Agency Watch – Winter 2011

Categories: Legislative Updates
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Eye on Sacramento

Pension Changes Bargained into Budget

Public employee pensions and benefits became a central focus of Sacramento this year, a focus which will spill over into 2011. 2010 saw the longest budget delay in California history, with pension reform being one of the hold-ups in budget negotiations. In the final budget deal, Schwarzenegger gained approval of negotiated deals with state unions to: roll-back pensions for new hires to pre-SB 400 (of 1999) PERS formula levels, increase employee contributions, require new hires to work additional years to receive full benefits, and base final retirement benefits on the highest three years of pay.

The “Bell” Bills

Near the end of the legislative session in August, legislators introduced a slew of bills to improve disclosures and transparencies of compensation and benefits in response to the City of Bell scandal. Public anger skyrocketed after revelations that Bell was paying its council members nearly $100,000 per year and other top officials even more, including former City Manager Robert Rizzo, whose base salary of nearly $800,000 was sweetened by about $700,000 in other benefits. With limited time left to craft solutions, none of the bills ended up becoming law. Two vetoed bills imposed a dollar cap on benefits ($217,483) for newly hired public retirement system members and prohibited “evergreen” provisions (automatic renewals and compensation increases) of employment contracts. The State Controller and PERS imposed some regulatory changes, involving compensation and benefit disclosures and reporting.

Spiking and Double Dipping

Two vetoed retirement bills, AB 1987 (Hernandez) and SB 1425 (Simitian), targeted pension ‘spiking’ and ‘double dipping’ to address recent media reports on pension abuses. The bills prohibited boosting worker’s pay in order to inflate retirement benefits, limited pay increases in the final year, and prohibited cashing in unused vacation/sick leave to increase final compensation. In addition, retirees would have been required to wait at least six months before returning to work for any other public entity.

In his veto message the governor claimed that the bills still allowed local pension boards to determine what is ultimately counted in a pension calculation, thus allowing inconsistent treatment of employees. There was a sense from the governor’s vetoes that some of the retirement bills didn’t amount to what he termed “real pension reform”. We will likely see similar legislation in the new session.

Governor-Elect Brown’s Agenda

In early December the incoming governor’s Finance Director, outlining a budget shortfall that could be $28 billion during the next 18 months, put pensions at the top of the debt list.

“The first is pension liabilities. Much has been discussed about our pension liabilities,” Ana Matosantos told a budget forum. “Basically, by estimates prepared by the pension fund (CalPERS) and the teachers’ retirement fund (CalSTRS), we have a $100 billion liability,” she said. “Other estimates have it as high as $500 billion.”

Governor-Elect Jerry Brown gave us some hints of his intentions as a candidate by introducing a vague plan to reform pension benefits and related abuses. The plan details benefit changes that include a two-tier system, no retroactive benefit improve-ments, extending vesting times for retiree healthcare, changes to final compensation, and increasing contribution rates for all government employees.

PERS Rate increases

The first PERS rates for cities, counties and special districts, reflecting stock market losses from two years ago, began arriving in late November. The actuarial valuations will impact employer contribution rates for FY 2011-12 and are based on data as of June 30, 2009 — a year in which PERS experienced a -23.4% drop in investment returns. A three-year phase-in of PERS rate increases to cover the losses began last July for state employees and classified school employees. Local government rates lag a year behind because calculations for 2,000 plans require more time. Local PERS contracting agencies rates could rise 55% over the next three years, a PERS board member estimates. Tony Oliveira, who also is president of the California State Association of Counties, made the projection at a recent PERS workshop.

In February 2011, the PERS Board will consider lowering its investment earnings assumption from 7.75% a year to 7.5% or 7.25%, resulting in additional estimated increases in future employer rates in the range of 1.5% to 6.0% for local miscellaneous, 3% to 10% for local safety, and 1.9% to 3.9% for schools. The change in the discount rate will first impact local agency rates in FY 2012-13. On top of this, last April PERS approved new actuarial assumptions based on changing demo-graphic trends, which are estimated to increase local miscellaneous rates by less than 1% to 2.5% and safety plans by 2 % to 3% of payroll.

STRS Lowers Investment Return Assumption

On December 2, the Teachers’ Retirement Board agreed to lower the investment returns rate from 8% to 7.75%. STRS had been contemplating a reduction of its expected rate of return on investments by half a percentage point to 7.5%, but the majority of Board members felt that was too dramatic a decrease. Schwarzenegger’s administration wanted the STRS investment forecast to be lowered even more to around 6%, claiming that STRS (and PERS) have been ignoring their financial problems.

The decision complicates the STRS funding situation and will increase pressure on the Legislature. Already severely underfunded, STRS has been preparing to ask the Legislature to increase the contributions from the state and local school districts. (Unlike PERS, STRS does not have authority to increase contribution rates.) But with the state facing another huge budget deficit, it will be difficult for STRS to sell lawmakers on any increase. STRS was expected to run out of money in about 35 years under the previous earnings forecast. To reach full funding, annual contributions need to be increased by two-thirds, 13.9% of pay. Now dropping the earning forecast to 7.75% increases the need for an additional contribution to 15.1% of pay, according to STRS actuaries.

New Pension Reform Ballot Initiative

The same pension reform organization with a new name is once again pushing pension reform through a proposed 2012 ballot initiative. “California Pension Reform,” founded by the late California former-legislator Keith Richman, and now headed by President Marcia Fritz, is hoping to have pension reform measures implemented at all public agencies through a constitutional amendment. The organization has released a draft initiative plan that would greatly restrict public pensions. The last time the organization tried to reform pensions they failed to garner enough support and funding to gather enough signatures required to get the initiative on the ballot. The proposed reform plan includes the following:

  • All public employees shall pay at least one-half of the actuarial cost of their retirement benefits, including retiree medical benefits.
  • Public employers may not contribute an employee’s share of retirement benefit costs.
  • All public employees hired on or after July 1, 2013 shall be eligible to participate in a defined contribution retirement plan.
  • No public employee hired on or after July 1, 2013 may receive retiree medical benefits prior to age 65.
  • Pensions for employees hired on or after July 1, 2013 shall not exceed the median statewide household income ($56,344 in 2009).
  • Pension benefits for employees hired after July 1, 2013, shall be based on an average of three years compensation.
  • Full actuarial funding of all public pension and retiree medical benefits plans shall be implemented no later than January 1, 2020, without increasing taxes.

2010 Final Bill Summary

The following is a list of enacted retirement-related bills from the second year of the 2009-2010 legislative session. Many of the pension and compensation reform measures introduced in 2010 were not enacted into law as Governor Schwarzenegger concentrated his efforts on getting reforms passed through budget negotiations. The 2011-12 legislative session will convene on January 3, 2011.

The following bills were enacted into law in 2010:

  • AB 609 (Conway) County Employees Retirement Administrative Costs: ‘37 Act County retirement systems are the only systems required to annually adopt a budget covering the entire expense of administration and prohibits the expense incurred in any year from exceeding 18/100 of 1% of the total assets of the retirement system. This became an issue because assets dropped recently but operational expenses and needs did not. This bill prohibits expenses incurred in any year from exceeding the greater of 21/100 of 1% of the approved actuarial liability of the retirement system or $2 million (basing it on assets). This bill was enacted into law as Chapter 663 of the statutes of 2010.
  • AB 1354 (Fong) County Employees Retirement Law: This bill requires that ’37 Act County retirement systems follow federal law regarding crediting qualified military service for vesting purposes by not exceeding the IRC limit. This bill was enacted into law as Chapter 188 of the statutes of 2010.
  • AB 1651 (De La Torre) Furloughed School Employees: This bill requires that the calculations for retirement allowances for PERS school members, subject to mandatory furloughs, include the amount of service and compensation that would have been credited had mandatory furloughs not occurred. This bill was enacted into law as Chapter 574 of the statutes of 2010.
  • AB 1743 (Hernandez) Placement Agents: The bill would define placement agents as lobbyists per the state’s Political Reform Act. Placement agents would be subject to strict gift limits, campaign contribution prohibitions, and be prohibited from receiving compensation contingent upon any investment decision. Placement agents, their firms and employers would be required to report quarterly on their fees and compensation and on any honoraria or gifts. The law would apply to PERS, STRS, and local retirement systems. Placement agents are persons hired in connection with an investment transaction as a finder, solicitor, marketer, consultant, broker or other intermediary to raise money or investments or obtain access to a retirement system. Recent investigative and enforcement activities in New York and media coverage of PERS in California have revealed a lack of transparency and limited disclosure of placement agent involvement in public pension plan investments. This bill was enacted into law as Chapter 668 of the statutes of 2010.
  • AB 1856 (Fong) PERS Service Credit Payments: This bill would allow a PERS member, who is authorized to pay for service credit in after-tax installments, to elect in writing to suspend payments for up to 12 months. This bill has been enacted into law as Chapter 197 of the statutes of 2010.
  • AB 2260 (Committee on Public Employees, Retirement and Social Security) STRS Housekeeping Bill: This bill makes clarifying technical changes to STRS law including reimbursing STRS for erroneous overpayments, clarifying that the post-retirement earnings limit for retirees below the normal retirement age applies to work performed within the California public school system, and restricting STRS’ executive-level staff from performing post-employment activities that influence the legislative or administrative action of the Board. This bill was enacted into law as Chapter 207 of the statutes of 2010.
  • SB 1139 (Correa) PERS Housekeeping Bill: SB 1139 makes technical and clarifying changes to PERS law, including expanding the types of programs the Board may establish to include those with after-tax payments such as Roth 401K. This bill was enacted into law as Chapter 639 of the statutes of 2010.

Eye on Washington

California Gets $1.2 Billion for Education Jobs

The Ed Jobs program, signed by President Obama in August, provides $10 billion in assistance to states to save or create education jobs for the 2010-2011 and 2011-2012 school years. California gets approximately $1.2 billion in one-time federal funds under the program. Jobs eligible to be funded under this program include those that provide educational and related services for early childhood, elementary, and secondary education.

Funds can be used “only for compensation and benefits and other expenses, such as support services, necessary to retain existing employees, to recall or rehire former employees, and to hire new employees, in order to provide early childhood, elementary, or secondary educational and related services.” Under guidance issued by the Department of Education, this would include “salaries, performance bonuses, health insurance, retirement benefits, incentives for early retirement, pension fund contributions, tuition reimbursement, student loan repayment assistance, transportation subsidies, and reimburse-ment for childcare expenses.”

Maureen Toal
Vice President, Public Affairs
800.540.6369 ext 135


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