On a split vote, the CalSTRS board last week gave members in two unusual retirement accounts, which have a guaranteed minimum return, a $300 million credit from a surplus.
To some board members it looked like bad timing and a policy out of step with the times. CalSTRS is seeking a multi-billion dollar rate increase for the main under-funded pension system.
A board member representing Gov. Brown’s finance department, Eraina Ortega, urged a delay until the policy adopted in 2006 during different economic conditions could be reconsidered at the next board meeting.
“I do think we have to be conscious as well of what those perceptions might be when we are seeking a funding solution to the defined benefit (pension) program,” Ortega said.
Others said they wanted to keep the promise made to members when the board adopted the policy, which gives members a credit when surpluses above the amount needed for the guaranteed return reach a certain level.
“I fully understand the angst that’s around it, and I fully support taking a look at the policy,” said board member Dana Dillon. “But I find it very problematic to tell our members now that we have butted up against it, we are going to do something else.”
The board approved the $300 million credit but, as suggested by several members, will revisit the policy during the next year. Dillon is the only current board member who served in 2006 when the policy was adopted.
Like most government employees, CalSTRS members have the option of voluntarily putting money into an employer-provided “defined contribution” retirement plan, a 401(k)-style individual investment plan that CalSTRS calls Pension2.
But CalSTRS is a “hybrid” plan with two individual investment plans that, unlike a typical 401(k), have a guaranteed minimum investment return based on 30-year treasury bonds, 3.75 percent last fiscal year.
The board was told last week that giving members an additional credit above the minimum during times of surplus should, in the long run, provide a yield close to the assumed rate of return for the CalSTRS investment portfolio, 7.5 percent a year.
The accounting is separate, but the money in the two individual investment plans is invested along with pension funds in the CalSTRS portfolio, valued at $181 billion at the end of February.
Awarding the credit, difficult with the current computer system, will cost $1 million or more, estimated Jack Ehnes, CalSTRS chief executive. He said the required staff time could slow work on the development of a new computer system.
A new actuarial report last week showed no major change in the main under-funded CalSTRS pension system. It still needs an additional $4 billion a year to project full funding over 30 years and, without a rate hike, could run out of money in 2046.
Unlike other public pension systems, the California State Teachers Retirement System cannot raise employer rates, needing legislation instead. After ignoring rate-hike pleas for nearly a decade, the Legislature is working on a funding solution.
Another CalSTRS difference is that members do not receive Social Security, in addition to their pensions, and most CalSTRS members do not receive employer-paid retiree health care.
The smaller of the two plans with surpluses, Cash Balance, was created in 1996 for part-time teachers, who work less than 50 percent of a full-time position for school districts, community colleges and county education offices.
Employers and employees each usually contribute 4 percent of pay. The normal payment at retirement is a lump sum, but annuity options are available for accounts of $3,500 or more.
At the end of June last year, the 31,000 non-retired members of the Cash Balance plan had a total of $169 million in their accounts. Last week the board awarded $5.5 million in additional credits and another $61,000 for annuities.
The other plan, the Defined Benefit Supplement, was created in 2001 for all CalSTRS members. Contributions to the plan come from pay beyond the normal hours of the school year, such as summer school, coaching and bonuses.
The 521,241 non-retired CalSTRS members had DBS accounts totaling $7.4 billion at the end of June last year. The board awarded $266 million in additional credits last week and another $29.6 million for annuities.
Most of the money in the Defined Benefit Supplement came from a 10-year diversion of a quarter of the teacher contribution to the under-funded main CalSTRS pension fund, 2 percent of pay from the total of 8 percent of pay.
The creation of the Defined Benefit Supplement was part of a package of legislation around 2000 that also cut state contributions and increased retirement benefits in several ways, causing much of the current CalSTRS pension under-funding.
An actuarial report from Milliman last April said that if CalSTRS were still operating under the 1990 benefit structure, the pension plan would be 88 percent funded instead of 67 percent funded.
The new Milliman report last week for the fiscal year ending last June 30, when the CalSTRS portfolio earned 13.9 percent, dropped the pension funding level or ratio by a tiny amount: down from 67 percent to 66.9 percent of the assets needed to project full funding in 30 years.
The CalSTRS actuarial “smoothing” policy spreads asset gains and losses over three years (the California Public Employees Retirement System had 15-year smoothing until last year), so only a third of the big gain last fiscal year is counted in the new report.
The CalSTRS debt or “unfunded liability” in the new report is $73.7 billion, up $2.7 billion from the previous year but $2.2 billion less than the expected increase.
In what lawmakers trying to fund CalSTRS may hope is a trend, the new report said the rate hike needed to project full funding in 30 years is 13.4 percent of pay, down 1.2 percent of pay from the previous year.
That’s still roughly $4 billion a year and a big increase from the current total contribution to the CalSTRS main pension fund, 19.5 percent of pay (employers 8.25 percent, teachers 8 percent and the state 3.25 percent).
Some good news given the CalSTRS board last week is that increased longevity, which will cause a major CalPERS rate increase, has been incorporated into CalSTRS assumptions.
“We do that now,” said Ed Derman, CalSTRS deputy chief executive officer. “So we wouldn’t anticipate the same kind of change, if any, in the next round that CalPERS had.”
A joint legislative committee is scheduled to hold a hearing Wednesday (April 9) on the California vested rights doctrine, which is believed to limit an increase in the teacher contribution to CalSTRS to 2.83 percent of pay.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 7 Apr 14