BILL ANALYSIS �
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: SB 984
Norma Torres, Chair HEARING DATE: April 21, 2014
SB 984 (Walters) as amended 3/19/14 FISCAL: YES
STATE TEACHERS' RETIREMENT SYSTEM: UNFUNDED LIABILITY
HISTORY :
Sponsor: Author
Other legislation: AB 611 (Bonta),
Currently in Senate PE&R Committee
SCR 105 (Negrete McLeod),
Resolution Chapter 123, Statutes of 2012
SUMMARY :
SB 984 makes findings regarding the current unfunded
liability of the State Teachers' Retirement System (CalSTRS);
requires a $2 billion appropriation from the General Fund to
CalSTRS, as specified and based on findings of the
Legislative Analyst in the May Revision; and requires the
Governor to form a working group to propose long-term funding
solutions. THIS IS AN URGENCY STATUTE.
BACKGROUND AND ANALYSIS :
1)Existing law :
a) establishes CalSTRS, which is the state retirement
system for California's teachers and school
administrators.
b) establishes contribution rates for educators, school
districts (i.e., employers), and the State, which are
currently 8%, 8.25%, and approximately 3.3%,
respectively.
c) requires an action of the Legislature to raise
employer or employee contribution rates to CalSTRS.
d) provides that current and former educators are
entitled to a financially sound retirement system.
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Date: April 8, 2014 Page
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1)This bill :
a) makes certain findings regarding CalSTRS' current
funded status, including the following:
i) CalSTRS currently reports an unfunded liability of
$71 billion. It would require increased contributions
of $4.5 billion annually over the next 30 years to
address this shortfall.
ii) Without any infusion of money to address the
problem, the unfunded liability is increasing at a
rate of $22 million per day.
iii) CalSTRS could be out of money by 2043 without a
funding solution.
iv) As the cost of addressing the problem grows, other
programs will be severely affected, such as education,
public safety, health care, the courts, and the social
safety net.
v) The Governor, legislative leaders, the State
Treasurer, the State Controller, and CalSTRS have all
expressed publicly that a funding solution must be
found.
vi) The Governor's budget stresses the need for action
but delays action until 2015-16.
vii) Given that the severity of the issue is critical,
and the State is generating windfall revenues, it
makes sense to dedicate a portion of the State's
revenue this year to mitigate the growing liability.
a) appropriates $2 billion from the General Fund to
transfer to CalSTRS: $1 billion to be transferred
immediately, and $1 billion to be transferred if the
Legislative Analyst determines in the May Revision that
the State has collected more than $1 billion in
unanticipated General Fund revenue.
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Date: April 8, 2014 Page
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b) requires the Governor to form a working group to
propose long-term funding solutions and to evaluate the
role of the State as a direct contributor to CalSTRS for
the purpose of supporting the benefit program.
c) requires that the working group include
representatives from the Governor's office, the
Legislature, school districts, teachers, and CalSTRS.
d) requires the working group to submit a report to the
Legislature on or before January 1, 2015, with solutions
that can be included in the 2015-16 budget.
e) states that this is an urgency statute.
FISCAL :
According to the latest information provided by CalSTRS, the
current unfunded liability is approximately $73.7 billion and
growing at a rate of approximately $15 million per day.
COMMENTS :
1)Background on this Issue
For most of its 100 year history, CalSTRS has struggled
with funding levels. Historically, the Legislature has
taken action from time to time to ensure steady funding.
In the late 1990's, due to the run-up in the stock market,
CalSTRS became 100% funded. However, subsequent recessions
in 2001-2002 and 2008 resulted in significant unfunded
liabilities. In spite of lower benefits for new employees
enacted in 2012 and several years of solid investment
returns, CalSTRS cannot retire its unfunded liability
without a significant influx of contributions.
Unlike the California Public Employees' Retirement System
(CalPERS), which can raise employer rates by board action
when investment returns are insufficient to properly fund
the system, CalSTRS' contribution rates are statutory and
require an act of the Legislature to change the rates. The
statutory rates are enough to cover the "normal cost" of
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Date: April 8, 2014 Page
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the retirement plan, but are not enough to pay down the
unfunded liability.
Based on its most recent valuation, CalSTRS is
approximately 67% funded. Generally, actuarial standards
do not perceive a plan as being significantly underfunded
if it is at least 80% funded and on an upward trajectory
toward full funding over an actuarially acceptable
timeframe (e.g., 30 years). CalSTRS' unfunded liability is
approximately $73.4 billion. Due to compounding interest,
the debt rises at the rate of approximately $15 million per
day (this figure is somewhat less than the $22 figure cited
by CalSTRS in 2013). If nothing is done to address the
shortfall, CalSTRS could run out of money in approximately
30 years. The State, however, must ensure benefits, and so
could be responsible for maintaining benefits for members
on a pay-as-you-so basis, at a cost exponentially higher
than is currently being paid.
CalSTRS members do not receive Social Security (SS)
benefits. If they are eligible for SS benefits due to
non-educational employment or as a survivor of a spouse,
the federal Windfall Elimination Provision and Government
Pension Offset will severely limit those SS benefits; thus,
many STRS members are almost entirely dependent on their
STRS pensions in old age. Moreover, STRS members are
primarily women (71%), and tend to outlive their
counterparts in the general population. Most do not
receive retiree health benefits other than Medicare.
CalSTRS serves approximately 868,000 members and retirees.
What has been done up to now ?
In 2012, SCR 105 required CalSTRS to present a report to
the Legislature on its funded status and to provide
possible scenarios for addressing the funding shortfall. A
joint hearing of this committee and the Assembly Committee
on Public Employees, Retirement and Social Security
(APER&SS) was held early in 2013 for this purpose. Over
the course of 2013, representatives from CalSTRS met with
legislative consultants and members, Governor's
representatives, and stakeholder groups on this issue.
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Date: April 8, 2014 Page
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In 2014, three more hearings, two of them joint hearings,
have been held to further discuss funding options and the
issue of raising members' contributions as part of a
funding solution. At those hearings, the chairs of this
committee and the APER&SS committee publicly committed to
addressing the funding shortfall with a comprehensive plan
in 2014.
More information on these hearings may be found at:
http://sper.senate.ca.gov/jointinformationalhearings
2)Argument in Support :
According to the author:
The California State Teachers' Retirement System is
$73.7 billion underfunded and will require immediate
infusion of funds to reduce the system's liability.
While full funding of CalSTRS will require a more
complete long-term fix, using one-time funds generated
from the recent temporary tax increases will begin the
process, while reducing the growing funding gap.
3)Argument in Opposition :
According to the California Teachers Association:
We believe a long-term funding solution to resolve
CalSTRS' fiscal shortfall needs to be a thoughtful,
prudent, and comprehensive process that includes all
stakeholders and that this process is already taking
place through the joint hearings held by the Senate and
Assembly PERS committees. A quick fix that does not
address the long-term viability of the system is
counterproductive to the long-term sustainability of the
system and could prevent CalSTRS from receiving future
funding as some may believe the funding SB 984 would
appropriate would be enough to eradicate the problem.
4)SUPPORT :
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Date: April 8, 2014 Page
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Fresno Unified School District
5)OPPOSITION :
California Association of School Business Officials
(CASBO), Oppose Unless Amended
California Teachers Association (CTA)
Faculty Association of California Community Colleges
(FACCC)
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Date: April 8, 2014 Page
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