Impacts of AB 340 on CalSTRS Members California Public Employees’ Pension Reform Act of 2013

Comprehensive Hybrid System Before we discuss any pension reform changes it is important to review what you currently have. CalSTRS administers a hybrid plan as part of a comprehensive financial security system. That hybrid plan includes: A traditional defined benefit plan that bases your monthly pension on a formula set by law. That formula uses your age at retirement, years of service credit and highest average salary. CalSTRS also includes a cash balance plan, the Defined Benefit Supplement Program. This acts like a 401(k) but also has a minimum earnings guarantee. We also offer a defined contribution plan called Pension2, which is a voluntary personal wealth plan for members. This is what you have now.

What is the Current Benefit Program? For full-time and electing part-time educators Defined Benefit Program Formula-based benefit Age at retirement Years of service (up to one year annually) Service credit can be enhanced through purchases of service credit or unused sick leave Final compensation (one year or three year highest)

What is the Current Benefit Program? Defined Benefit Supplement Benefit based on contributions and guaranteed interest credited to account Contributions paid on compensation for more than one year of annual service Limited-time compensation Pension2

What is the Current Benefit Program? For electing part-time educators (adjunct faculty) Cash Balance Benefit Program Similar to DBS Program No service credit Contributions at least equal to 8 percent on all creditable compensation Benefits payable as lump sum or monthly annuity Pension2

Pension Reform Impact What changes apply to current CalSTRS members and retirees? When will the changes take place? I’m here to discuss the impact of pension reform on CalSTRS members both current and future new: CalSTRS receives a lot of questions about the reform changes which will be answered as we explore all the provisions of AB 340. First however, we are going to briefly review the current benefits structure. Next we’ll cover the impact of changes to new members first hired to perform CalSTRS creditable activities on or after Jan. 1, 2013. The reason being is that the majority of changes under AB 340 apply mostly to new members. We will then explore the changes that apply to current members and retirees. Feel free to ask questions as we go along, but keep in mind there will be a Q and A at the end of the presentation. If you have specific questions about the law that go beyond my ability to answer, I’ll make sure to get you an answer from our legal staff.

Assembly Bill 340 Approved 9/12/ 2012 Governor Brown approves Assembly Bill 340 California Public Employees‘ Pension Reform Act of 2013 (PEPRA) Takes effect 1/1/ 2013 Impacts current and new CalSTRS members On Sept. 12, 2012 Governor Brown approved signed Assembly Bill 340 which is also called the California Public Employees’ Pension Reform Act of 2013. The bill takes effect on Jan. 1, 2013. As mentioned in the last slide, the bill does apply to both current and future new members but the impacts are different and most of the provisions apply to new members. Let’s first examine who is a new member and the benefits structured for future those new members under AB 340.

New Members New Members are subject to the new benefit structure New members: Individuals who are first hired to perform CalSTRS creditable activities on or after January 1, 2013

Current Members Current Members are subject to the existing benefit structure Current members: Individuals who are first hired to perform CalSTRS creditable activities on or before December 31, 2012. This includes those who: Were CalSTRS members before 2013, terminated membership, and return to active membership on or after January 1, 2013 Performed CalSTRS creditable activities even if they were subject to coverage under a different retirement system Other retirement systems include Social Security, PARS, etc.

Current Members continued Potential clean-up legislation in early 2013 may expand who is considered a current member to: Individuals who were first employed by a public employer to perform service subject to coverage in a concurrent retirement system on or before December 31, 2012 These individuals must have been employed to perform creditable service in the concurrent retirement system within the last six months Concurrent retirement systems include: CalPERS Legislators’ Retirement System University of California Retirement System San Francisco Employees’ Retirement System Those systems established under the County Employees’ Retirement Law of 1937

Equal Share of Pension Costs Applies to New Members New member contribution rate based on greater of either: At least 50 percent of normal cost of new plan, or Current member contribution rate Future New members will be required to pay at least 50 percent of the normal cost of benefits or the current contribution rate, whichever is greater. It also calls for the contribution rate to be rounded to the nearest quarter percent. The new member contribution rate will be adjusted following each valuation if the normal cost increases or decreases by more than one percent. A higher new member contribution rate can be agreed to through collective bargaining. Right now current members pay an 8 percent contribution rate, which is set in statute.

Equal Share of Pension Costs continued Employer contribution rate is at least the normal cost minus the member contribution rate Under the law, the Teachers’ Retirement Board must establish the normal cost of the new benefit plan The employer contribution rate is at least the normal cost minus the member contribution rate. Under the law, the Teachers’ Retirement Board must establish the normal cost of the new benefit structure, and they will be considering a board item at their regular meeting tomorrow afternoon or Friday. The item explains that the intent of the Legislature is unclear since the board has not had the authority to set contribution rates in the past. Legislative staff indicate that urgency legislation will be considered early next year to clarify these provisions of the law. Staff recommendations are to adopt a normal cost of 15.9% effective January 1, 2013, and to establish the contribution rates at the level currently established in statute until the Legislature has an opportunity to clarify the legislation.

Retirement Age & Age Factor Changes Applies to New Members Normal retirement age increases to age 62 with a 2% age factor Minimum retirement age increases to age 55 Maximum age factor increases from 63 to 65 Eliminates the career factor For new members, AB 340 changes the normal retirement age from 60 to 62 with a 2 percent age factor It also changes the age factor for early retirement at age 55 with five years of service from 1.4 percent to 1.16 percent The maximum age factor now becomes 2.4 percent at age 65 as opposed to 2.4 percent at age 63 Originally, the Governor proposed in his 12 point plan an increase in retirement age to 67. The career factor under the new law is eliminated for new members, as well.

Current and New Age Factors Generally, it will take two additional years for new members to reach the same age factor available to current members.

Creditable Compensation Cap Applies to New Members Compensation cap equal to 120% of 2013 Social Security wage base 2013 cap equals $136,440 Adjusted annually - Consumer Price Index No defined benefits (including DBS) on compensation above cap Employers can offer DC plan for compensation above the cap. This provision places a cap on compensation used to calculate a defined benefit and is an effective anti-spiking tool. For new members the compensation cap will be equal to 120 percent of the 2013 Social Security wage base. Right now that’s estimated to be about $136,000. The cap equals $136,440. Every year following 2013 Each year, this number will be adjusted using the CPI for All Urban Consumers. Any income above this cap does not count toward final compensation that figures into a member’s pension benefit. Employers can offer a defined contribution plan for contributions on compensation above the cap. The Teachers’ Retirement Board is looking into what defined contribution plans CalSTRS can offer to these members.

Creditable Compensation Defined Applies to New Members Only salary paid on salary schedule counts toward CalSTRS benefit Excludes allowances, bonuses, cash in-lieu payments Three-year final compensation No Replacement Benefits Program Another anti-spiking tool is found in the provision that calculates benefits for new members based on regular, recurring pay. What counts toward pay is a salary based on a publicly available salary schedule. If pay is not a part of the regular salary schedule, that pay will not count toward any retirement benefit. This excludes allowances, bonuses, cash in-lieu of fringe benefits, limited-period compensation and compensation determined to have been paid for the purposes of enhancing a benefit. The final compensation period will be based on the three years highest three consecutive years for all new members regardless of their years of service. Current members with more than 25 years of service credit can use a single year for compensation that factors into a pension benefit, but this is going away for new future members. The Replacement Benefits Program is eliminated for future new members.

Postretirement Employment Applies to Current and New Members AB 178 increased postretirement earnings limit Earnings limit for 2012-13 is $40,011 Based on 50% of average final compensation vs. 50% of average active member’s salary Some third-party contract employees excluded We’ll move now to parts of the AB 340 that apply both current and future new members. The first is the postretirement earnings limit. To discuss this, I’d also like to cover another recently passed bill which is AB 178. AB 178 increased the earnings limit from about $32,000 to $40,011. It’s a change in formula that used to be based on half the average member’s salary to what is now effectively half of the average final compensation for recently retired members. Another change continued from AB 178 is the third-party exclusion. Retired members employed by a third party are excluded from the postretirement earnings limit and related provisions if they meet specified criteria. The criteria include: 1) the third party does not participate in a California public pension system, 2) the activities performed by the retired member are not normally performed by the employees of an a CalSTRS employer, and 3) the activities are performed for a limited term. CalSTRS has not identified any example of service that would meet these criteria.

Postretirement Employment Applies to Current and New Members Narrow exemption in AB 178 extended through 2013-14 Applies to appointments with financially or academically distressed schools Adds restrictions based on the receipt of retirement incentives AB 178 also included a very narrow exemption from the earnings limit for certain appointments to assist schools that are in financial or academic distress. AB 340 extends this exemption through 2013-14. AB 340 prohibits the exemption from being used by a person who has received a retirement incentive or any financial inducement to retire from a public employer in the previous six months.

Postretirement Employment Applies to Current and New Members AB 340 expands $0 earnings limit for the first 180 days after most recent retirement to all members, regardless of age Members at or above normal retirement age are subject to the $0 earnings limit if their most recent retirement date is on or after January 1, 2013 One significant change in AB 340 for both current and future new members is that the $0 earnings limit is applied expanded to all members regardless of age for the first 180 days (or approximately 6 months) after their most recent retirement. This is also called the separation-from-service requirement. There is no change to the current separation-from-service requirement for members under normal retirement age. The expansion of the $0 dollar limit applies to all members who have a benefit effective date on or after January 1, 2013. Members at or above normal retirement age retiring through December 31, 2012, will not be affected. If a member reinstates and re-retires in the future, after January 1, 2013, the $0 limit will apply for the first 180 days after his or her most recent retirement.

Postretirement Employment Applies to Current and New Members Narrow exemption from $0 earnings limit granted for critical vacancies Must be at or above normal retirement age Governing body approval thru resolution at public meeting No retirement incentive or financial inducement to retire from any public employer Termination of services not a factor in hiring justification If a member is at or above normal retirement age, the separation-from-service requirement does not apply if: 1) the governing body of the employer (such as a school board) approves the appointment through a resolution adopted at a public meeting, 2) the member did not receive a retirement incentive or any financial inducement to retire from a public employer, and 3) the member’s termination of service is not the cause of the need to acquire the member’s services.

Airtime Purchases Prohibited Applies to Current and New Members Nonqualified service credit or “airtime” purchases prohibited effective 1/1/2013 Request to purchase must be received prior to 5 p.m., 12/31/2012 Does not affect purchase of other service credit or redeposits No change in crediting of unused sick leave Another important change that applies to all members is the elimination of airtime purchases received after December 31, 2012. First, you must be vested in order to purchase airtime. Your request must be received by CalSTRS by 5:00 p.m. on December 31, 2012. You do not need to complete the purchase prior to January 1, 2013. You will be able to select from the normal payment plans based on your employment status as long as your request is received prior to 5:00 p.m. on 12/31/12. Otherwise all requests to purchase airtime received after this date will be denied. Purchases of other service credit and redeposits are not affected.

Forfeitures & Benefit Prohibitions Applies to Current and New Members Forfeiture of benefits for work-related felony convictions Employer and member must notify CalSTRS within 90 days of the conviction. No retroactive benefit enhancements No pension holidays The last provisions of AB 340 deal with the forfeiture of benefits and prohibition of retroactive benefit increases and pension holidays. If a member commits a felony and is convicted, he or she will forfeit the benefit accrued after the first commission of the felony. This applies to members carrying out official duties in seeking an elected office or appointment. The member can keep their benefit earned prior to the commission of the felony but not after. The employer and the member must notify CalSTRS within 90 days of the conviction. Going forward no retroactive benefit enhancements will be applied. And finally, no pension holidays will occur, which is something CalSTRS does not participate in because our contribution rates are fixed in statute.

Impact of AB 340 on Adjunct Faculty No provision individually applies to adjunct faculty Unused sick leave continues to convert to service credit If first hired to perform service subject to CalSTRS before 2013, subject to rules in effect for existing members Current benefit formula Current determination of final compensation Currently creditable compensation

Senate Concurrent Resolution 105 Establishes framework for development of a funding plan Directs CalSTRS to work with stakeholders Develop 3 options & submit to Legislature by Feb. 15, 2013 Legislature intends to address funding in 2013-14 session One additional legislative vehicle that concerns CalSTRS most significant reform issues was also recently passed, which is Senate Concurrent Resolution 105 SCR 105 as approved by the Legislature on on August 31, 2013 2012 The resolution establishes a framework for development of a funding plan and directs CalSTRS to work with affected stakeholders to develop three alternative plans as requested in the resolution. As stated in the resolution, the plans will consider gradual, incremental increases in contributions to address the long-term funding needs of the Defined Benefit Program. Once completed, CalSTRS will submit the plans to the Legislature early next year as outlined in the resolution. The Legislature has expressed its intent to address the long-term health of the fund in the 2013-14 legislative session. We are hopeful a funding solution will be addressed.

We’re looking ahead for you. But also remember our past– CLOSING We’ve embraced new technology, such as social media, to help you with the important questions you might have about your benefits and your retirement system. We’re looking ahead for you. But also remember our past– For nearly 100 years CalSTRS has provided retirement security for generations of California educators. Never missed a payment—even during the Great Depression. In these challenging fiscal and political times, look to your trusted retirement system for answers. You can count on CalSTRS now and in the future. 25