ACSA members have many questions regarding pension reform legislation moving in the Capitol. EdCal asked California State Teachers Retirement System Deputy Chief Executive Officer Ed Derman to answer some of those questions, presented here. Next week, we will have response from California Public Employees Retirement System officials.

Q. Retirement legislation is pending – including Senate Bill 1425, Assembly Bill 1987 and SB 919 – that would change public employee retirement benefits. What are the key concerns with these bills?

A. The only bill that affects CalSTRS members is SB 1425. Among the concerns members might have with the bill are:

• The bill would impose limitations in the increases in compensation that could count in final compensation.

• Compensation that is paid in addition to salary, such as auto allowances, would no longer count toward final compensation, but would be credited to the Defined Benefit Supplemental Program.

• Compensation earned in the public school service in the first 180 days after retirement would be offset by reductions in benefits, regardless of age.

Q. How does the calculation of retirement earnings change under these bills, particularly SB 1425?

A. Final compensation would be based exclusively on salary paid, and not other compensation such as auto allowances or performance bonuses. In addition, the amount of compensation increases that would count toward final compensation would be limited.

Q. If CalSTRS thinks someone may have “spiked” last year’s earnings, how would one go about demonstrating their final compensation did not include spiking?

A. It isn’t clear at this time whether the bill would allow crediting of compensation in excess of percentage limits even if it wasn’t done for the purposes of enhancing the benefit. As a result, at this point, CalSTRS has not developed procedures to allow the crediting of compensation that appears to be spiking.

Q. What if you change jobs within a district and receive a much higher salary before retiring? What if you go to another district and negotiate a higher salary?

A. It appears the author (of SB 1425) intends the limit to be imposed even if the person changed jobs within the same or different district.

Q. If a pension member is over 60 years of age and retires after Jan. 1, 2011, does that mean he or she is prohibited from working within the STRS or PERS systems for 180 days? What if he or she is under 60 years of age when they retire? Is there a waiver or exemption process for this requirement?

A. Under current law, beginning July 1, 2010, a retired member under age 60 who works in the public schools will have his or her benefit reduced by the amount they earn in the first six months of retirement or until he or she reaches age 60, whichever occurs first. This consequence of working after retirement would be extended to all retired members beginning July 1, 2011 under SB 1425.

In other words, the member is free to return to work, but there would be no net economic benefit of doing so for the first 180 days. There is no waiver or exemption under current law or as proposed.

Q. What does SB 1425 mean when it refers to class of employees? Can you give some examples?

A. Class of employees (a concept under current law) refers to a group of members who have similar duties, such as a group of teachers or a group of counselors. A superintendent would be considered a class of one, but SB 1425 would eliminate the concept of class of one, and impose special limitations on their final compensation.

Q. STRS has an annual earnings limit for retirees. What is that amount? Is that calculated on the fiscal year or on a calendar year? What happens if someone exceeds the earnings limit?

A. The earnings limit in 2010-11 will be $31,020. The limit is adjusted each year based on the average percentage increase in compensation paid to CalSTRS members in the prior year. Any earnings in excess of that amount are offset by a reduction in benefits paid.

Q. If a school district offered a Public Agency Retirement Services (PARS) Retirement Incentive this year, how do these bills impact that program?

A. If a member retires for any reason and under any incentive program, he or she will be subject to the limitations for working in the first six months as discussed earlier.

Q. What would the long-term fiscal effect on the state be if these bills pass?

A. There would be relatively modest net improvement in the funding status of the retirement plan, which could reduce long-term required increases in contributions paid by the state and/or school employer.

Q. Discuss the fairness issue here, since improvements have been put into place over the last 10 years to avoid spiking in STRS.

A. While spiking is not an issue at CalSTRS to anywhere the same degree as it is with other plans, there are always opportunities to artificially enhance final compensation. This bill would mitigate those opportunities to a degree. On the other hand, depending on how the bill is ultimately enacted, it also could limit the impact of other increases in compensation, such as from changes in employment, from being counted toward final compensation

Q. We understand there are lot of issues still in flux as these bills make their way through the legislative process. What do you hope to see mitigated in the proposals?

A. We need to clarify how the final compensation will be applied, and the extent to which those caps are rigid, or subject to change under specific circumstances.

ACSA Legislative Advocate Sal Villaseñor is working on the legislation and advises it could get modified prior to becoming law. However, the proposed six months break in service after retirement is nearly certain to remain. He can be reached at svillasenor@acsa.org.