Legislative Alert – April 2012

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Last month we reported that the PERS Board voted to lower its expected rate of return (discount rate) for investments from 7.75% to 7.5%. That assumption change will result in employer rate increase of about 1-2 percent of payroll for most miscellaneous retirement plans and a 2-3 percent increase for most safety plans. This month, the PERS Board adopted a policy to phase in the impact of that change because of continued budget challenges facing California public employers. Under the policy adopted by the PERS Board, most PERS employers will see about half of the projected rate increase in the first year and the rest of the increase in the second year.

Without phase in, a public agency miscellaneous plan was expected to see an increased employer contribution rate of 1.24% of payroll over the next 20 years. Under the phase in approach, that employer contribution rate for a miscellaneous plan will instead go up by 0.65% in the first year, followed by an additional increase of 0.64% the following year, for a total increase of 1.29% over the two year period.

For school plans, the first year of the employer rate increase due to the discount rate change will be the fiscal year that begins July 1, 2012. The employer contribution rate for school employers is estimated to be 11.81% for 2012-13. For local public agencies, the first year of the increase will be July 1, 2013. Contracting agencies that don’t participate in pooled plans will have the option to decline the phase-in of increases.



In April, the joint legislative conference committee on pension reform held its fifth and final meeting. Now we play the waiting game to see what recommendations and legislative measures the Committee will move forward with. At this point, details on what they will propose are unclear, but below are the most likely areas they will be addressing. The Committee is expected to make its report and legislative package available in the next month or so, though exactly when is still unknown. Other pension reforms bills are expected to be held until after that time.

The Assembly pension legislative committee isn’t going to act on a package of public pension reforms proposed by Gov. Jerry Brown and adopted by Republicans in their own bills. Assembly pension committee chairman Warren Furutani said in a letter recently that measures that mirror Brown’s 12-point reform plan won’t be heard in his committee. Furutani also co-chairs a special conference committee that is working on public pension reform.

“I believe it is appropriate this year to limit the bills considered this year in the policy committees to those that are not within the purview of the Conference Committee,” Furutani said in an April 18 letter to Assemblyman Cameron Smyth, R-Santa Clarita.

Smyth and his fellow Republicans took Brown’s pension plan earlier this year and put it into legislation. Brown, who linked pension reform with a successful appeal to voters for tax increases, has said little about pension reform in the last few months. Senate President Pro Tem Darrell Steinberg has said that the Legislature will pass pension reform this year.

1. Hybrid Plan

The Governor’s proposal is to provide a three-pronged retirement benefit to the public sector that makes up 75% replacement of a final salary—a third coming from a defined benefit plan, a third coming from Social Security, and a third coming from a 401(k)-style defined contribution style plan. (For those not in Social Security, the defined benefit plan would make up two-thirds of the entire benefit.)

Committee members are instead considering a lower pension with a STRS-like cash balance plan instead of the 401(k). The cash balance plan is a defined benefit plan that acts like an alternative retirement plan for part-time employees. Normal retirement age is 60, but no earlier than age 55 years. A participant must terminate from all creditable service and apply for a retirement benefit. Distribution of a retirement benefit must begin by age 70½, unless still working. There’s also talk of lowering the benefit formula for all new employees after July 1, 2013 and implementing a dollar cap (because a percentage cap doesn’t work with lower paid workers).

2. Cost Sharing

The Committee supports the Governor’s plan for a 50-50 cost sharing split between employers and employees of normal retirement costs. But some are questioning whether this should be done through collective bargaining.

3. Normal Retirement Age

The Governor wants to raise the normal retirement age for new hires to 67 for general employees and 57 for safety employees. The Committee may apply different normal retirement ages for manual labor vs. non-manual labor work.

Other potential reform topics include:

  • Post-retirement work
  • Pension spiking
  • Compensation limits
  • Employer liability for “excessive salaries”
  • 1959 Survivor Benefit
  • Elected official pensions



A bill introduced last session by Assembly member Hueso, AB 1248, will require cities and counties to provide all employees not covered under a defined benefit plan with Social Security coverage. Unless part-time, seasonal, and temporary employees are already in an alternate to Social Security retirement plan by the time this bill goes into effect (proposed amendments will change that date to July 1, 2012), cities and counties will no longer be able to move these employees into a lower-cost defined contribution plan (7.5% total contribution) unless it provides a higher benefit than Social Security (usual 12.4% contribution).

This bill was meant to address the City of San Diego moving new employees out of the pension plan and into a new 401K-style defined contribution plan. The intent of the bill is to provide Social Security death and disability benefits to employees no longer in a pension system, but also has the effect of mandating Social Security for part-time employees.



The following is a full list of retirement-related bills that are still alive for the 2011-12 Legislative Session. We don’t expect to see much movement on these bills until the joint legislative committee on pension reform reports its findings and legislative proposals in the coming months.

AB 340 (Furutani) County Employee Post-Retirement Service

AB 340 would prohibit a person who has been retired for service from a ’37 Act County retirement system from being reemployed in any capacity without reinstatement into the system for 6 months. This bill also prohibits unscheduled overtime, payments for unused vacation, sick leave, or time off, and housing and vehicle allowances from being included in final compensation calculations.

AB 344 (Furutani) PERS Retiree Appointments

This bill would eliminate 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 preceding years for employees not in a group or class.

AB 1184 (Gatto) Excess Compensation

This bill is in response to the City of Bell scandal. The bill requires PERS to develop guidelines so that an agency does 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 bears that associated liability. The bill also prohibits PERS from administering replacement plans for new hires.

AB 1248 (Hueso) Social Security Mandate

AB 1248 requires cities and counties 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 (proposed amendments will change that date to July 1, 2012). The bill would significantly restrict the ability of any city or county from moving their part-time, seasonal, and temporary employees in Social Security or a defined benefit plan to a less costly alternative defined contribution plan in the future.

AB 1320 (Allen) Taxpayer Adverse Risk Prevention Account

This bill establishes a fund for each employer that would receive excess pension contributions not actuarially required (no employer contribution holidays). Those funds can then be used in years when contributions are less than what is actuarially required. Employer contribution rates may only be reduced when the account exceeds 50% of the employer’s assets.

AB 1633 (Wagner) Retirement Benefit Cap

AB 1633 caps retirement benefits for new hires of any public retirement system at $80,000 if the member is covered by Social Security, and $100,000 if not.

AB 1639 (Hill) Benefit Formula Compensation Cap

This bill prohibits retirement benefits from being based on any amount exceeding federal revenue limits under section 401(a)(17) – which is now $250,000.

AB 1653 (Cook) Pension Forfeiture for Felony

This bill would require any public officer or staffer hired after January 1, 2013 to forfeit all retirement benefits if convicted of a felony.

AB 1908 (Alejo) Layoff Notices

AB 1908 changes the advance written notice requirement for classified employees of a school district or community college district from at least 45 days to 60 days if the termination date of a specially-funded program is other than June 30, or if a classified employee is subject to layoff as a result of a bona fide reduction or elimination of a service performed by a department.

AB 1949 (Cedillo) 403(b) Vendors

This bill allows education agencies to limit the number of vendors allowed to market 403(b) plans to their employees. The bill authorizes a school district, county office of education, or charter school to select 4 or more 403(b) vendors.

AB 2224 (Smyth) Retirement Reform Bill

This bill makes the following retirement reforms: (1) eliminates air time; (2) eliminates retroactive benefit enhancement; (3) requires a hybrid pension plan option; (4) bases final compensation on 3 years average; (5) requires the normal cost of retirement contributions to be paid each year; (6) prohibits employer pickup of employee contributions; (7) prohibits reemployment without reinstatement to the retirement system except in an emergency; and (8) vests employer contributions for retiree healthcare at 50% for 15 years of service and 100% for 25 years of service.

AB 2275 (Achadjian) STRS Postretirement Earnings

This bill extends STRS postretirement earnings limit exemptions until June 30, 2014.

AB 2416 (Mansoor) Retirement Reserve Funds

AB 2416 requires every public retirement system to create a reserve fund if it does not have one. The bill requires any excess funds to be placed in the reserve fund to be used against deficiencies in other fiscal years, and prohibits assets in the reserve fund from being used for benefit payments.

AB 2663 (Assembly Retirement Committee) STRS Housekeeping Bill

Among other things, the STRS Housekeeping Bill: (1) requires, for employees of multiple employers, unused excess sick leave days to be paid for by the employer for which the member was eligible to use those excess sick leave days; (2) allows retired members to perform postretirement work for “creditable service” under the Cash Balance Benefit Program; and (3) prohibits certain reductions in an annuity payment for retired members of the Cash Balance Program who perform creditable service.

ACA 22 (Smyth) Retirement Reform

ACA 22 requires each public retirement system to provide a hybrid pension plan, bases final compensation on an average of 3 consecutive years, prohibits retroactive benefit increases, and prohibits employer “pickup” of employee contributions.

ACA 26 (Smyth) Retirement Forfeiture

This constitutional amendment requires forfeiture of retirement benefits for any public employee convicted of certain felonies.

SB 27 (Simitian) Compensation and Return-to-Work

For both PERS and STRS members, SB 27: (1) prohibits a member retiring after January 1, 2013 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 retirement benefit calculations; and (3) prohibits final compensation increases from exceeding the average increase received in the 2 preceding years by employees in the same or a related group. 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.

SB 46 (Correa) Compensation Disclosure

This bill would require, until January 1, 2019, all public officials to file an annual compensation disclosure form to be posted by each public agency on their website. The Controller will develop the form.

SB 827 (Simitian) Conference Committee

This is the Senate bill that also convened the conference committee on public pension reform.

SB 1142 (Walters) Retiree Healthcare Ban

This bill prohibits all public employers from providing retiree healthcare benefits for employees first hired on or after January 1, 2013 unless it fully funds those benefits.

SB 1176 (Huff) Pension Reform Bill

This bill also puts into legislation the Governor’s pension reform proposals, including: (1) eliminates airtime; (2) prohibits retroactive benefit increases; (3) requires public employers to offer a hybrid retirement plan; (4) any elected employee who commits a felony forfeits retirement benefits; (5) bases final compensation calculations on 3 consecutive years average; (6) prohibits employer pickup of employee contributions; (7) prohibits postretirement employment without reinstatement to the pension system except during an emergency; (8) limits employer contributions for retiree healthcare to 50% with 15 years of service with 100% contribution only after 25 years of service.

SB 1231 (Walters) ’37 Act County Retirement COLAs

SB 1231 prohibits cost of living increases in ’37 Act counties if the retirement system is not fully funded, or if the benefit will require additional county contributions or create an unfunded liability.

SCA 13 (Cannella) Retirement Reform Amendment

This Senate Constitutional Amendment: (1) prohibits retroactive benefit increases; (2) requires any defined benefit pension plan to be offered only as part of a hybrid plan and can only be based on 3 years average final pay; (3) raises employee contribution rates 5% until a plan is 90% funded; (4) allows contribution holidays only if a plan is 120% funded; (5) prohibits employer pickup of employee contributions; (6) eliminates airtime purchases; (7) prohibits retiree reemployment; and (8) requires 25-year vesting for full retiree healthcare benefits.

SCA 18 (Huff) Public Employee Retirement Reform

SCA 18 would require each public retirement system to: (1) provide a hybrid pension plan; (2) base final compensation on an average of 3 consecutive years final pay; (3) prohibit retroactive benefit increases; (4) prohibit employer pickup of employee contributions; and (5) eliminate airtime service credit purchases.



Following are important dates/deadlines for the upcoming legislative year:

May 15 – Governor’s May Revision for the budget

June 15 – California Constitution requires Budget Bill passed by midnight

June 30 – Constitution requires Budget Bill enacted by the Governor

July 6 – Last day for policy committees to meet, summer recess begins

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


Please contact PARS with any questions or requests for further information. Additional news and an archive of past Legislative Alerts, is available on the PARS website at www.pars.org. Go to “News Center” and then click on “Legislative Updates”.

Thank you,

Maureen Toal
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.


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