History of STRS Funding

AB 8 of 1979 (Chapter 282, Statutes of 1979) established a mechanism to reduce the unfunded liability of the Teachers’ Retirement Fund. First, AB 8 amended the state’s limited-term appropriation of $144.3 million for 30 years to a perpetual appropriation which was cumulatively increased or decreased beginning with the 1980-81 fiscal year by an amount which reflects the change in the California CPI. The second component was an ever-increasing appropriation of $10 million in 1980-81 graded-up to $280 million in 1994-95. The $280 million would then be indexed by the California CPI starting in 1994-95.

This funding mechanism was changed by SB 1370 (Chapter 460, Statutes of 1990), which enacted the Elder State Teachers’ Retirement Full Funding Act. Elder Full Funding was enacted to provide a state general fund funding mechanism to fully fund the Teachers’ Fund within a reasonable time frame (45 years). Specifically, under Elder Full Funding, an amount equal to 4.3 percent of the prior year statewide member payroll is appropriated to the Teachers’ Retirement Fund to meet the normal cost deficit, and to reduce the unfunded liability of the fund. Elder Full Funding further provides that the funding percentage shall be adjusted to reflect the contribution required to fund the normal cost deficit when the unfunded actuarial obligation has been deemed to be eliminated by the board. If a rate increase or decrease is required, the adjustment may be for no more than 0.25 percent per year and in no case may the transfer exceed 4.3 percent of payroll.

Elder Full Funding statutes also stipulate that the state General Fund appropriation shall not be applicable to any unfunded liability resulting from any benefit increase or change in contribution rate that occurs after July 1, 1990.

The June 30, 1997 valuation of the Defined Benefit Plan (DB Plan) concluded that the retirement fund was 97.3 percent funded with only a three-year amortization period remaining. Therefore, STRS would expect to be fully funded by June 30, 2000, assuming all assumptions used in the current valuation are realized. In addition, STRS no longer has a normal cost deficit.

Elder Full Funding states that upon achieving full-funding, the state General Fund appropriation cannot be adjusted by more than 0.25 percent per year regardless of whether a normal cost deficit exists or not. Consequently, under Elder Full Funding, once the unfunded actuarial obligation is eliminated, and if there is no normal cost deficit, the General Fund appropriation as a percentage of payroll will begin to decline by 0.25 percent per year.

Under the proposal, the unfunded liability of the retirement fund would be refinanced over the 30-year period beginning July 1, 1997. This will reduce the 1998-99 General Fund contribution from $657 million to $80 million. In addition, beginning in 1999-2000, 65 percent of the Elder Full Funding would continue to be appropriated each year into the retirement fund in order to finance increased benefits that take effect Jan. 1, 1999.

Source: STRS

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