PA 07-186—sHB 6141
Finance, Revenue and Bonding Committee
AN ACT CONCERNING ADEQUATE FUNDING OF THE TEACHERS' RETIREMENT SYSTEM
SUMMARY: The act authorizes enough state general obligation (GO) bonds to fund (1) $2 billion of the unfunded liability of the Teachers' Retirement System (TRS), (2) the cost of issuing the bonds, and (3) up to two years of interest on the bonds. It exempts the bonds from the state's debt limit. The maximum bond term is 30 years.
For each fiscal year in which the bonds are outstanding, the act automatically appropriates the actuarially required annual state contribution to the Teacher's Retirement Fund (TRF). It allows the state to reduce annual TRF contributions only if (1) it protects bondholders' rights in another way or (2) the governor declares an emergency or extraordinary circumstances, a supermajority of the legislature approves, and the reduction does not cause the TRF's funded ratio (assets versus liabilities) to fall below specified levels.
The act makes all TRS benefits contractual for all vested TRS members while the bonds are outstanding, thus barring the state from unilaterally reducing benefits during that time. Certain specified TRS benefits are already contractual for active teachers who were vested in the system on October 1, 2003 or who become vested or accumulate 10 years of credited service after that date.
The act eliminates the cost of living adjustment reserve account (CLARA) within the TRF and credits all CLARA's assets to the TRF. CLARA was used to fund annual cost of living adjustments (COLAs) for TRS members who retired on or after September 1, 1992 and their surviving beneficiaries. Under prior law, CLARA was funded by allocating to it any total annual TRF returns above 11. 5%.
The act guarantees TRS members who retire on or after September 1, 1992 an annual COLA by eliminating a provision that barred TRS from paying them a COLA in any year that TRS actuaries determined CLARA did not have enough money to pay for it. The act also reduces promised retirement COLAs for members who join TRS on or after July 1, 2007.
Finally, the act automatically appropriates all the GO bond premiums the state receives from July 1, 2007 through June 30, 2009 for GO bond debt service in addition to budgeted debt service appropriations. Under the act, premium funds do not lapse at the end of those fiscal years and the treasurer can use them for debt service unless she determines they are no longer needed for that purpose. The treasurer usually deposits any bond premiums in the General Fund's debt service account. (A premium is an amount a bond purchaser pays for a bond that exceeds its face value. Buyers typically pay a premium to receive an above-market interest rate on a bond. )
EFFECTIVE DATE: July 1, 2007
The act authorizes the State Bond Commission to allocate the amount of state GO bonds, with a maximum term of 30 years, needed to fund the act's purposes. The state must use the bond proceeds to pay $2 billion of the TRS' unfunded liability plus the bond issuance costs and up to two years of bond interest. TRS' unfunded liability is its actuarially determined pension liability for service before the determination date minus the assets in the TRF.
Before the bond commission can authorize the bonds, it must receive:
1. a signed request for a bond authorization by, or on behalf of, the Office of Policy and Management secretary containing any terms and conditions the commission requires and
2. a written determination from the secretary and the state treasurer that issuing the bonds is in the state's best interest.
Exemption from State Debt Limit
The act exempts the bonds from the state's debt limit law and related certifications. That law limits the total amount of General Fund-supported state debt the General Assembly can authorize to 1. 6 times the net General Fund tax receipts for the fiscal year of the authorization. Before the General Assembly may pass any bond act, the state treasurer must certify that it will not cause the state to exceed the debt ceiling. A similar certification is required before the bond commission can authorize new bonds.
Bond Proceeds and Net Premium
The act requires the bond proceeds and any investment earnings on them, minus issuance costs, to be deposited in the TRF. It requires the treasurer to invest those proceeds according to the statutory requirements for investing state trust funds. The proceeds must be used, along with TRS member contributions and General Assembly appropriations, to pay teacher retirement benefits. The act requires any net premium the state realizes on the sale of the bonds to be used to pay debt service on them.
Annual State Contribution to the TRF
For each fiscal year in which any TRS bonds or any bonds refunding them remain outstanding, the act establishes an automatic General Fund appropriation for the state's required annual contribution to the TRF, as determined by the fund actuaries and certified by the Teachers' Retirement Board and state comptroller. The annual appropriation must be allotted quarterly on July 15, October 1, January 1, and April 1.
State Commitments to Bondholders
The act promises, and authorizes the state treasurer to promise bondholders, that the General Assembly will not pass any law to diminish the state's required contributions until the bonds are paid off except (1) when the state makes other provisions to protect bondholders' rights or (2) in an emergency or extraordinary circumstance, provided certain conditions are met (see below). The act makes this promise contingent on the TRS actuaries certifying the state's annual contributions as required by law.
Emergency Reduction in State Contribution
The act allows the state to reduce its actuarially required annual TRF contribution while the bonds are outstanding if certain conditions are met. It also places limits on the amount of any reduction.
Before any reduction can occur, all of the following conditions must be met.
1. The governor must declare an emergency or the existence of extraordinary circumstances. The act specifies that an extraordinary circumstance can be a change in the actuarial methods or accounting standards used to value the TRF that results in a significant increase in the state's required contribution.
2. The governor must invoke the statute that (a) gives her discretion, and (b) requires her whenever the comptroller projects a General Fund budget deficit greater than 1%, to reduce appropriated accounts by up to 5% and total fund appropriations by up to 3%.
3. At least three-fifths of the members of each house of the General Assembly must approve the reduction.
4. TRF's funded ratio (actuarial value of TRF assets over its liabilities) must be at least as high as it was immediately after the sale of the TRS bonds.
Once these conditions are met, the act allows the state to reduce its actuarially required contribution within certain limits. The limits are that the reduced contribution may not lower TRF's funded ratio more than (1) 5% below what it would have been if the full contribution had been made or (2) its funded ratio immediately after the TRS bond sale, whichever is greater.
TEACHER BENEFITS UNDER TRS
While the TRS bonds are outstanding, the act makes all TRS benefits for all members contractual. By doing so, it bars the state from unilaterally diminishing TRS benefits during the bond term. The act specifies that it does not grant members any vested rights to TRS benefits until they meet the TRS vesting requirements in effect when the bonds are issued.
Certain TRS benefits were already contractual for active teachers who were vested in TRS as of October 1, 2003 or who vest or accumulate 10 years of service in TRS on or after that date. Prior law already barred the General Assembly from diminishing statutory TRS retirement provisions concerning credited service; retirement and survivors' benefits eligibility; benefit formulas, payment schedules, and cost of living allowances; death and survivors' benefits; and disability benefits. The act extends the contractual benefits to cover voluntary contributions, benefit payment options, and reemployment benefits, among others.
Both the prior law and the act exclude retired teachers' health coverage and health coverage contributions and annual state contributions to the TRF from the TRS contractual benefits.
COST OF LIVING ADJUSTMENTS
Under prior law, COLAs for TRS members who retired on or after September 1, 1992 and their surviving beneficiaries were paid from the CLARA account, which was a separate TRF account. CLARA was funded by allocating to it any part of the total return on the fund's pension assets for the preceding year that exceeded 11. 5%. On May 1 each year, the fund actuaries determined how much of a COLA the CLARA account could support. If they determined there was not enough money, no COLA would be paid. (This never actually happened and COLAs were paid every year. ) The act eliminates both CLARA and the no-COLA possibility and transfers CLARA's assets to the TRF on July 1, 2007.
COLAs for TRS Members Who Retire On or After 9/1/92
Under prior law, TRS members who retire on or after September 1, 1992 and their surviving beneficiaries were eligible for an annual benefit COLA only if the TRS actuaries determined the CLARA account could pay for it. If there was not enough money to pay the full COLAs, the COLAs were to be proportionately reduced or eliminated.
The act repeals the actuarial certification and proportional COLA reduction requirements and thus guarantees annual COLAs for these retirees. It keeps the existing COLA calculation for these members, which is a COLA equal to the Social Security benefit COLA, but no more than 6%, or, if the total return on the TRF's assets was less than 8. 5% in the previous year, no more than 1. 5%.
COLAs for New TRS Members
The act reduces promised retirement COLAs for members who join TRS on or after July 1, 2007. For these members, TRS retirement COLAs will be the Social Security benefit COLA subject to a three-tier maximum based on annual TRF earnings. If total fund returns for the preceding year are less than 8. 5%, the maximum COLA is 1%; if returns are between 8. 5% and 11. 5%, the maximum COLA is 3%; and if returns are more than 11. 5%, the maximum COLA is 5%.
Teachers' Retirement System
The TRS is a state-funded, defined benefit retirement system for professional employees working in Connecticut public schools. It covers employees who (1) hold positions requiring a teaching certificate or permit issued by the State Board of Education, (2) hold the appropriate certification for their position, and (3) are employed at least half-time. It offers normal, proratable, and early retirement after a 10-year vesting period. TRS members are not covered by Social Security for their TRS service, and TRS benefits are not coordinated with Social Security. The TRS is administered by a 12-member Teachers' Retirement Board.
OLR Tracking: JSL: SS: PF: dw