Legislative Alert – August 2011Categories: Legislative Updates
…PENSION REFORM AGAIN?
Pension reform stalled between the governor and Democratic and Republican leadership during the budget process this year. However, the issue is likely to be taken up again next year. Governor Brown will apparently be releasing an “update to his pension proposal” soon. He wants to focus on the issue once the legislature comes back in January. Whatever Brown releases will not likely contradict what he’s already released in his 12-point plan, but it will contain more detail. Since some of the pension reforms bills in the legislature aren’t progressing as the legislature goes into recess for the year (September 9), there is a potential that all these bills will be rolled into a final pension reform package used in future budget discussions that may start soon.
…CALPERS BOOSTS COSTS OF TERMINATING PLAN
The CalPERS board in August approved a large increase in the cost of terminating pension plans, which rarely occurs (only one or two happen a year). The concern is that ending just one large plan could “dramatically” erode a pool currently responsible for the pensions of 4,700 members of 118 terminated plans. The new regulation increases the money an employer must set aside to offset or “discount” future obligations. A much lower bond-based earnings rate will be assumed, currently 3.8 percent, rather than the CalPERS earnings forecast of 7.75 percent.
As of June 2009, the terminated pool had assets worth $144 million, liabilities of $60 million, and $5.4 million in annual pension payments. The pool was 240 percent funded, far better than CalPERS’ total funding of nearly 70 percent earlier this year.
Unique among CalPERS funds, the Terminated Agency Pool lacks the key part of the modern public pension plan: the ability to get more money from employers and taxpayers if investments, expected to cover roughly two-thirds of pension costs, fall short. Now the new bond-based discount rate for terminated plans is likely to result in a bond-based investment of the pool. The goal is to generate cash flow from the investments that matches cash needed to pay the pensions.
This will make leaving CalPERS prohibitively expensive for a contracting agency. A study by the City of Pacific Grove last year found that leaving CalPERS would cost $30 million to $34 million.
CalPERS will include a hypothetical termination liability in the annual actuarial reports sent to plans, starting in October of next year. “CalPERS will need to proactively communicate with stakeholders, including employers, members, and the general public about this change and why it was necessary to protect our members,” said the report to the Board.
If there is an initiative on the November ballot next year that would switch new state and local government hires to a defined contribution retirement plan, the higher cost of leaving CalPERS could be a campaign issue.
…STATE AUDITOR REPORT CALLS STRS ‘HIGH RISK’
State Auditor Elaine Howle reported in August that California’s public teacher pension system is considered “high risk” because it’s expected to run out of money in the next 30 years. The report adds STRS to a list of other high-risk issues facing the state, including continued budget shortfalls and overcrowded prisons. The report warns that the state may end up having to provide funding for the system using taxpayer money. High-risk agencies must report back to the auditor on progress they’re making.
Teachers currently contribute 8 percent of their salaries to the pension system. School districts provide 8.25 percent, and the state contributes 2 percent. The pension system was nearly fully funded in 2001, but the economic crisis dropped the funding level to 71 percent and further decline is expected. The latest actuarial study available from STRS for the year ended June 30, 2010 shows the actuarial liability for the defined benefit plan is 71% funded, leaving $56 billion in unfunded liabilities. For PERS, the latest actuarial study for the year ended June 30, 2009 shows the school employers pool was 65% funded.
…MORE NEW BALLOT INITIATIVES
Alan Ebenstein, Ph.D., President of the California Center for Public Policy, filed two initiatives addressing public pensions. One would assess a 15% surcharge of state income tax on pensions that are above $100,000 per year, increasing to 25% for pensions above $150,000. The other would raise the full retirement age of PERS and STRS members to 65, with the exception of sworn public safety officers, who could get full benefits starting at age 58.
An additional initiative filed by Michael Lee Madsen Sr., would amend the Constitution to require that all pension systems in California, after January 1, 2016, invest at least 85% of their assets in California-based businesses, which are those businesses that have at least 70% of their workforce employed in California.
Updates on local ballot measures reforming public pensions include Los Angeles, San Diego, and San Francisco. Measure G in Los Angeles was approved by voters to lower the pensions for new police and firefighters if they retire early after 20 years. Also, new hires will now contribute 2 percent of their pay toward retiree health care, up from zero for current police and firefighters. City officials in San Diego decided to push an initiative to switch new hires (other than police) to defined contribution plans until the June 2012 ballot. In San Francisco, two measures were placed on the ballot for November: one requiring all city workers to increase pension contributions to 7.5%, the other additionally requiring public safety workers to increase their contributions to 10%.
The following are updates on the public employee retirement-related bills for the 2011-2012 Legislative Session which are still alive this year, or are now two-year bills (dead for this year and will be taken up again in the second year of the 2011-12 session). The session ends on September 9 so we are now in the last 10 days of session and bills are on the floor for votes before being sent to the Governor. We will update the status of these bills as the Legislative session comes to a close in next month’s Legislative Alert.
Bills Still Alive
AB 89 (Hill) Public Retirement Benefits Limit
This bill specifies that for a person who first becomes a member of a public retirement system on or after January 1, 2012, the maximum salary upon which retirement benefits shall be based shall not exceed an amount set forth in IRC Title 26 section 401(a)(17) – $200,000. The bill also now prohibits public employers from making contributions to any qualified public retirement plan based on compensation exceeding that amount.
AB 344 (Furutani) PERS Retiree Appointments
This bill would delete the option for a PERS retiree to serve without reinstatement from retirement under an appointment that exceeds 960 hours in any fiscal year. The bill also prohibits any exceptions to the law prohibiting compensation increases during the final compensation period and 2 years preceding for employees not in a group or class.
AB 873 (Furutani) PERS and STRS Retiree Employment
This bill would now prohibit a retired STRS or PERS board member and certain officers from representing another person before PERS or STRS for 4 years and from assisting in a business activity for 2 years, if they participated in obtaining the award of, or in negotiating, a contract or contract amendment with PERS or STRS. It also prohibits them from working as a placement agent in connection with PERS and STRS for 10 years. This bill has passed both houses and will now go to the Governor for consideration.
AB 1028 (Comm. on Pub. Empl., Ret. and S. S.) PERS Housekeeping Bill
Along with modifying the definition of “pay rate” for school members to include amounts deducted for participation in a deferred compensation, retirement, money purchase pension, or flexible benefits plan, the PERS housekeeping bill now requires that emergency/special skills appointments of retired members without reinstatement be interim appointments to a vacant position during recruitment for a permanent appointment, and would prohibit an agency from appointing a retired person under this provision more than once.
AB 1184 (Gatto) Excess Compensation
This is one of the bills in response to the City of Bell scandal. This bill requires PERS to develop guidelines that an agency not experience a significant increase in actuarial liability due to increased compensation paid by another agency to a non-represented employee and to implement program changes to ensure that a contracting agency that creates a significant increase in actuarial liability due to increased compensation bear the associated liability. The bill also prohibits PERS from administering replacement plans for new hires.
AB 1247 (Fletcher) Retirement System Annual Reports
AB 1247 would require the PERS board to submit an annual report to the Legislature, Governor, and Treasurer, limiting the scope of the report to state employee retirement plans, and would revise the adjustments of the investment return assumptions and discount rates utilized by the board any time it calculates the contribution rates. This bill has passed both houses and now goes to the Governor for consideration.
AB 1320 (Allen) Taxpayer Adverse Risk Prevention Account
This bill establishes a fund for each employer to receive the excess of pension contributions not actuarially required so the funds can be used in years when contributions are less than what is actuarially required (no employer contribution holidays). The employer contribution rate may be reduced when the account exceeds 50% of the employer’s assets.
SB 349 (Negrete McLeod) STRS Housekeeping Bill
The STRS housekeeping bill makes various technical and minor policy (and sometimes not so minor) changes to increase the efficiency of the pension plan and its programs. Among other technical provisions, this bill makes conforming changes to reconcile differences between the defined benefit pension plan and the Cash Balance plan. The bill removes the $500 late reporting penalty for the DB and Cash Balance Benefit (CB) programs and specifies that retired DB members are not allowed to make contributions to the CB Program. The bill also specifies that the zero-dollar earnings limit for members who retire under the normal retirement age of 60 apply to a member’s age at the most recent retirement and makes conforming changes to reconcile the differences between the DB and the CB post-retirement employment limitations, including reducing the time CB retirees must wait to return to work to the earlier of 180 days or age 60, allowing retirees over 60 to perform service without limitation, and requiring post-retirement earnings limit exemption paperwork to be filed within 60 days. This bill has passed both houses.
SB 350 (Negrete McLeod) PERS School Member Survivor Allowance
This bill would merge the first, second, and third levels of the 1959 Survivor Benefit for contracting local agencies of PERS that currently provide one of those levels of benefits to employees, and allow PERS to suspend employee premiums of $2 monthly when the funding pool is determined to contain surplus funds. This bill passed both houses and was sent to the Governor on August 22.
Two Year Bills
AB 340 (Furutani) County Employee Post-Retirement Service
This bill, after January 1, 2012, would prohibit a person who has been retired for service from a ’37 Act County retirement system from being re-employed in any capacity without reinstatement into the system for 6 months. This bill was amended to also prohibit a variety of payments, including unscheduled overtime, payments for unused vacation, sick leave, or compensatory time off, and housing and vehicle allowances from being included in final compensation calculations.
AB 1248 (Hueso) Public Employees Retirement
This bill requires local employers to provide Social Security coverage to all employees not covered under a defined benefit plan, unless they are already covered under an alternate benefit plan for part-time, seasonal, and temporary employees by July 1, 2011.
SB 27 (Simitian) Compensation and Return-to-Work
For STRS members, SB 27: (1) prohibits one employee from being a class; (2) enhances provisions preventing pension spiking; (3) and shifts compensation paid in addition to salary or wages directly to the credit of the Defined Benefit Supplement Program. For both STRS and PERS members: (1) after January 1, 2013, prohibits a retiring member from returning to work for 6 months; (2) provides that any change in compensation principally for the purpose of enhancing a member’s benefits would not be included in the retirement benefit calculation; and (3) prohibits final compensation increases from exceeding the average increase received within the 2 preceding years by employees in the same or a related group.
Following are important dates/deadlines for the 2011 legislative year:
Sept. 2 – Last day to amend on the Floor
Sept. 9 – Last day for any bill to be passed
Oct. 9 – Last day for Governor to sign or veto bills
Nov. 2 – General Election
Feel free to contact PARS with any question or requests for further information. Additional news, and an archive of past Legislative Alerts, is available on the PARS website at www.pars.org.
Vice President, Public Affairs
Public Agency Retirement Services (PARS)
(800) 540-6369 ext. 135
The contents of this publication reflect PARS’ understanding of the facts. Before taking any action based on this information, consult professional advisors regarding your agency’s specific objectives and circumstances. For further information, contact PARS.