Legislative Alert – October 2011Categories: Legislative Updates
… PENSION REFORM ON THE HORIZON
As the first year of the 2011-12 legislative session came to an end in September, many of the pension/compensation reform bills introduced were held (such as significant reform bills like SB 27 – Simitian) in anticipation of a comprehensive package of proposals from the Governor and the ‘conference committee’ on public pension reform detailed below. Much of the language of those bills made their way into the language of the Governor’s reform plan and will surely be included in any legislation that comes out of the conference committee.
PENSION REFORM COMMITTEE
In September, Senate Bill 827 (Simitian) and Assembly Bill 340 (Furutani, D-Long Beach) were ‘gut and amended’ to include language convening a “Joint Legislative Conference Committee on Public Employee Pensions” (a committee made up of members of both parties and houses of the legislature) to reform state and local pension systems. The committee is tasked with examining the current public pension systems and creating comprehensive legislation to reform state and local pension systems, in light of the fiscal issues currently facing the state.
Three separate hearings have been scheduled before the Legislature reconvenes in January, the first of which was held last week, the day before the Governor released his new 12-point pension reform plan. The first hearing included testimony from public employee unions and representatives from the state’s largest public employee organizations, including CalPERS, CalSTRS, and ’37 Act County representatives. The next hearings, in November and December, will include testimony from the Little Hoover Commission and the Analyst’s Office, among others.
Appointees to the committee include Assembly members Michael Allen (D-Santa Rosa), Warren Furutani (D-South Los Angeles County), Jim Silva (R-Huntington Beach), and Senators Gloria Negrete McLeod (D-Chino), Joe Simitian (D-Palo Alto), and Mimi Walters (R-Laguna Hills).
GOVERNOR’S PENSION REFORM PROPOSAL
On the heels of the Pension Reform Committee, Governor Brown unveiled his new 12-point pension reform plan on October 27 which would apply, according to Brown, “to all California state, local, school and other public employers, new public employees, and current employees as legally permissible.” However, most of the proposals apply to newly hired employees due to vested rights issues. The Governor’s plan is intended to reduce the taxpayer burden for state retiree healthcare costs and make public retirement benefits more sustainable. The response by the Democratic leadership and unions has been very tepid, but some Republicans and the California Chamber of Commerce commended his proposal. Below is a summary of the reform proposals included in the plan:
For all public employees
1. Require employees to contribute at least 50 percent of the annual cost of their pension benefits.
2. Limit post-retirement employment to working 960 hours or 120 days per year for a public employer, and prohibit all retired employees who serve on public boards and commissions from earning any retirement benefits for that service.
3. Prohibit collection of pension benefits for employees convicted of a felony in carrying out official duties, in seeking an elected office or appointment, or in connection with obtaining salary or pension benefits.
4. Prohibit retroactive pension increases.
5. Prohibit pension holidays for employees and employers.
6. Prohibit “Air-Time” service credit purchases.
For newly hired public employees
7. Create a Hybrid retirement plan that…
- Reduces the defined benefit formulas and adds a professionally-managed defined contribution component (similar to a 401k)
- Targets and caps a salary replacement benefit of 75 percent (based on 30 years of service for safety members and 35 years for non-safety members)
- Caps the defined benefit component of the plan as determined by the Department of Finance
8. Increase retirement age for non-safety employees to 67 (for safety employees it will be below 67 – not determined yet).
9. Require final compensation used in defined benefit calculations to be based on a final three-year average.
10. Require benefit calculations to be based on regular, recurring pay – excluding special bonuses, unplanned overtime, payouts for unused vacation or sick leave, and other perks.
11. Require 15-year vesting for retiree healthcare benefits (25 yrs for maximum benefit).
12. Increase pension board independence and expertise by adding two independent, public members with financial expertise to the CalPERS Board.
… MORE NEW BALLOT INITIATIVES
The “Pension Solvency Act” has been approved for circulation by the Secretary of State. The ballot measure was proposed by Ted Costa, a Republican from Citrus Heights, and Robert J. Matteoli. Costa launched the recall movement that pushed Governor Gray Davis out of office. He is also CEO of Sacramento-based People’s Advocate, Inc., of which Matteoli is a member.
The proposed initiative reduces pension benefits for current and future public employees, including teachers, nurses, and public safety officers, and proposes a new pension system for private sector employees. The “Pension Solvency Act” would apply to all California public pension systems. The initiative’s provisions include:
- Raises minimum retirement age to 59 1/2.
- Eliminates all forms of compensation except base pay from pension calculations.
- Sets a $100,000 annual base pay cap for pension calculations.
- Cuts in half the cost-of-living-adjustments granted retirees when a pension system is less than 97 percent funded.
- Requires government employers pay their full annual obligations to their pension funds.
- Calls on state and federal authorities to investigate CalPERS executives and any public employee making over $250,000 per year for fraud and other crimes.
- Creates a “California Separate Private Employees’ Retirement System” that mirrors the CalPERS system for private sector workers.
Another initiative, titled “State and Local Government Officials Retirement Benefits” and introduced by Larry Click, an activist from Riverside County, has also been approved for signature-gathering by the Secretary of State. This initiative proposes the following:
- Politicians will be limited to the retirement program with the most restrictive rules and the lowest benefits for a subordinate employee group within that public entity.
- Require pension benefit calculations to be based upon the base salary only, using a final three year average.
- There also appears to be language to reduce retirement benefits being provided to some current and former public officials, which would be legally questionable to implement.
Proponents of the initiatives now have until March 8, 2012, to collect the necessary 800,000 valid signatures to qualify for the next statewide ballot in November 2012. It remains to be seen whether these initiatives have the funding to gain the necessary signatures and make it onto the ballot.
… FINAL DISPOSITION OF RETIREMENT-RELATED BILLS FOR 2011
Following is the summary of action on all the public employee retirement-related bills for the first year of the 2011-2012 Legislative Session. As mentioned previously, many of the pension/compensation bills were held this session in anticipation of comprehensive proposals from the Governor and the Pension Reform Committee. Bills not passed/vetoed can be taken up again starting in January and must be acted upon by January 31. We will update the status of those bills and any newly introduced bills again starting in February, when the next Legislative Alert will go out.
BILLS ENACTED INTO LAW
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 prohibits public employers from making contributions to any qualified public retirement plan based on compensation exceeding that amount. AB 89 was enacted into law on October 2, on which date it went into effect via an urgency clause, as Chapter 390 of 2011.
AB 873 (Furutani) PERS and STRS Retiree Employment
This bill prohibits 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 was enacted into law on October 7 as Chapter 551. Like all other bills not including an urgency clause (or otherwise specified in the bill language), AB 873 will go into effect on January 1, 2012.
AB 340 (Furutani) County Employee Post-Retirement Service
This bill was gutted and amended (along with SB 827, Simitian) at the end of session to create the “conference committee” detailed previously. Below is the original bill language which will likely make its way back into any reform package proposed by the committee.
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 re-instatement 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. This bill passed both houses but the Assembly refused to concur in amendments made in the Senate, so the bill has gone to Conference Committee to resolve differences in the bill text.
AB 1028 (Committee on Public Employees, Retirement and Social Security) PERS Housekeeping Bill
Along with modifying the definition of “payrate” 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 requires that emergency/special skills appointments of a retired member 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. This bill was enacted into law on October 3 as Chapter 440.
AB 1247 (Fletcher) Retirement System Annual Reports
AB 1247 requires 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 was enacted into law on October 9 as Chapter 733.
SB 322 (Mcleod) PERS Benefit Limit
This bill was enacted into law as Chapter 47 and prohibits a PERS member who receives benefits based on credited service with multiple employers from receiving annual retirement benefits exceeding the federal dollar limitations set forth in IRC Section 415(b)(1)(A) of Title 26 – $195,000, even for service under multiple employers.
SB 349 (Negrete McLeod) STRS Housekeeping Bill
The STRS housekeeping bill makes various technical and minor (and sometimes not so minor) policy changes to increase the efficiency of the teachers’ pension plan and its programs. The bill makes conforming changes to reconcile differences between the defined benefit pension plan and the Cash Balance plan, removing the $500 late reporting penalty for the pension and Cash Balance plans and specifying that retired pension members are not allowed to make contributions to the Cash balance plan. 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 reconciles the differences between the pension and Cash Balance plans’ post-retirement employment limitations by: reducing the time Cash Balance plan 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 was enacted into law on October 9 as Chapter 703.
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 was vetoed by the Governor on September 6. According to the Governor’s message, he vetoed the bill because he wants the provisions to be part of a more comprehensive pension reforms package.
… 2012 LEGISLATIVE CALENDAR
Following are important dates/deadlines for the upcoming legislative year:
November 2, 2011 General election
January 1, 2012 “Trigger 1” budget cuts are implemented, if activated by below-
projections revenue forecast
January 4 Legislature reconvenes
January 10 Governor releases 2012-13 State Budget proposal
January 31 Last day for each house to pass bills introduced in 2011
February 1 “Trigger 2” cuts implemented, if activated by below-projections revenue forecast
February 24 Last day for legislators to introduce new bills
March 29 Spring recess for Legislature
April 9 Legislators return from spring recess
May 15 Governor’s May Revision for the budget
June 15 The California Constitution requires Budget Bill passed by midnight (if not, Legislators receive no pay until it is – due to Proposition 25)
June 30 The Constitution requires the Budget Bill be enacted by the Governor
July 6 The last day for policy committees to meet, legislative summer recess begins if Budget Bill has been enacted
August 6 Legislature returns from summer recess
August 31 Last day for Legislature to pass bills and send to Governor
September 30 Last day for Governor to sign or veto bills
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.