Important Notice Regarding the Retiree Cost-of-Living Adjustment (COLA) – 2007

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The retiree cost-of-living adjustment (COLA) is governed by Section 31870 of the County Employees ‘ Retirement Law of 1937 (1937 Act). Under that section, the SCERS Board must determine the appropriate COLA for SCERS retirement benefits and implement that COLA on April 1st each year. Pursuant to the law, the COLA is based on the annual change in the U.S. Department of Labor, Bureau of Labor Statistics Consumer Price Index (CPI) for All Urban Consumers for the San Francisco-Oakland-San Jose area. The law requires that this change be rounded to the nearest one-half percent.

SCERS performs the calculation of the cost-of-living increase. In making this calculation, SCERS compares the average annual CPI for the calendar year just ended with the average annual CPI for the preceding calendar year, and not the end-of-year CPI for the two years. Thus, to determine the COLA effective April 1, 2007, SCERS compared the average annual CPI for 2005 and 2006, not the December 2005 CPI compared to the December 2006 CPI. The average annual CPI is often slightly different than the year-end CPI, but over time the two measures produce virtually identical results.

Determination of the COLA is not based on simple subtraction of the average annual CPI for 2005 from the average annual CPI for 2006. Instead, the COLA is based on the ratio of the two average annual CPIs. This is done because the actual CPI number is a measure of how much consumer prices have changed relative to a designated ‘base period’ (the current base period is 1982-1984). In order to measure the amount of change from year to year, as opposed to the amount of change from the base period, SCERS must use the ratio of the two average annual CPI numbers. Put another way, via the ratio, 2005 becomes the base year for measuring the increase in the cost-of-living in 2006. 

The U.S. Department of Labor statistics on cost-of-living for the San Francisco-Oakland-San Jose area can be found here. The chart on that page shows that the average annual CPI for 2005 was 202.7 and the average annual CPI for 2006 was 209.2. The ratio of these two annual average CPIs shows an increase of 1.032% from 2005 to 2006. This results in a base COLA of 3% when rounded to the nearest one-half percent, as required by the law.

The actual COLA that a person receives is dependent upon the individual’s tier and date of retirement, and includes consideration of whether the individual has any accumulated carry-over in his/her ‘COLA Bank.’ A person accumulates a balance in his/her COLA Bank if the actual cost-of-living increase for a year is greater than the maximum annual COLA authorized for the person’s tier by the 1937 Act. For example, the maximum annual COLA for a Tier 3 Miscellaneous member is 2%. If the actual cost-of-living increase for the year was 3%, the Tier 3 member would get a 2% COLA and accumulate 1% in his/her COLA Bank. The balance in the COLA Bank would then be applied the next time the actual cost-of-living increase for the year was less than the annual maximum COLA. Accordingly, if the actual cost-of-living increase the next year was 1%, SCERS would add the 1% balance in the COLA Bank to the 1% COLA for the year, resulting in a total COLA of 2%. The balance in the COLA Bank would be reduced to zero.

Because of accumulated balances in their COLA Banks, Tier 1 members (both Miscellaneous and Safety) who retired on March 31, 1981 or earlier will receive a COLA of 4% effective April 1, 2007. Tier 1 members who retired on or after April 1, 1981 will receive a 3% COLA. Miscellaneous Tier 3 members and Safety Tier 2 members will receive a 2% COLA. COLA’s for 2007 will be reflected in direct deposits and checks issued on April 30, 2007.

The determination of the retirement benefit COLA is separate and apart from the determination of any salary cost-of-living increase for active employees. The retirement benefit COLA is determined by the SCERS Board, while a salary adjustment for active employees is determined by the Board of Supervisors. In addition, determination of the salary adjustment for active employees is not controlled by the 1937 Act and thus can be based on different cost-of-living benchmarks, which can result in a larger salary adjustment than the retirement benefit COLA. 

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