SAN FRANCISCO — California legislation that increases the contribution rate to the California State Teachers' Retirement System' took effect this week, and Moody's Investors Service called it a credit positive for the system.
The bill, which took effect July 1, increases the contributions school districts, teachers and the state government pay into the CalSTRS fund.
Contribution rates for CalSTRS members will increase from 8% to 8.15% of payroll during the first fiscal year. Employer contributions are currently at 8.25% and will gradually increase by an additional 10.85% over the next seven years, for an eventual total of 19.1%.
"The bill, AB 1469, is credit positive for CalSTRS because it sets a clear path to shore up CalSTRS' funding gap — nearly $74 billion as of June 30 2013 — over the next thirty years," Moody's analysts said in a report.
California school districts will stomach the biggest increase under the bill, with aggregate annual contributions rising to roughly $6 billion from $2.2 billion. The increase will be phased in over seven years.
Annual contribution rates from the state and teachers will increase in phases over three years. The state's CalSTRS annual contributions will increase to $2.1 billion from $1.2 billion, while teachers' contributions will increase the least, to $2.88 billion from $2.25 billion.
"Passage of the CalSTRS' funding plan is an important step for the pension fund's financial health, because without a rate increase, CalSTRS would have depleted its $184 billion investment portfolio by 2046," Moody's said.
CalSTRS funds ongoing pension benefit payments through new contributions and earnings on its investment portfolio.
Higher contribution rates will go a long way toward improving CalSTRS' ability to meet future pension benefit payments, which stood at 66.9% as of fiscal year-end 2013, Moody's said.
Unlike its sister fund California Public Employees Retirement Fund, CalSTRS requires legislative approval to impose rate increases on its members and member agents. Previous recommendations to address the system's funding gap with rate increases were not met with approval by the governor and state legislators.
AB 1469 now allows the CalSTRS' retirement board limited contribution rate-setting authority for contributions.
Another provision of the new bill is a requirement that CalSTRS submit a funding status report to the Legislature every five years to ensure the plan continues to sustain an appropriately funded benefit program.
According to CalSTRS, it is the largest educator-only pension fund in the world, with a portfolio valued at $184.8 billion as of May 31.
CalSTRS provides retirement, disability and survivor benefits for California's 868,000 public school educators and their families from the state's 1,600 school districts, county offices of education and community college districts.
CalSTRS members don't participate in Social Security.
