BILL ANALYSIS Ó SENATE COMMITTEE ON BUDGET AND FISCAL REVIEW Mark Leno, Chair Bill No: AB 1469 Author: Bonta As Amended: June 12, 2014 Consultant: Joe Stephenshaw Fiscal: Yes Hearing Date: June 15, 2014 Subject: Budget Act of 2014: State Teachers' Retirement System (STRS) Summary: Provides for statutory changes necessary to enact STRS provisions of the Budget Act of 2014. Background: This bill makes the following statutory changes to implement the 2014-15 budget. 1. Establishes a plan to address the STRS Defined Benefit Program's unfunded liability, which is approximately $74 billion, by increasing contribution rates, beginning July 1, 2014, of teachers, employers, and the state, as follows: For members who are not subject to the Public Employees' Pension Reform Act of 2013 (PEPRA), the rate increases by the percentage of the member's compensation that is creditable to the Defined Benefit Program as follows: 1) on July 1, 2014, by .15 percent; 2) on July 1, 2015, by 1.20 percent; and, 3) on July 1 2016, by 2.25 percent. For members who are subject to PEPRA, the rate increases the percentage of the member's compensation that is creditable to the Defined Benefit Program as follows: 1) on July 1, 2014, by .15 percent; 2) on July 1, 2015, by .56 percent; and, 3) on July 1 2016, by 1.205 percent. The state's contribution rate increases as follows: 1) on July 1, 2014, by 1.437 percent; 2) on July 1, 2015, by 2.874 percent; and, 3) on July 1 2016, by 4.311 percent. -1- The employer contribution rate increases by the percentages of creditable compensation upon which members' contributions under the Defined Benefit Program are based, as follows: 1) on July 1, 2014, by .63 percent; 2) on July 1, 2015, by 2.48 percent; 3) on July 1 2016, by 4.33 percent; 4) on July 1, 2017, by 6.18 percent; 5) on July 1, 2018, by 8.03 percent; 6) on July 1, 2019, by 9.88 percent; and, 7) on July 1, 2020, by 10.85 percent. 1. The contribution rate increases on July 1, 2016, for members and the state, and July 1, 2020, for employers, will be in place until July 1, 2046, unless adjusted as follows: For the 2017-18 fiscal year and each fiscal year thereafter, the STRS Board is required to increase or decrease the state's contribution percentage, from the percentage paid during the prior fiscal year, to reflect the contribution required to eliminate the remaining unfunded actuarial obligation, from benefits in effect prior to July 1, 1990, provided that: o The adjustment may be for no more than .50 percent per year of the total of the credible compensation of the previous fiscal year. o At any time when there is not an unfunded actuarial obligation, as determined by the board, the contribution percentage shall be reduced to zero. For the 2021-22 fiscal year and each fiscal year thereafter, the STRS Board is required to increase or decrease the employer contribution percentage, from the percentage paid during the prior fiscal year, to reflect the contribution required to eliminate the current unfunded actuarial obligation by June 30, 2046, provided that: o The contribution percentage does not change in any single fiscal year by more than 1.0 percent. -2- o The increased contribution percentage established by this bill does not exceed 12.0 percent. o The board cannot increase the rate in order to supplant the state's obligation, as specified. 1. Makes the improvement factor, which provides retirees with an annual increase of two percent in monthly allowances, a vested right, beginning July 1, 2014 (for members who retire after December 31, 2013), for active members in any calendar year in which active members paid increased contributions pursuant to this bill. Further, specifies that if the increased contributions required by this bill cease to be legally required, due to a prevailing legal challenge that would cause the provisions of this plan to become inoperable, the Legislature reserves the right to adjust the improvement factor, as specified. 2. Requires the STRS Board to report to the Legislature on or before July 1, 2019, and every five years thereafter, on the fiscal health of the Defined Benefit Program and the unfunded actuarial obligation with respect to service credited to members of the program, before July 1, 2014. The report must identify adjustments required in contribution rates in order to eliminate, by June 30, 2046, the unfunded actuarial obligation of the Defined Benefit Program with respect to service credited to members of the program before July 1, 2014. 3. Establishes that any excess member contributions to the Defined Benefit Supplement Account shall be returned to the member or employer, as specified. 4. Makes legislative declaration that the provisions of this bill, as specified, do not constitute a new functional responsibility for schools and community colleges pursuant to subdivision (c) of Section 41204, and do not require an adjustment pursuant to subdivision (b) of Section 8 of Article XVI of the -3- California Constitution. Further, makes legislative declaration that the provisions of this bill, as specified, do not constitute a reimbursable mandate for school districts pursuant to Article XIII B of the California Constitution. Any challenge to these findings must be filed in Sacramento Superior Court within 60 days of the effective date of the act adding this section. 5. Establishes that, on or after June 1 of each year, the Director of Finance must determine if, pursuant to a final, unappealable judicial decision, as specified, an adjustment to the constitutional minimum guarantee of funding for schools, or an adjustment in funding provided to schools and community colleges pursuant to subdivision (b) of Section 8 of Article XVI of the California Constitution must be made, or amounts are needed to fund a reimbursable mandate pursuant to Article XIII B of the California Constitution. If the Director of Finance estimates that an adjustment will require increased General Fund expenditures of more than $10 million, then the increased contributions for members, employers, and the state, required by this bill, will become inoperable. 6. Specifies that any action or proceeding challenging the validity of any matter authorized by the act adding this section by any person or entity shall be brought in accordance with, and within the time specified in (60 days), Chapter 9 (commencing with Section 860) of Title 10 of Part 2 of the Code of Civil Procedure. 7. Provides that none of the provisions are severable. If any provision of this act or application of any section of this act is held by a court to be invalid, unenforceable, or not binding, the finding shall invalidate the other provisions and applications of this act in its entirety. Fiscal Effect: Statutory changes contained in this bill related to state costs are consistent with the 2014 budget package. Significant increased costs for employers, reaching billions of dollars annually through the 2045-46 -4- fiscal year. Support: Unknown Opposed: Unknown Comments: This bill provides the necessary statutory references to enact the 2014-15 budget related to STRS contributions. -5-