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BENEFITS


COST-OF-LIVING INCREASES AND DECREASES

HOW COST-OF-LIVING INCREASES AND DECREASES ARE APPLIED TO LACERA ALLOWANCES

WHEN THE COST OF LIVING INCREASES

When the BOR determines that the cost of living has increased, it grants a Cost-of-Living Adjustment (COLA) that increases monthly allowances. According to the provisions of LACERA retirement plans, if the COLA percentage exceeds the maximum allowable, the excess percentage is accumulated to supplement future COLA benefits. The accumulated percentage carryover is known as the COLA Accumulation. The longer you have been retired (or receiving a survivor's allowance), the more COLA carryover you have accumulated.

LACERA uses the COLA Accumulation to offset any COLA decreases, as well as to fund the maximum increase allowable under each plan.

IF THERE IS NO CHANGE IN THE COST OF LIVING

If the CPI is unchanged from the prior year, no COLA adjustment (or zero COLA) will be granted. If this occurs, retirees/survivors would still receive the maximum allowable COLA increase, provided there is sufficient COLA Accumulation to fund it.

WHEN THE COST OF LIVING DECREASES

If the BOR were to determine, based on the CPI, that a COLA decrease was indicated, in most cases, a deduction to allowances would NOT be necessary. Furthermore, in most cases, LACERA would apply the maximum allowable increase to the allowances. This is because most retirees/survivors have a COLA Accumulation large enough to offset any negative COLA adjustment and to fund the maximum COLA increase.

It is important to understand that the law dictates a cost-of-living decrease may not reduce a member's or survivor's allowance to an amount less than the member/survivor received on the effective date of the allowance. Only past COLA increases could ever be subject to a decrease; the amount of your beginning allowance is guaranteed for life.

Should a negative COLA adjustment become necessary, LACERA would reduce the plan's COLA accumulation, rather than allowances, by the amount of the negative adjustment. Assuming sufficient COLA Accumulation remained, LACERA would apply the maximum percentage increase allowable to allowances. The increases would be funded through a corresponding reduction to the COLA Accumulation.

If there's enough COLA Accumulation to fund an increase in an amount less than the maximum allowable, LACERA will apply an increase equal to the amount of the COLA Accumulation.

A decrease to a retiree/survivor allowance could only occur if the retiree/survivor did not have a COLA Accumulation large enough to offset the percentage of the COLA decrease.*

EXAMPLE 1: Let's suppose the COLA adjustment for the year is a negative 1.5 (-1.5) percent. The chart below illustrates how this would apply to a Plan A retiree with a COLA Accumulation of 13.7 percent.**

EXAMPLE 1: HOW COLA ACCUMULATION WORKS
COLA Accumulation   13.7%
COLA Adjustment - (-1.5)
New Balance of COLA Accumulation = 12.2
Maximum Allowable COLA Increase - 3.0
New Balance of COLA Accumulation = 9.2%

In this example, even though the COLA adjustment is a negative percentage, the retiree/survivor would receive the maximum COLA increase allowable under Plan A.

EXAMPLE 2: This chart shows how a negative 1.5 (-1.5) percent COLA adjustment would affect a Plan D retiree with a COLA Accumulation of 2.2 percent.**

EXAMPLE 2: COLA ACCUMULATION CAN FUND A PARTIAL INCREASE
COLA Accumulation   2.2%
COLA Adjustment - (-1.5)
COLA Accumulation Remaining to Fund an Increase = 0.7%

Although Plan D allows a maximum increase of 2 percent, this retiree/survivor would receive an increase of 0.7 percent. The increase is limited to the percentage of COLA Accumulation available to fund it.

EXAMPLE 3: This chart indicates how a negative 1.5 (-1.5) percent COLA adjustment would impact a Plan A retiree with a 1.2 percent COLA Accumulation.**

EXAMPLE 3: COLA ACCUMULATION CAN'T COMPLETELY OFFSET A
NEGATIVE COLA ADJUSTMENT
COLA Accumulation   1.2%
COLA Adjustment - (-1.5)
Percentage Deducted from Allowance = (0.3)
Percentage of Adjustment Offset by Accumulation   1.2
Remaining Balance of COLA Accumulation = 0%

In Example 3, the retiree's/survivor's allowance would be reduced by 0.3 percent, rather than the full -1.5 percent of the COLA adjustment; the difference would be offset by the 1.2 percent COLA accumulation. This member's COLA Accumulation has been depleted.

As you can see, the COLA Accumulation provides a hedge against reductions to prior COLA increases. It also serves to increase retirees' and survivors' chances of receiving the maximum annual allowable COLA increase.

For information regarding financial or legal matters, consult a professional advisor. LACERA does not offer financial or legal advice. For information on your retirement account, call 800-786-6464 to speak with a LACERA Retirement Benefits Specialist.

*The law dictates a cost-of-living decrease may not reduce a member's or survivor's allowance to an amount less than the member/survivor received on the effective date of the allowance. Only past COLA increases could ever be subject to a decrease.
**Data also applies to survivors of members who died during that period.

2/12/16