CalSTRS board lowers discount rate; increases to contributions significantly less than from similar move by CalPERS
At its meeting today in San Diego, the board of the California State Teachers’ Retirement System voted to lower its “discount rate” (the assumed annual rate of return on the system’s investment portfolio over the 30-year actuarial period) from 7.5 percent to 7.0 percent. The board also approved adjusting its mortality assumptions, adding three more years to the average life expectancy of those drawing benefits from CalSTRS.
What to Expect as a Result of the Increase
As part of the funding plan passed in 2014 to cover a major shortfall and fully fund the system, CalSTRS employer contributions are slated to rise in each of the next four fiscal years, topping out and staying at 19.1 percent in 2021-22. CalSTRS employer costs are limited by state law and can go up slightly in 2021-22, but can only be increased by 1 percentage point.
With today’s approval of a 7.0 percent discount rate, employer contributions are likely to rise from 19.1 percent to 20.1 percent in 2021-22 and are likely to remain at that level.
When CalPERS lowered its discount rate in December, the only option it had in statute was to dramatically increase the employer contributions. Conversely, CalSTRS can go to the state – this authority was granted to CalSTRS by the California Public Employees' Pension Reform Act. CalSTRS is expected to increase the state contribution rate by approximately 0.5 percent each year for 10 years, while the employer contribution rate is expected to remain at 20.1 percent. CalSTRS materials indicate it could go to 20.25 in 2022.
While the lowering of the discount rate changes the 2016 valuation of the fund, CalSTRS has made assurances that it can get to 100 percent funded using their current authority and without employer contribution increases in excess of the maximum 20.25 percent, even at the newly-established discount rate of 7 percent.
It is also expected that there will be an increase in contributions for post-PEPRA employees (hired after Jan. 1, 2013); the increase could be as much as a half-percent and could be effective as early as July 1, 2017. The board slightly adjusted the actuarial recommendations to delay the 7.0 percent rate specifically for post-PEPRA employees until 2018 – a rate of 7.25 percent will be used for post-PEPRA employees in 2017. This move was made specifically for the purposes of moderating the initial impacts on employees hired after PEPRA went into effect.
This is a much “softer landing” for CalSTRS than for CalPERS. CSBA will report additional information from CalSTRS as a result of today’s board action as it becomes available. In response to comments made by CSBA during the meeting, the CalSTRS board indicated a willingness and inclination to further engage with school board members on the effects of the discount rate adjustment.
Click here for information on a webinar being held on Feb. 6 by CalPERS regarding its new discount rate, which was adopted by the CalPERS board in December.