Copyright© 2008 by School Services of California, Inc.

Volume 21                   For Publication Date: September 26, 2008             No. 20

Teachers’ Retirement Board Adopts Actuarial Valuation

At its last regular meeting, the Teachers’ Retirement Board adopted the June 30, 2007, actuarial valuation of the Defined Benefit (DB) Program. The valuation reflects that the DB program had an unfunded actuarial liability (UAO) of $20.7 billion on June 30, 2007. The State Teachers’ Retirement System (STRS) defines Unfunded Actuarial Obligation as the excess, if any, of the Actuarial Obligation over the Actuarial Value of Value of Assets.) The UAO increased by $1.1 billion from the June 30, 2006, actuarial obligation, but the funding ratio of the DB program actually increased by 1% to 88%. Moreover, the unfunded actuarial obligation actually grew less than had been expected based on the 2006 Actuarial Valuation.

Four factors were cited as being responsible for the change in the UAO:

1. The 20.9% investment return in 2006-07 was much higher than the assumed return of 8%, and about one-third of that investment gain was recognized in fiscal 2006-07.

2. Fiscal 2006-07 creditable earnings by DB Program members was 3.74% higher than expected.

3. An actuarial loss of $813 million due to the allocation to both the Supplemental Benefits Maintenance Account (SBMA) and the Teachers’ Health Benefit Fund.

4. Changes in actuarial assumptions and methods (See Community College Update of April 25, 2008, on page 199).

The consulting actuary reported that, given current assumptions, the $20.7 billion UAO cannot be amortized within 30 years. This is consistent with the projections made by STRS’ consulting actuary for prior actuarial valuations since 2003.

To amortize the current UAO (assuming no growth in active membership), a total contribution rate of 21.356% of total membership salaries would be needed over the next 30 years. Phrased differently, to eliminate the UAO over 30 years, the total contribution rate would need to increase by 3.611% from the current projected total contribution rate of 17.656%. The level of contributions available to fund the UAO decreased since last year’s valuation, primarily due to the revised actuarial assumptions adopted by the Board on April 3, 2008.

If the contribution rate is not increased, the UAO is projected to jump to $184,838 billion in the fiscal year ending in 2037. However, it is unlikely that STRS will move forward with legislation in 2009 to address the problem, given the current economic environment.

When STRS decides that the timing is right, it will undoubtedly want to update potential solutions discussed several years ago. In December 2005 and February 2006, the Teachers’ Retirement Board discussed available options to address the DB program’s unfunded actuarial obligation. The problem was actually worse at that point, with an unfunded actuarial obligation of $24.16 billion as of June 30, 2004, and a cost to amortize that obligation over a 30-year period of 5.235% of creditable salary each year. Ideas discussed then included:

• Issue pension obligation bonds to finance the unfunded actuarial obligation

• Amortize the unfunded actuarial obligation over 40 years, rather than over 30 years

For new members:

• Determine final compensation based on three consecutive school years of salary

Rates

• Eliminate the career factor

• Reduce the age factor to 2% after age 60

• Do not convert unused sick leave to service credit

• Eliminate 2% member contributions to the Defined Benefit Supplement

Program

• Reduce or eliminate employer contributions to DBS for excess service and credit

contributions to the DB Program

• Reduce or eliminate annual 2% benefit adjustment

• Incorporate the purchasing power account into the DB Program

• Do not extend the Medicare Premium Payment Program

• Impose employer contributions when members work after retirement

• Increase the contribution rate for employees, employers, or the state

At this point, its unclear when solutions will be brought forward and which solutions will be favored. Stay tuned . . .

—Deborah Harmon