The CalSTRS Funding Plan, enacted by Assembly Bill 1469 as part of the 2014-15 budget, puts the CalSTRS Defined Benefit Program on the path to full funding in 32 years through incremental shared contribution increases among the program’s three contributors: CalSTRS members, employers and the state.
The contribution rates established in the funding plan would fully fund the Defined Benefit Program based on the actuarial assumptions in place at the time it was designed in 2014. Those assumptions are periodically adjusted by the Teachers’ Retirement Board based on experience. The funding plan gives the board limited authority to adjust employer and state contribution rates accordingly.
The CalSTRS Funding Plan is the result of years of focused discussions, stakeholder outreach, legislative visits and hearings. Since 2006, guided by the Teachers’ Retirement Board, CalSTRS committed to promoting the development of a comprehensive strategy to address the long-term funding needs of the system.
The biggest challenge in this effort was that unlike most other pension plans in California, the board lacked the authority to raise contribution rates and instead had to rely upon action from the Legislature and the Governor, who enacted a responsible funding plan in 2014.
In 2013, CalSTRS submitted a report of possible funding strategies, “Sustaining Retirement Security for Future Generations: Funding the California State Teachers’ Retirement System,” to the Legislature pursuant to Senate Concurrent Resolution 105. The report, developed with input from affected stakeholders, identified funding options and illustrated the implications of gradual, incremental contribution increases necessary to close the Defined Benefit Program’s funding gap and secure the long-term needs of the fund.
Enactment of the funding plan in the 2013-14 legislative session fulfills the Legislature’s expressed intent in SCR 105 to restore long-term viability to fund and uphold the state’s promise to a secure retirement for California’s educators. CalSTRS believes the funding plan enacted in AB 1469 achieves the right balance of time, commitment and comprehensiveness needed to set the Defined Benefit Program on a sustainable path.
Member contribution increases
AB 1469 increased member contributions on compensation that is creditable to the Defined Benefit Program, which had not been increased beyond 8% since 1972.
|Effective date||Pre-funding plan member contribution rate||Rate changes under AB 1469 (2% at 60 members)||Rate changes under AB 1469 (2% at 62 members*)|
|July 1, 2014||8%||8.15%||8.15%|
|July 1, 2015||8%||9.20%||8.56%|
|July 1, 2016||8%||10.25%||9.21%|
* The contribution rate for CalSTRS 2% at 62 members is based, in part, on the normal cost of benefits and may increase or decrease in future years. Effective July 1, 2018, the contribution rate for CalSTRS 2% at 62 members increased to 10.205%.
CalSTRS members who performed creditable service on or after January 1, 2014, are guaranteed their 2% annual benefit adjustment, also referred to as the improvement factor, in exchange for increased contributions to the Defined Benefit Program. This includes members who retired in 2014. The annual benefit adjustment for members who retired before January 1, 2014 is not contractually guaranteed—it can be reduced or eliminated by the Legislature if economic conditions dictate. However, the Legislature has yet to reduce the annual benefit adjustment since first providing this adjustment in 1972.
Employer contribution increases
Increases in the employer contribution rate were phased in over seven years. Prior to the funding plan, the employer contribution rate had not been increased since 1986.
Starting in 2021-22, the funding plan provides the board limited authority to adjust the employer contribution rate, if necessary, to fully fund the remaining unfunded liability by 2046. Those adjustments are limited to 1% annually, not to exceed 20.25% of creditable compensation.
|Effective date||Pre-funding plan employer contribution rate||Increases under AB 1469 (Increase from pre-funding plan rate)||Increases under AB 1469 (Total)|
|July 1, 2014||8.25%||0.63%||8.88%|
|July 1, 2015||8.25%||2.48%||10.73%|
|July 1, 2016||8.25%||4.33%||12.58%|
|July 1, 2017||8.25%||6.18%||14.43%|
|July 1, 2018||8.25%||8.03%||16.28%|
|July 1, 2019||8.25%||9.88%*||18.13%*|
|July 1, 2020||8.25%||10.85%**||19.10%**|
|July 1, 2046||8.25%||Increase from pre-funding plan rate ceases in 2046-47||Increase from pre-funding plan rate ceases in 2046-47|
* The Budget Act of 2019 provided supplemental payments to CalSTRS to reduce the unfunded actuarial obligation of the system and reduce contribution rates for employers and the state. Based on the additional amounts paid to CalSTRS, the effective employer contribution rate was adjusted from 18.13% to 17.1% for fiscal year 2019-20.
** The Budget Act of 2020 redirected the supplemental payment paid by the state on behalf of employers as part of the 2019-20 state budget to reduce the employer contribution rate for fiscal years 2020-21 and 2021-22. The effective employer contribution rate was adjusted from 19.1% to 16.15% for fiscal year 2020-21. The 2021-22 employer contribution rate will be 2.18% of payroll less than the rate set by the board in the spring of 2021.
State contribution increases
The CalSTRS Funding Plan maintained the state’s base contribution rate of 2.017% and the purchasing power benefit contribution of 2.5%. It replaces the portion of the state contribution rate that was formerly dedicated to paying for the 1990 benefit structure with an amount that fully funds those benefits over 32 years.
The funding plan provides the board limited authority to adjust the state’s contribution rate; however, the rate cannot be increased by more than 0.5% each year.
For 2020, the board initially set the state’s contribution rate at a total of 10.828%, including the 2.5% for the purchasing power contribution.
However, the Budget Act of 2020 suspended the board’s rate-setting authority for fiscal year 2020-21, and the increase adopted by the board did not go into effect. Instead, the total state rate remained at the 2019-20 level of 10.328%. To ensure CalSTRS is made whole, the state transferred $297 million in Proposition 2 revenues to bridge the gap.
Increased member and employer contributions under AB 1469 are only payable for compensation that is creditable to the Defined Benefit Program.
Excess contributions received by CalSTRS for service creditable under the Defined Benefit Supplement Program that are also attributable to increases under the funding plan are returned to school district employers. School district employers are responsible for returning excess member contributions to their employees, and the returned pre-tax contributions are considered taxable income in the year they are received by the employee. This occurs regardless of when the contribution was initially paid.
CalSTRS is required to submit a funding status report to the Legislature every five years. The first report was submitted in June 2019.
The CalSTRS Funding Plan represents a prominent milestone in CalSTRS’ funding history and demonstrates the leadership and commitment of the Legislature, Administration and our stakeholders. With a responsible funding plan firmly in place, CalSTRS is on target to meet the promise of a secure financial future for California’s educators.