redefine final compensation. That possible sponsored legislation would:

• Modify how final compensation is determined to reflect either 12 consecutive months of earnable salary or 36 consecutive months of earnable salary, rather than the current 12 or 36 months of average earnable salary per school year

• This is similar to what PERS does

• It would help members who get a midyear raise and those who retire midyear

• It’s tough to calculate final compensation for those who get a midyear raise

• The change would mostly help California Community College faculty rather than K-12 teachers

All of the proposals above would require legislation to implement, and not all proposals will move forward. However, STRS’ Benefits and Services Committee recently identified providing options for teachers who want to work later in life as its first priority for changing plan design, so we may well see legislation introduced to help with that.

—Deborah Harmon