The District participates in the State Teachers’ Retirement System (“CalSTRS”). Contributions to CalSTRS are fixed in statute. For fiscal year 2013-14, teachers contributed 8% of salary to CalSTRS, while school districts contributed 8.25%. In addition to the teacher and school contributions, the State contributed 4.517% of teacher payroll to CalSTRS (calculated on payroll data from two fiscal years ago). Unlike typical defined benefit programs, however, neither the CalSTRS employer nor the State contribution rate varies annually to make up funding shortfalls or assess credits for actuarial surpluses. The State does pay a surcharge when the teacher and school district contributions are not sufficient to fully fund the basic defined benefit pension (generally consisting of 2% of salary for each year of service at age 60 referred to herein as “pre-enhancement benefits”) within a 30-year period. However, this surcharge does not apply to systemwide unfunded liability resulting from recent benefit enhancements.
As indicated above, there was no required contribution from teachers, schools districts or the State to fund the unfunded actuarial liability for the CalSTRS defined benefit program and only the State legislature can change contribution rates. The 2013 CalSTRS Actuarial Valuation noted that, as of June 30, 2013, the contribution rate, inclusive of contributions from the teachers, the school districts and the State, was equivalent to 19.497% over the next 30 years. The 2013 CalSTRS Actuarial Valuation provides that the contribution rate would need to have been raised by 13.382% to a total of 32.879% to amortize the unfunded liability over a 30-year period as of June 30, 2013.
As part of the 2014-15 State Budget, the Governor signed Assembly Bill 1469 which implements a new funding strategy for CalSTRS, increasing the employer contribution rate in fiscal year 2014-15 from 8.25% to 8.88% of covered payroll. Such rate would increase by 1.85% beginning in fiscal year 2015-16 until the employer contribution rate is 19.10% of covered payroll as further described below. Teacher contributions will also increase from 8.00% to a total of 10.25% of pay, phased in over the next three years. The State’s total contribution will also increase from approximately 3% in fiscal year 2013-14 to 6.30% of payroll in fiscal year 2016-17, plus the continued payment of 2.5% of payroll annual for a supplemental inflation protection program for a total of 8.80%. In addition, AB 1469 provides the State Teachers Retirement Board with authority to modify the percentages paid by employers and employees for fiscal year 2021-22 and each fiscal year thereafter to eliminate the CalSTRS unfunded liability by June 30, 2046. The State Teachers Retirement Board would also have authority to reduce employer and State contributions if they are no longer necessary.
Pursuant to Assembly Bill 1469, school districts’ contribution rates will increase in accordance with the following schedule:
The District’s total employer contributions to CalSTRS for fiscal years 2011-12, 2012-13 and 2013-14 were $1,495,402, $1,650,971, $1,765,424 and $1,999,983, respectively, and were equal to 100% of the required contributions for each year. The District projects employer contributions to CalSTRS of approximately $2.5 million in fiscal year 2015-16. With the implementation of AB1469, the District anticipates that its contributions to CalSTRS will increase in future fiscal years as compared to prior fiscal years. The District, nonetheless, is unable to predict all factors or any changes in law that could affect its required contributions to CalSTRS in future fiscal years.
The District also participates in the California Public Employees’ Retirement System (“CalPERS”) for all full-time and some part-time classified employees. All qualifying classified employees of K-12 school districts in the State are members in CalPERS, and all of such districts participate in the same plan. As such, all such districts share the same contribution rate in each year. However, unlike school districts’ participating in CalSTRS, the school districts’ contributions to CalPERS fluctuate each year and include a normal cost component and a component equal to an amortized amount of the unfunded liability. Accordingly, the District cannot provide any assurances that the District’s required contributions to CalPERS will not significantly increase in the future above current levels.
In February of 2014, the CalPERS Board of Administration adopted new actuarial demographic assumptions that take into account public employees living longer. Such assumptions are expected to increase costs for the State and public agency employers (including school districts), which costs will be amortized over 20 years and phased in over three years beginning in fiscal year 2014-15 for the State and amortized over 20 years and phased in over five years beginning in fiscal year 2016-17 for the employers. CalPERS estimates that the new demographic assumptions could cost public agency employers up to 9% of payroll for safety employees and up to 5% of payroll for miscellaneous employees at the end of the five year phase in period. To the extent, however, that future experiences differ from CalPERS’ current assumptions, the required employer contributions may vary.
The District’s total employer contributions to CalPERS for fiscal years 2011-12, 2012-13, 2013-14 and 2014-15 were $397,085, $449,222, $504,384 and $563,045, respectively, and were equal to 100% of the required contributions for each year. The District projects employer contributions to CalPERS of approximately $0.62 million for fiscal year 2015-16. With the change in actuarial assumptions described above, the District anticipates that its contributions to CalPERS will increase in future fiscal years as the increased costs are phased in. The implementation of PEPRA (see “—California Public Employees’ Pension Reform Act of 2013” below), however, is expected to help reduce certain future pension obligations of public employers with respect to employees hired on or after January 1, 2013. The District cannot predict the impact these changes will have on its contributions to CalPERS in future years.
CalPERS is currently considering mitigation strategies intended to reduce risk and investment volatility in the funding of the pension system. The proposed policy (the “Funding Risk Mitigation Policy”) provides the mechanism for a discount rate reduction when investment performance significantly outperforms the discount rate. The parameters set out in the Funding Risk Mitigation Policy also provide for the threshold amount required – the actual investment return in excess of the discount rate needed to lower the discount rate. This policy, if adopted, may result in increases in employer contributions and member contributions over time. The District cannot predict whether the Funding Risk Mitigation Policy will be adopted and what, if any, effects such policy would have on its contributions to CalPERS in future years.
Below is the overall impact to the District expenditures based on the planned employer increase in STRS and PERS combined: