DFS-26 - San Bernardino County Superintendent of Schools

From: Melissa Anderson
Sent: Thursday, September 06, 2012 10:26 AM
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Subject: CalSTRS Produces Fact Sheet on AB 340, Pension Reform Legislation
Attachments: CalSTRS Fact Sheet re Pension Reform.pdf; CalSTRS Releases Summary of Pension
Changes and Funding Resolution.pdf
Hi all ~
In addition to all the other information we disseminated last week on the new pension reform legislation
(Initial press release from CalSTRS, CalPERS Statement, CalPERS Preliminary Analysis and Summary,
1

etc.), CalSTRS has produced its own initial assessment and fact sheet. I have attached a copy of both
for your reference.
For copies of the correspondence we’ve already distributed, please click this link:
http://www.sbcss.k12.ca.us/busServe/distFinServ_bulletins.php
Bear in mind that these are preliminary analyses, and both CalSTRS and CalPERS will be publishing more
definitive information as the actual bill language is further examined.
We will continue to keep you apprised of any further developments…
Take care,
Melissa
Melissa Anderson, Chief
District Financial Services
San Bernardino County Superintendent of Schools
760 E. Brier Drive
San Bernardino, CA 92408
(909) 388-5701
I have enough money to last the rest of my life…unless I buy something.
~ Jackie Mason
2

CALIFORNIA STATE TEACHERS’ RETIREMENT SYSTEM Fact Sheet
Summary of AB 340, the California Public
Employees’ Pension Reform Act of 2013 and its
Impact on CalSTRS Members
Reform Title AB 340 Impact on CalSTRS Members Applies To:
1. Require Equal
Sharing of
Pension Costs
2. Places a
Cap on
Compensation
used to
Calculate
a Defined
Benefit
3. Change Age
Factors and
Eliminate
Career Factor
4. Require Three-
Year Final
Compensation
5. Eliminate
Replacement
Benefits
Program
Requires new members to pay at
least 50% of the normal, ongoing
cost of benefits or the current
contribution rate, whichever is greater.
Places a cap equal to 120% of
the Social Security wage base on
compensation earnable. The cap is
adjusted each year based on changes
to the Consumer Price Index for All
Urban Consumers. An employer may
provide a contribution to a defined
contribution plan on compensation in
excess of the cap.
Changes the normal retirement age
from 60 to 62 with a 2% age factor.
Changes the maximum age factor
from 2.4% at age 63 to 2.4% at
age 65. Changes the age factor for
early retirement at age 55 with five
years of service from 1.4% to 1.16%.
Eliminates the ability for members
with 30 years of service to retire
as early as age 50. Eliminates the
career factor.
Extends the final compensation
period to three years for all new
members, regardless of years
of service.
Limits benefits from the Defined
Benefit Program to the federal 415
limit ($171,202 at age 65 in 2012).
All changes are proposed to take effect January 1, 2013
Moderate. Current members pay 8% in
contributions, equal to 44% of normal
costs. Fifty percent of the estimated
normal cost of the new plan is less
than 8%. Therefore, the new member
contribution rate will likely be 8%,
according to preliminary estimates.
Significant impact to a minimal number
of members. The cap significantly affects
members who earn above 120% of the
Social Security wage base (or $132,120
in 2012). Approximately 4,500 current
members make more than that amount.
Significant impact to a significant
number of members. Current normal
retirement age is 60. Current maximum
age factor is 2.4% at age 63. Actual
average retirement age is about 62. Age
factors will be lower for new members
retiring before age 65. The current career
factor applies to members with 30 or
more years of service, which represents
about 39% of recently retired members.
Moderate impact to a significant number
of members. Current members who retire
with 25 years of service have their final
compensation based on the highest 12
consecutive months of average annual
compensation. Approximately 52% of
recently retired members qualify for the
one-year calculation.
Significant impact to a minimal number
of members. Federal law allows payment
of benefits in excess of the 415 limit.
There are 317 members currently
receiving benefits under this provision.
New members
New members
New members
New members
New members
see reverse

CalSTRS Fact Sheet
Reform Title AB 340 Impact on CalSTRS Members Applies To:
6. Calculate
Benefits Based
on Regular,
Recurring Pay
7. Limit Post-
Retirement
Employment
8. Felons Forfeit
Pension
Benefits
9. Prohibit
Retroactive
Benefit
Increases
10. Prohibit
Pension
Holidays
11. Prohibit
Purchase of
Nonqualified
Service
Excludes allowances, bonuses and
cash in lieu from the Defined Benefit
Program.
Extends the $0 earnings limit to all
members during the first 180 days
of retirement. Extends a very limited
earnings limit exemption until June
30, 2014, and includes additional
restrictions based on the receipt of
retirement incentives.
Requires that a member forfeit
pension and related benefits if
convicted of a felony in carrying
out official duties, in seeking an
elected office or appointment or in
connection with obtaining salary or
pension benefits.
Prohibits applying pension
improvements to prior service.
Prohibits all employers from
suspending employer and/or
employee contributions necessary
to fund annual pension costs.
Contributions may not be less than
the normal cost.
Prohibits the purchase of
nonqualified service, or airtime,
for requests submitted on or after
January 1, 2013.
Significant impact to a minimal number
of members. Compensation related to
“overtime” work, such as summer school
or after school activities, is already not
counted toward the Defined Benefit
Program. Allowances (auto and housing),
bonuses and cash in lieu no longer count
toward any benefit for new members.
Moderate impact to minimal number
of members. Current earnings limit is
$40,011 in 2012-13, based on 50% of
the median final compensation for recently
retired members. Currently, members
under age 60 are subject to a $0 earnings
limit during the first six months of
retirement. Only 1,100 retired members,
including those with prior exemptions,
earned over the limit in 2010–11.
Minimal. Only elected members currently
have such forfeiture requirements, but
felony convictions are very rare.
No immediate impact. In the past, when
pension benefits were improved, the
improvement usually would apply to
service that was performed in the past as
well as future service.
Minimal. CalSTRS contributions are
currently fixed in statute and cannot
be reduced without legislation. The
only reductions have been in 1998
and 2000 when the state reduced its
contribution from 4.607% to the current
level of 2.541%. However, since 2002
the contributions fixed in statute that
are paid by the state (as plan sponsor)
and the employers have been less than
the amounts required actuarially to fund
CalSTRS in full.
Moderate impact to minimal number of
members. Current members may purchase
up to five years of nonqualified service
(as allowed by the IRS) and pay the entire
cost based on the actuarial assumptions.
About 700 members purchase this type of
service each year.
California State Teachers’ Retirement System | P.O. Box 15275 | Sacramento, CA 95851-0275 | CalSTRS.com | CalSTRSbenefits.us
9/4/12
New members
All (retired,
current active
and new
members)
Current active
and new
members
All (retired,
current active
and new
members)
Current active
and new
members
Current active
and new
members
All changes are proposed to take effect January 1, 2013

CalSTRS Releases Summary of Pension Changes and
Funding Resolution
Anti-Spiking Tools Valuable but Funding Plan Still Needed
CalSTRS has conducted an initial assessment of AB 340, the California Public
Employees’ Pension Reform Act of 2013, and its impact on CalSTRS members
and operations and outlined key changes. A detailed analysis is expected to be
released by next week. However, the most significant reform issue for CalSTRS
continues to center on closing its $64.5 billion funding gap. Although a specific
funding plan is not included as part of AB 340, CalSTRS is encouraged by the
approval of Senate Concurrent Resolution 105 (SCR 105), which states the
Legislature’s intent to take action to address the long-term funding needs of
CalSTRS in the 2013-14 legislative session.
“We have been working for some time to raise awareness of our funding
shortfall, the cost of waiting to address it and the ultimate risk failing to do so
presents to the state General Fund,” said CalSTRS Chief Executive Officer Jack
Ehnes. “SCR 105 establishes a framework for the development of a funding
solution and we are hopeful legislation that addresses the long-term funding
needs of CalSTRS will be enacted in the 2013-14 session.”
Impacts of AB 340
The total impact of the new legislative changes may not be fully realized for
decades to come. CalSTRS analysis of the proposed changes has identified three
key areas:
1. Future CalSTRS members will be required to work longer to receive full
retirement benefits.
2. A valuable anti-spiking tool will further enhance existing CalSTRS
safeguards against pension spiking.
3. The strength and appropriateness of CalSTRS current plan design is
validated.
1. New CalSTRS members required to work longer
Changes in the normal retirement age from 60 to 62 with a 2 percent age factor
will mean that new employees will need to work until age 62 to receive full
retirement benefits compared to the current allowable age of 60. CalSTRS
estimates the total fund savings from the changes to the benefit formula to be
$22.7 billion over 30 years.
Primary savings to the fund reflect:
� A reduced benefit formula.
� A required final compensation based on three years.
September 5, 2012

� A cap on compensation allowed to calculate a defined benefit, otherwise
known as creditable compensation.
Initial changes to the normal, ongoing cost of benefits are estimated to result in
a contribution rate of 8 percent of payroll for new employees. Based on
legislative changes set forth in AB 340, which requires that employees pay at
least 50 percent of normal costs, a normal cost of 15.9 percent of payroll is
projected for future members. This represents a reduction from the existing plan
structure projected normal cost, for those same future members, of 18.51
percent. Normal cost is the present value of benefits attributed by the pension
formula to employees.
2. Valuable anti-spiking tool enhances existing safeguards
AB 340 establishes a limit on compensation that is counted toward calculating a
member’s pension which will further enhance existing CalSTRS safeguards
against pension spiking. For new CalSTRS members (starting on or after January
1, 2013), who like existing members, are not covered by Social Security, the
initial limit is 120 percent of 2013 Social Security wages, which will be
approximately $132,000. Preventing pension spiking is a priority for CalSTRS.
Since last fall CalSTRS has made aggressive changes to strengthen its antispiking
efforts, including creating a toll-free Pension Abuse Reporting Hotline and
a dedicated Compensation Review Unit to investigate suspected pension spiking
cases.
3. CalSTRS plan design validated
Overall, the changes as set forth in AB 340 recognize the appropriateness of the
existing CalSTRS plan design. CalSTRS administers a comprehensive, hybrid
system that includes a defined benefit plan, a cash balance plan similar to a
401(k) but with a minimum earnings guarantee, and a defined contribution plan.
CalSTRS members earn a reasonable benefit for the service they provide to
California’s students. They receive on average about 55 percent of their final
salary and retire at nearly age 62 having performed more than a quarter century
of service. What cannot be measured is the potential impact the new pension
changes will have on the attractiveness of public education as a profession.
Long-Term Funding
The CalSTRS $64.5 billion funding shortfall can be managed with thoughtful
action. With the Legislature’s approval of SCR 105 on August 31, plans are
underway to work with affected stakeholders to develop three alternative plans
as requested in the resolution. The plans will consider gradual, incremental
increases in contributions to address the long-term funding needs of the Defined
Benefit Program. Once completed CalSTRS will submit the plans to the
Legislature early next year as outlined in the resolution. The Legislature has
expressed its intent to address the long-term health of the fund in the 2013-14
legislative session.
September 5, 2012