Past Ask Jack Questions and Answers
Governor's 12-Point Pension Proposal?
Answered on Mar. 13, 2012
Currently the Teacher’s Retirement Law restricts the amount you can earn in a CalSTRS-covered position after you retire without it affecting your retirement benefit. For example, if you return to work in a CalSTRS-covered position, you are subject to an earnings limitation of $31,020 per school year for 2011-12 unless you have an exemption from the earnings limit. However, the exemptions will expire June 30, 2012.
Under the Governor’s 12-point proposal, anyone who retires from a California public employer, including K-12 schools and community colleges, after the effective date of the legislation would be prohibited from working either as an employee or contractor for any California public employer unless they reinstate from retirement. An exception would apply in the event that the retiree is hired either during an emergency to prevent stoppage of public business or because the retiree has skills needed to perform work of limited duration. Work by a retiree under this exception is limited to 960 hours or 120 full-time days in a consecutive 12-month period.
Again, the Governor’s 12-point proposal must work its way through the legislative process and the earliest it would take effect, if adopted as written, would not be until after June 2013. Until that time all members are subject to requirements under the Teacher’s Retirement Law mentioned above.
Answered on Feb. 24, 2012
Under current CalSTRS-offered benefits, the normal retirement age is age 60, and the minimum retirement age is generally attainable at age 55 with at least five years of service credit. If an educator has 30 years of service credit, he or she is able to retire even earlier at age 50.
However, the Governor’s 12-Point Pension Reform proposal seeks to impose an increase in the full retirement age for new members to age 67. The Governor’s proposal also seeks to increase the minimum retirement age to 57 with five years of service credit.
Answered on Feb. 14, 2012
Under the current benefit formula, members are entitled to a benefit based on age, final compensation and years of service credit at retirement. This benefit can be as much as 2.4 percent of final compensation per year of service credit.
The Governor proposes to increase the retirement age for all new CalSTRS members (excluding existing members already in the system) to age 67 to qualify for full retirement benefits. Under the plan, the defined benefit portion of the benefit would not exceed 1.43 percent of final compensation per year of service credit. Because this change only applies to new members, any service performed in the past, or in the future, by existing members would not be affected. Keep in mind that the Governor’s proposal must work its way though the legislative process in order to become effective.
Answered on Jan. 10, 2012
There are two provisions that may impact current retirees or reduce anticipated benefits for members and one that deals with contributions paid by members.
First, if adopted as written, under the Governor’s 12-Point proposal current and retired members acting in their official capacity who are convicted of a felony would be subject to forfeiting their benefits.
Second, the Governor’s proposal calls for the elimination of future purchases of so-called "air time" (additional retirement service credit for time not actually worked) for all current and future employees.
Lastly, the proposal states also that the "annual normal pension costs should be shared equally by employees and employers" and that employee contribution rates would be "at least 50 percent of the annual cost of their pension benefits." This provision could require members to pay at least 50 percent of the normal cost of the Defined Benefit Program which could result in an increase to approximately 8.86 percent for current members.
Based on the analysis CalSTRS has published, the intent of the majority of provisions appear to be directed toward future employees who have yet to enter the system.
Read the Governor’s 12-Point Proposal.
Read the CalSTRS analysis of the Proposal.
Answered on Jan. 3, 2012
No one can predict the outcome or precise timing of any potential pension reform measures. As meaningful discussions on pension reform take shape, it’s important to remember that the Governor’s 12-Point proposal must work its way though the legislative process before anything is official.
The Governor has also indicated that he intends to submit some of his proposals as constitutional amendments, which require approval by California’s voters. Although there has been no specific legislation introduced to date, the earliest any of the proposals could go into effect would be 2013.
Read the Governor’s 12-Point Proposal.
Read the CalSTRS analysis of the Proposal.
- Will the Governor's 12-point pension reform proposal affect reciprocity between CalPERS and CalSTRS?
Answered on Nov. 30, 2011
CalSTRS is thoroughly reviewing the Governor’s pension reform proposal and any potential implications that may follow. It is important to keep in mind that this is currently only a proposal and will be further discussed in the Legislature.
Meantime, we do not anticipate any direct effect on concurrent retirement, or what some may refer to as reciprocity, between the CalPERS and CalSTRS plans. Again, the most pressing need CalSTRS has is a plan of action to address the long-term funding shortfall, which only the Legislature and Governor have the authority to implement.
It's important to keep in mind that GASB’s proposed rules will not increase or change the actual funding shortfall of $56 billion which only the Governor and Legislature have the authority to develop a plan to address.
Answered on Nov. 10, 2011
Although we are still analyzing all of the potential implications of the Governor’s pension reform proposal, two provisions - the prohibition of retroactive pension increases and the limitation of post-retirement employment – may apply to retired members if adopted as they are currently written.
However, the ban of any benefits increases provided on a retroactive basis would apply to future benefit increases and does not seek to undo retroactive increases already provided. It is important for our members to understand that this is only a proposal and it will be discussed further in the Legislature in the coming months.
We appreciate Governor Brown’s focus, as it’s going to take strong leadership from him and the Legislature to develop a plan to address the CalSTRS $56 billion unfunded liability, as the Governor and Legislature have the sole authority to set the funds’ contribution levels.
Changes to my benefits or contributions?
Answered on May 31, 2011
There is currently no proposed legislation to change the contribution rates from members, the school districts or the state.
It is important to note that CalSTRS contribution rates have not increased for decades. With the plan facing a funding gap what is needed is a responsible funding strategy that would increase in contribution rates at a gradual and predictable pace.
Answered on May 17, 2011
No legislative proposal has been introduced that would change the core benefits (retirement, disability and survivor benefits) structure for CalSTRS members.
Additionally, these benefits and how they are calculated for existing members are a legal contract with the state. As such, they are protected by the state’s constitution and significant legal precedent. Any legislation that affects the core benefits of existing members would be subject to potential legal challenge and resulting rigorous judicial review.
Governor Brown has released a 12-point plan for pension changes that has not been developed enough to be written into proposed legislation. A lot depends on the form of the proposed changes before CalSTRS can assess the potential impacts to the benefits of both current and retired CalSTRS members.
Answered on Jan. 18, 2011
There are currently no proposals that would affect your receipt of your annual benefit adjustment. That adjustment is 2 percent of your initial retirement amount. However, unlike your retirement, disability and survivor benefits, the annual benefit adjustment is not a core benefit. That means it is not constitutionally guaranteed.
State law currently provides for the annual 2 percent benefit adjustment to begin on the first September 1 after a member has been receiving a pension for at least one year. This provision of law, however, specifically states the Legislature may adjust the amount of the annual benefit adjustment as economic conditions dictate.
What this means is the Legislature has the ability to pass a bill and the Governor sign into law a measure that reduces or eliminates the current 2 percent annual benefit adjustment. This legislation could apply not only to new members, but to existing members, even if they have already retired.
Answered on Jan. 7, 2011
No, because the "highest salary period" or "final compensation" is part of the CalSTRS Defined Benefit formula that is set by state law. CalSTRS retirement benefits are calculated using a member's years of service, age at retirement and final compensation.
Final compensation is defined for current retired and active members as the highest average annual compensation earned by a member during a specified period of CalSTRS-covered paid employment.
The CalSTRS benefits of existing members are a legal contract with the State of California and, therefore, are protected by the U.S. and California constitutions. While CalSTRS benefits could be changed by the Governor and Legislature, changes to this core benefit formula could only be applied to educators who first become CalSTRS members after the effective date of any legislation.
Answered on Oct. 12, 2010
The CalSTRS benefits of existing members are a legal contract with the State of California and, therefore, protected by the U.S. and California constitutions.
However, the CalSTRS Defined Benefit Program could be changed by the Governor and Legislature. A change to the core benefits (retirement, disability and survivor) could only be applied to educators who first become CalSTRS members after the effective date of any legislation.
We hosted a webinar on October 26 to discuss questions like these and sort fact from fiction. Watch the webinar recording.
Impact of state budget crisis?
Answered on Apr. 20, 2011
Although the State of California’s contribution is lower than it was in 1998, the state has never ceased to make payments to the CalSTRS Defined Benefit Program.
The state withheld a $500 million contribution to the CalSTRS inflation protection program in 2003 but was forced to repay that amount plus interest following a successful legal challenge by CalSTRS.
Answered on Feb. 25, 2011
Currently, there are no proposals to do this and any attempt at such an action is unlikely to be successful.
First, borrowing from the Teachers’ Retirement Fund is not possible. CalSTRS funds are held in a separate trust fund from the state’s funds. The state is not allowed to borrow or use the CalSTRS trust fund for any purpose. Such funds are only to be used by CalSTRS to pay benefits and related administrative expenses.
Additionally, prior attempts to withhold the state’s contributions to CalSTRS as a way to save money have failed in the courts. The courts have more than once affirmed the promise to California’s educators for a stable, guaranteed pension as a contractual right.
This constitutional protection was most recently upheld in 2007 when the courts ordered the state to pay, with interest, a $500 million contribution withheld from the CalSTRS inflation-protection program.
Answered on Sep. 3, 2010
The terms of the current and retired CalSTRS members’ pension plan is a legal contract with the State of California, protected by the California and U.S. constitutions. The state as the pension plan guarantor, or sponsor, would be obligated to pay the difference between the benefits paid and the contributions received on a pay-as-you-go basis. This requirement would take precedence over most other programs funded by the state.
Causes of funding gap?
Answered on Jul. 23, 2010
The 2001 dot com bust, followed by the 2008 world economic turmoil created lower than expected investment returns. The fund experienced a minus-25 percent return for the fiscal year that ended June 30, 2009. However, the benefit enhancements which rewarded longevity in the classroom, implemented in 1998 and 2000, were not significant contributing factors to the projected unfunded liability.
Why care to close the gap?
Answered on Mar. 22, 2011
True, your core benefits (retirement, disability and survivor benefits) are protected as contractual rights. However, state legislation could be enacted that would affect the annual 2 percent benefit adjustment, which is not constitutionally guaranteed. This legislation could apply not just to members hired after the bill is enacted, but also to current members, even if they have already retired.
Answered on Nov. 5, 2010
You can be assured that CalSTRS core benefits (retirement, disability and survivor) for current active and retired members are constitutionally guaranteed. What you’ll receive in retirement is based on a formula that factors your age, your years of service and your highest salary.
CalSTRS funding shortfall can be managed, but the solution requires thoughtful action. The state must act to adopt a responsible funding strategy that will protect the state General Fund, and uphold the state’s promise to teachers.
Learn more about your CalSTRS retirement formula and how your benefit is calculated on this website.
Answered on Mar. 6, 2010
The longer it takes to address the funding shortfall, the more expensive the solution. See The Cost of Waiting »
To address the underfunding, the provisions of the pension plan that are not guaranteed, such as the 2 percent annual benefit adjustment for retired members, could be reduced or eliminated by legislation.
How to close the gap?
Answered on Dec. 20, 2011
Recent media reports have suggested that to solve the unfunded liability the state will have to increase CalSTRS funding by $3.8 billion a year for 30 years for a total of more than $114 billion.
Although this is an accurate statement based on current projections, achieving adequate funding can occur several ways that would be phased in over time. The CalSTRS $56 billion funding shortfall can be managed, but it will require gradual and predictable increases in contributions.
Answered on Dec. 12, 2011
On October 13, 2011, CalSTRS along with a number of our stakeholders participated in GASB’s public hearing and formally recommended the Board to suspend adoption of the Exposure Drafts as they are currently written until more appropriate accounting standards can be implemented.
Meantime, CalSTRS is in dialog with our stakeholders and will be conducting informational meetings to further educate school employers. We will be posting information on our website and further encourage our stakeholders to continue to submit comments to GASB.
It's important to keep in mind that GASB’s proposed rules will not increase or change the actual funding shortfall of $56 billion which only the Governor and Legislature have the authority to develop a plan to address.
Answered on Nov. 17, 2011
GASB's intent behind the new accounting rules is to implement improved financial reporting, which CalSTRS supports. However, in their current state, the proposed GASB amendments do not accurately address the cost-sharing accountability structure of the CalSTRS pension system.
Unlike most systems, the plan sponsor of CalSTRS is the state of California, not the employer, which is the school district. Both are different entities and both contribute to the plan in addition to the employees. GASB is proposing to make the school employer (school districts) responsible for reporting unfunded liabilities.
However, at CalSTRS, the state as the plan sponsor is ultimately responsible for reporting the $56 billion funding shortfall and we don’t think it makes sense for school employers to be required to show a portion of the CalSTRS unfunded liability on their balance sheets. Because of this, CalSTRS has formally recommended GASB remove cost-sharing plans from the proposed amendments until more appropriate accounting standards can be implemented.
Answered on Jul. 29, 2011
Despite the good news on ending the fiscal year with a 23.1 percent investment return, we can’t count on investments to close the long-term funding gap. We estimate it would take four more years of 20 percent investment returns to wipe out the $56 billion unfunded liability. That’s an unreasonable expectation given the current state of the global economy and financial markets.
It’d be natural to think that a 23.1 percent investment return would almost cover the 25 percent loss two years ago. However, the math works against us. This year’s 23.1 percent return is on a smaller investment portfolio amount than two years ago. To get us back to the starting point of two years ago, before the 25 percent loss, we’d have needed a 33 percent return this year.
Answered on Jul. 15, 2011
It would be extremely costly for CalSTRS to freeze its current defined benefit plan system and transition to a 401(k) system.
First, CalSTRS would be responsible for maintaining defined benefit plans for all current members, which they are entitled to by law, until they die or are no longer receiving benefits. This would require CalSTRS to operate two systems, one for existing members and another for the new 401(k) plans. Even more significant, this change would have an adverse impact on cash flow, resulting in a required change to the fund’s asset allocation.
Also, studies have shown that defined benefit systems are more cost efficient because they require less administrative costs than a 401(k) program. On average, the annual administrative costs for CalSTRS are 0.2 percent of its assets. Defined contribution plans, such as 401(k) systems, cost 1 to 2 percent to administer.
Answered on Mar. 18, 2011
A very small proportion – just 2.2 percent – of CalSTRS retirees receive benefits that total more than $100,000 annually. Therefore, the impact of limiting these benefits would not significantly affect the solvency of the fund.
Answered on Nov. 24, 2010
No, it won’t and for a couple of reasons.
First, the CalSTRS Defined Benefit Program is not a so-called “pay as you go” system like Social Security. In other words, CalSTRS is not dependent upon contributions from active members to the “pool” this month in order to pay next month’s pension benefits.
Second, demographics, as in when and who is expected to enter the retirement pool, are part of the assumptions considered when calculating the annual actuarial valuation. This means the entry of our Baby Boomer members into retirement has already been factored into calculating the projected long-term funding shortfall of $40.5 billion.
Answered on Mar. 14, 2010
In our analysis of CalSTRS asset allocation and potential returns in each asset class, we determined that there was only a 10 percent chance—given current assumptions—that our investment earnings would be high enough to eliminate the unfunded liability.
How does CalSTRS operate?
Answered on Jan. 17, 2012
CalSTRS takes pension spiking very seriously, which is why we have, and continue to aggressively pursue instances of suspected spiking. Our internal controls and processes to identify and resolve instances of spiking include regularly conducting school district audits and analyzing employer compensation reports to identify excessive increases that could affect the member’s final compensation factor.
To underscore our commitment to detecting and preventing pension spiking CalSTRS has formed a dedicated anti-spiking Compensation Review Unit and implemented an anonymous toll-free Pension Abuse Reporting hotline. The Compensation Review Unit is specifically focused on analyzing individual cases to determine if compensation changes have resulted in pension spiking.
In addition to these newly strengthened efforts, by the very nature of the CalSTRS comprehensive hybrid plan design, annual compensation for most members adheres to strict salary schedules which are established through collective bargaining. When members receive summer school compensation and other extra-pay assignments as part of their established duties, this compensation is credited to a cash balance account and does not figure into final compensation, a factor used in establishing pension benefits.
You can anonymously report suspicions of pension abuse to CalSTRS by calling the toll-free Pension Abuse Reporting Hotline at 855-844-2468 or by completing the online form at www.CalSTRS.com.
Answered on Oct. 24, 2011
CalSTRS has been very transparent in providing the Legislature and Administration with financial data that illustrates the need to address a $56 billion funding shortfall, the gap between projected future assets and obligations to retired educators. CalSTRS assisted the State Auditor in developing the information for the report which further underscores that, absent any thoughtful action, the fund is projected to be depleted in the early 2040s.
It’s important to state that the authority and responsibility to develop a long-term plan rests with the plan sponsor and guarantor of the system, which is the Legislature and Administration. CalSTRS encourages a gradual and predictable approach to restore the system’s funding. Acting to increase contributions sooner, rather than later, is the best way to curtail risks to the state General Fund.
Answered on Oct. 14, 2011
CalSTRS is temporarily suspending its Home Loan Program because the program’s administrator and loan servicing agent, Bank of America, has decided to sell their correspondent lending business. The suspension, effective October 1, 2011, is not in any way related to CalSTRS long-term funding shortfall.
CalSTRS intends to resume the Home Loan Program as soon as possible after thoroughly exploring the options available in the home mortgage market and establishing a partnership with a new loan servicing agent.
In the meantime, you are welcome to contact a Home Loan Program Manager at hlp@calstrs.com to learn more about options still available. Although new loan originations have ceased, there will be no impact on the servicing of loans already originated through the program.
Answered on Sep. 15, 2011
The last actuarial valuation, a snapshot of the CalSTRS fund’s assets and liabilities, as of June 30, 2010, shows the fund is 71 percent funded. Another important number from the actuarial valuation is the amount of the funding shortfall. This difference between projected future assets and future benefit payments is currently $56 billion.
This last actuarial valuation showed that absent changes in contribution rates or liabilities, CalSTRS assets will be depleted by the early 2040s. If that happens, benefit payments would still be paid. However, as the plan sponsor, the State of California would be obligated to pay the difference between the benefits paid and the contributions received.
What’s needed is thoughtful action by the state to avoid increased costs and risks to the state General Fund. CalSTRS is working with the administration and Legislature to ensure they understand the issues and have the data they need to make informed decisions.
Answered on Aug. 26, 2011
CalSTRS, as a “forever” investor, considers the long-term value of investments rather than short-term market activity. Despite the greater risk, equities provide a higher return over the long term than bonds.
Historically, more than 55 percent of CalSTRS benefits are paid from investment earnings. It is clear that reducing our investment in equities and increasing our exposure to bonds will increase the cost of the benefits to employers and, ultimately, the taxpayer.
While the stock market continues to prove an essential part of the CalSTRS investment portfolio, CalSTRS is increasingly diversifying its portfolio into areas such as the Inflation Sensitive asset class. This new asset class helps hedge the portfolio against inflation to include using more treasury inflation-protected securities.
Also an innovation and risk unit was created within the Investment Branch to look into new investment strategies, implement pilot programs and evaluate their effectiveness.
- In a prudent manner.
- Using the highest code of ethical conduct.
- And, in a thorough and transparent manner.
Answered on Aug. 19, 2011
As a fiduciary, each Teachers' Retirement Board member is to perform duties and make decisions to guide the system solely for the benefit of CalSTRS members and to do so in an economical manner. That means each of the trustees must think of how the decisions they are asked to make will benefit the members of the system first, before all other considerations.
The Board must conduct and govern its affairs:
So Board members—regardless of background or how they became a board member—must make decisions with one voice: as a fiduciary.
Answered on Jun. 6, 2011
Contribution rates are set by state law. CalSTRS members contribute 8 percent of their pay to CalSTRS, a rate that has not changed for nearly 40 years. School districts contribute 8.25 percent of each member’s earnings, an amount that has not increased since 1990. Since 1998, the state’s contribution to the Defined Benefit Program has decreased from 4.607 percent of payroll to the current 2.017 percent. The state pays an additional 2.5 percent of payroll for purchasing power protection.
The comparison chart on this page shows the current contribution rates paid to CalSTRS compared with the retirement-related costs associated with other pension systems.
Over the last 15 years, investment earnings represented 55 percent of the total resources to pay benefits.
- Members contributions = 18 cents
- School district employers contributions = 18 cents
- Investment earnings = 55 cents
Answered on Apr. 4, 2011
Over the last 15 years, state funds have provided an average of 9 cents of each benefit dollar paid. The rest of that average benefit dollar paid is:
Answered on Feb. 22, 2011
More California educators retired last year than ever before, almost 15,500, which was a 21 percent jump over the previous year. The median benefit for these new retirees was just over $49,000 annually, which replaces about 60 percent of their highest salary.
Our data shows that of the nearly 220,000 CalSTRS members receiving retirement benefits from their own service, only 2.2 percent receive pensions that exceed $100,000 annually. Of those, approximately 4,800 retirees, a remarkable 97 percent, worked at least three decades; 71 percent worked in education between 35 and 45 years.
These figures point out that CalSTRS retirees work long careers to earn a stable pension that serves as their primary source of retirement income. California’s educators do not pay into or receive Social Security for their public school employment.
- Restrict campaign contributions to board members and the governor.
- Require board members to recuse themselves when such a campaign contribution is received.
Answered on Sep. 10, 2010
Our 12-member Teacher's Retirement Board’s fiduciary responsibility includes the duty to operate with the highest standards of ethical conduct. CalSTRS was the first public pension fund in California to adopt regulations to avoid the appearance of ‘pay-to-play’ on investment decisions.
The regulations adopted in 2006, in part:
At the same time, the board adopted a policy requiring general partners to disclose any use of placement agents in CalSTRS transactions.
Learn more about our board’s fiduciary duty and how our board governs with transparency.
What about Social Security?
Answered on Jul. 1, 2011
No, it would either be more costly or provide small benefits. A coordinated benefit structure for CalSTRS members that included Social Security contributions or factored them into a member’s benefits would add an additional cost of $1.8 billion each year for employers and members, or reduce benefits for CalSTRS members by 33 percent.
Answered on Jun. 2, 2010
The good news is that the CalSTRS Defined Benefit pension is not affected by Social Security and any funding shortfalls Social Security might experience. There is no decrease in the CalSTRS pension amount if a retiree is also receiving Social Security. However, California educators did not pay into Social Security for their public school employment covered by CalSTRS, therefore any Social Security benefits paid to CalSTRS members earned from other employment or from a spouse's income will likely be reduced due to two provisions in federal law.
Those provisions are the Windfall Elimination Provision and the Government Pension Offset. You can read more about those provisions on CalSTRS.com.
There have been ongoing efforts in Congress to reduce or eliminate these provisions. The Teachers' Retirement Board has supported these efforts. At this point, however, there has been no action taken on such legislation and, given the cost of making such changes, it is possible that such changes would not occur except in the context of more comprehensive modifications to the Social Security program.
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