Administrative Bulletin No. 2002-10

Subject:   Employer Contribution Rate to be PAID
                During the 2004-05 School Year

To:  Chief School Administrators                        Date:  November 2002
        College and University Presidents
        School Principals

Employer Contribution Rate to Increase

The required employer contribution rate (ECR) is determined annually through an actuarial valuation of the Retirement System’s assets and liabilities. The ECR has decreased dramatically in the last two decades, even with recent substantial benefit improvements. The ECR has been less than 1% of member salaries for the past three fiscal years, and less than 2% of salaries for the last six fiscal years. The substantial decline in the ECR is primarily the result of investment returns significantly greater than anticipated. High rates of investment return earned in the 1980’s and 1990’s caused the employer contribution rate to decrease to historically low levels.

As you are aware, rates of return in the capital markets have been unfavorable in recent years, and negative over most of the past three years. Although the assets of the Retirement System are prudently diversified and the asset valuation method employed in the actuarial valuation dampens market volatility, the poor return of the capital markets will require a dramatic increase in the ECR. For budgeting purposes, we recommend you use an estimated ECR of approximately 21/2 % of pay. This rate will be applied to fiscal year 2003-04 STRS member salaries, and collected in September, October, and November of 2004. A more refined estimate of the ECR will be provided in an Administrative Bulletin in early February 2003.

In subsequent years, the ECR will continue to increase. Although forecasting an exact ECR is impossible, you should plan on this continued upward trend for the ECR.

It is important to note that the new entrant employer rate, or the cost of our current benefit structure for new members joining the Retirement System, is approximately 12% of pay. This rate does not recognize recent asset gains. The ECR has not been as high as 12% in 15 years. This is primarily due to many years of asset performance significantly greater than anticipated. Unfortunately, recent capital market returns have been very disappointing.

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