BACKGROUND:
Governor Jerry Brown unveiled a 12-point public employee pension reform plan that he wants to put before voters in November 2012. The proposal increases the retirement age of public employees and puts them in a hybrid plan that relies upon a combination of a Defined Benefit (DB) plan, a Defined Contribution (DC) plan and Social Security (IMPORTANT POINT: Teachers do not receive Social Security). The proposal also changes the one-year final compensation to three-year final compensation, limits post-retirement employment, and prohibits retroactive pension increases and pension holidays for employers and employees. The governor’s pension proposal paints a broad stroke of options for reforming California’s pension systems, but does not address the short and long term funding needs of CalSTRS.
The governor’s proposal is the first step of potential legislative action. This proposal will be considered by the Joint Conference Committee on Pensions, whose charge is to review all pension proposals. This proposal could result in a ballot measure, but it must go through the legislative process first.
MAIN MESSAGE:
We share in the governor’s vision of having a strong retirement system for educators, but we have questions and concerns on some of these proposals and are looking forward to further clarification of the proposal and what the impact will be on the retirement benefits of educators, public education and the economic stability of California.
Budget cuts have already made it harder to attract and retain teachers in our classrooms and we want to ensure that the plan doesn’t further diminish our ability to recruit teachers to our neighborhood schools. It’s important to remember that educators have been paying half of their retirement for over 40 years.
We will continue to work with the governor and the Legislature on measures to sustain our state's retirement system, and continue to act as partners with taxpayers in finding solutions to help rebuild our state’s working class.
IMPORTANT POINTS:
“Hybrid” Risk-Sharing Pension Plan: New Employees. This plan requires all new employees to participate in a combination Defined Benefit (DB) plan, Defined Contribution (DC) plan and Social Security, which teachers do not participate in.
- The governor’s hybrid plan aims to limit teacher retirement benefits to 75 percent of what they made in the classroom. Currently teachers earn approximately 62 percent of what they earned in the classroom.
- The governor’s plan would reduce the current formula of 2 percent at age 60 to 1.43 percent at age 67, reducing the current replacement ratio from 62 percent to approximately 50 percent.
- This means the DC portion must achieve a 25 percent replacement ratio. Anyone who has been paying attention to the stock market recently understands how difficult that would be to achieve.
- How the governor’s “hybrid” will achieve a 75 percent replacement ratio with a lower DB formula, in concert with a new DC plan, is unclear, especially when CalSTRS members do not participate in Social Security.
Increase Retirement Age: New Employees. This will require new educators to retire at age 67.
- The normal retirement age for CalSTRS is 60, but the average retirement age for CalSTRS members is closer to 62.
- This second tier of new employees would be required to work longer for a reduced benefit.
Require Three-Year Final Compensation to Stop Spiking: New Employees.
- This already exists for educators who work less than 25 years.
- If an educator works 25 years or more, their retirement calculation is based upon their highest year of compensation. This has been an effective tool for incentivizing educators to stay in the classroom longer.
Calculate Benefits Based on Regular, Recurring Pay to Stop Spiking: New Employees.
- Educators have not been able to supplement their retirement benefits with overtime, because all additional pay over and above the normal working year is shifted into the CalSTRS Defined Benefit Supplement plan. This has been effective in preventing spiking.
Limit Post-Retirement Employment: All Employees.
- The governor’s proposal is based on hours. The CalSTRS system is based on a fixed dollar amount, which works for those in the classroom.
- CalSTRS already has limitations on the amount of time retirees can come back to work provided they sit out for six months and are under 60 years of age, with special exemptions such as special education and English-Language Arts instructors.
Prohibit Retroactive Pension Increases: All Employees.
- Inequities exist between retirees in the CalSTRS system. Should the system ever be more than fully funded, this proposal would eliminate our ability to address inequities.
Prohibit Pension Holidays.
- Educators and school districts have not been given pension contribution holidays.
- Educators have been paying 8 percent contributions for over 40 years.
- School districts have been contributing 8.25 percent contributions for over 20 years.
- The state continues to pay a reduced contribution of 2.5 percent to CalSTRS, which was previously 4.6 percent.