CALIFORNIA LEGISLATURE STATE IA 95814 May 22, 2014 Senator Mark Leno, Chair Senate Budget Committee State Capitol, Room 5019 Sacramento, CA 95814 Dear Senator Leno, In January of this year, the Governor's budget proposed to hold stakeholder meetings in 2014-15 to develop a plan of shared responsibility between the Legislature, school districts, teachers and the pension system to achieve a fully funded, sustainable teachers? retirement system within 30 years. In the Governor?s January budget, it was anticipated that a solution could be reached this year, and that solution would be included in the 2015-16 budget. Throughout the year, the Senate Committee on Public Employment and Retirement and the Assembly Committee on Public Employment, Retirement, and Social Security have held numerous public hearings on the issue of the funding shortfall with an interest in addressing the shortfall with a comprehensive plan in the current budget year. For this and other reasons, we are pleased to see that the Governor?s May Revision includes a plan to address the shortfall in the current budget year. In holding our hearings, we discussed a variety of funding scenarios, carefully considering the issues of how much funding would be necessary, how responsibility for funding would be shared between the State, schools, and teachers, how increased contributions would be ramped up over a series of years, and when increased contributions would begin. Partially in response to the Governor?s stated intent in the January budget to postpone funding until 2015-16, we primarily looked at approving a plan for full funding this year with increased contributions beginning in 2015-16. We also heard from stakeholders that waiting until 2015-16 would be preferable from a budgeting perspective for both the schools and teachers. Based on our hearings and input from stakeholders, including groups representing teachers and employers, we approve of the Governor?s plan in concept and design as being consistent with the plans considered by our committees; however, we recommend the following modi?cations: 1) As a compromise between the idea of postponing employer contributions altogether until 2015-16 and the contribution increase recommended in the Governor?s plan, we recommend somewhat smaller employer contribution increases in the ?rst three years with contributions in years 4 and following being actuarially comparable to contributions required in the Governor?s plan. An attachment lays out this recommendation with actual contributions for the full funding plan. 2) We recommend that report to the Legislature at regular intervals on the ef?cacy of the plan and whether or not the funding plan needs amendment in order to meet its objectives. For this purpose, we recommend the following language to be included in the funding legislation: 22311.5. The board shall report to the Governor and the Legislature on or before July 1. on the ?scal status of the De?ned Bene?t Program. The report shall include the ratio of the actuarial value of assets to the actuarial value of liabilities as of June 30, and the proiected ratio of the actuarial value of assets to the actuarial value of liabilities as of June 30, 2046., based on the June 30, actuarial valuation and the then current economic and demographic assumptions underlying the De?ned Bene?t Program. The report shall also identify the adiustment required in the contribution rates charged in order to result in the actuarial value of assets equaling the actuarial value of liabilities as of June 30, 2046. 3) Based on statements that their systems are currently unable to increase member contributions differently for 2% at age 60 members and 2% at age 62 members, we recommend that the increase for both groups be 0.15% in 2014-15 with the intention that shall increase contributions for the 2% at age 62 members proportionally to the Govemor?s plan in following years when they have the ability to assess the two groups differently. The attached funding plan assumes this change as well as the change recommended in Recommendation 1, above. In all other aspects of the Governor?s funding plan we are in concurrence, and recommend approval. Sincerely, Senator Norma J. Torres, Chair Rob Bonta, Chair Senate Committee Assembly Committee CALIFORNIA LEGISLATURE STATE CAPITOL CALI 95814 May 22, 2014 Nancy Skinner, Chair Assembly Budget Committee State Capitol, Room 6026 Sacramento, CA 95814 Dear Skinner, In January of this year, the Governor's budget proposed to hold stakeholder meetings in 2014-15 to develop a plan of shared responsibility between the Legislature, school districts, teachers and the pension system to achieve a fully funded, sustainable teachers? retirement system within 30 years. In the Governor?s January budget, it was anticipated that a solution could be reached this year, and that solution would be included in the 2015-16 budget. Throughout the year, the Senate Committee on Public Employment and Retirement and the Assembly Committee on Public Employment, Retirement, and Social Security have held numerous public hearings on the issue of the funding shortfall with an interest in addressing the shortfall with a comprehensive plan in the current budget year. For this and other reasons, we are pleased to see that the Governor?s May Revision includes a plan to address the shortfall in the current budget year. In holding our hearings, we discussed a variety of funding scenarios, carefully considering the issues of how much funding would be necessary, how responsibility for funding would be shared between the State, schools, and teachers, how increased contributions would be ramped up over a series of years, and when increased contributions would begin. Partially in response to the Governor?s stated intent in the anuaiy budget to postpone funding until 2015-16, we primarily looked at approving a plan for full funding this year with increased contributions beginning in 2015-16. We also heard from stakeholders that waiting until 2015-16 would be preferable from a budgeting perspective for both the schools and teachers. Based on our hearings and input from stakeholders, including groups representing teachers and employers, we approve of the Governor?s plan in concept and design as being consistent with the plans considered by our committees; however, we recommend the following modi?cations: 1) As a compromise between the idea of postponing employer contributions altogether until 2015-16 and the contribution increase recommended in the Governor?s plan, we recommend somewhat smaller employer contribution increases in the first three years with contributions in years 4 and following being actuarially comparable to contributions required in the Governor?s plan. An attachment lays out this recommendation with actual contributions for the full funding plan. 2) We recommend that report to the Legislature at regular intervals on the ef?cacy of the plan and whether or not the funding plan needs amendment in order to meet its objectives. For this purpose, we recommend the following language to be included in the funding legislation: 2231 1.5. The board shall report to the Governor and the Legislature on or before July 1, on the ?scal status of the Defined Benefit Program. The report shall include the ratio of the actuarial value of assets to the actuarial value of liabilities as of June 304 and the proiected ratio of the actuarial value of assets to the actuarial value of liabilities as of June 30, 2046, based on the June 30, actuarial valuation and the then current economic and demographic assumptions underlying the De?ned Benefit Program. The report shall also identify the adiustment required in the contribution rates charged in order to result in the actuarial value of assets equaling the actuarial value of liabilities as of June 30, 2046. 3) Based on statements that their systems are currently unable to increase member contributions differently for 2% at age 60 members and 2% at age 62 members, we recommend that the increase for both groups be 0.15% in 2014-15 with the intention that shall increase contributions for the 2% at age 62 members proportionally to the Governor?s plan in following years when they have the ability to assess the two groups differently. The attached funding plan assumes this change as well as the change recommended in Recommendation 1, above. In all other aspects of the Governor?s funding plan we are in concurrence, and recommend approval. Sincerely, M/ma/?1 Rob Bonta, Chair Senator Norma J. Torres, Chair Assembly Committee Senate Committee