In relation to applicable interest rate for calculating certain benefits provided by the New York state teachers' retirement system

BILL NUMBER:S4006

Title of bill

An act to amend the education law and the retirement and social security law, in relation to the applicable interest rate for calculating certain benefits provided by the New York state teachers' retirement system

Purpose

To authorize the New York State Teachers' Retirement System to use the average annual rate on the ten-year United States treasury obligations in calculating certain benefits.

Summary of provisions

This bill would amend Section 537 of the Education Law and Sections 517-b and 613-a of the Retirement and Social Security Law and would authorize the System to use the average annual interest rate on the ten-year United States treasury obligations for the days during the calendar year that preceded the calendar year in which the retirement becomes effective for the purposes as set forth in said provisions.

Justification

In duly administering the statutes since 2004, it has become apparent an issue for the membership arises due to the inverse relationship between interest rates and lump sum benefits; that is, as interest rates decrease, benefits increase, or vise versa. The current statute requires the interest rate to be calculated on the rate of the ten-year United States treasury obligations as of January 1. This bill is necessitated by the fact that the law specifies a single day of the year to calculate factors that will be used for the entire year and this is subject to uncertainty The amendments proposed by this bill will dampen the effect of volatility by providing for the use of the average annual rate of the ten-year United States treasury obligations instead of the rate on a single day.

Amending the statute to use the annual average for the days during the calendar year that precedes the calendar year in which retirement becomes effective provides the membership with the ability to know the interest rate for the purposes of the de minimis lump sum benefit. Consistent with the other statutory provisions, corresponding amendments are proposed for the loan default calculations. Just as smoothing of assets diminishes the volatility of the employer contribution rate, an average annual interest rate used in the calculation of lump sum benefits will mitigate the swings in the level of lump sum benefits.

The implications of this interest rate will commence on January 1, 2016.

Existing law

Current statutes require the System to use the interest rate on the ten-year United States treasury obligations in making certain benefit

calculations. Specifically, in implementing requests by eligible members entitles to de minimis benefits to take a lump sum benefit in lieu of a lifetime benefits, the System is governed by Section 537 of the Education Law. Additionally, pursuant to Sections 517-b and 613-a of the Retirement and Social Security Law, the System is required to calculate the actuarial reduction in the respective lifetime retirement benefit of Tier III through Tier VI members who have failed to repay their member loans in full at the time of retirement.

Legislative history

This is a new bill.

Fiscal implications

The annual cost to employees of members of the New York State Teachers' Retirement System is estimated to be negligible.

Effective date

This act shall take effect on June 30, 2015 or immediately if it has become law on or after June 30, 2015. The implications of this interest rate will commence on January 1, 2016.