Agency Watch – Spring 2012Categories: Legislative Updates
Eye on Sacramento
THE LATEST ON PENSION REFORM
In the Conference Committee’s Hands
Last September, the California State Legislature convened a joint legislative “Conference Committee on Pension Reform” (a committee made up of members of both parties and houses of the legislature) to propose changes to state and local pension systems. Most of the pension reform bills introduced this session were held up in anticipation of a comprehensive package of proposals from Governor Jerry Brown and the committee.
The conference committee held hearings between October and April which included testimony from representatives of public employee unions, CalPERS, CalSTRS, ’37 Act County Systems, Little Hoover Commission, the Legislative Analyst’s Office, national retirement benefits associations, and UC representatives. The committee is expected to make its report and legislative package available sometime after a budget is signed. At this point, details on what the committee will propose remain unclear, but the group is thought to be considering a lower pension for new hires with a STRS-like cash balance plan – a defined benefit plan that acts like a defined contribution plan. Other potential reform issues include: post-retirement work, pension spiking, compensation limits, employer liability for “excess” salaries, survivor benefits, and elected official pensions.
Brown’s 12-Point Plan
In February, Governor Brown released detailed language for his 12-point pension reform plan. The language was introduced verbatim in two Republican bills as the minority party’s statement on the need for pension overhauls. It remains to be seen whether any of the reform measures will be included in the legislative recommendations made by the conference committee, but Republicans on the committee complained that the governor’s plan has not had a proper hearing or vote.
The governor proposed a “hybrid plan” — a three-pronged retirement plan that would replace 75% of an employee’s 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 employees not in Social Security, the defined benefit plan would make up two-thirds of the entire benefit. The proposal would also require employees to contribute at least 50% of the annual cost of their pension benefits and prohibit retroactive pension increases, contribution holidays for employees and employers, and “air-time” service credit purchases.
Proposed Ballot Initiatives Fail
Six pension reform initiatives were introduced within the last year and cleared by the Secretary of State for circulation. By March, the final remaining initiative failed to gather enough signatures to qualify for the November 2012 ballot. Most did not garner enough financial backing to undertake the expensive process of obtaining signatures. With this failure, pension reform in 2012 now rests squarely in the hands of the legislature as ballot-induced pressure for reforms has subsided.
Lower Investment Return Forecast
CalPERS gave final approval in March to reduce its investment return forecast a
quarter-point from 7.75% to 7.50%. CalPERS actuarial staff proposed lowering the discount rate to 7.25% but the Board decided against the larger decrease due to the fiscal pressure it would put on local agencies. CalPERS is planning a two-year phase-in of rate increases using the “smoothing” approach it has used in the past to soften the impact. 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.
School Contribution Rates
CalPERS also approved new contribution rates that will go into effect July 1, 2012. The contribution rate for school employers of 11.417% was approved by the CalPERS Board at its May meeting. That rate is an increase of nearly 0.5% from the current 10.923% in 2011-12. This increase over last year’s contribution rates is partially due to the board lowering the expected investment return rate (discount rate).
Second Lowering of Investment Return Forecast
CalSTRS also cut its assumed investment return rate this year in February from 7.75% to 7.5% on recommendation from its actuaries. The CalSTRS Board’s action marks the second time in a year and a half that it has lowered the investment forecast by a quarter-point (the fund last dropped its discount rate from 8% to 7.75% in December 2010) – and reflects a new realization that CalSTRS can’t rely on the high annual return that the pension fund had assumed. The last decade has dampened optimism. In the 2011 calendar year, CalSTRS earned only 2% on investments, while earning 0.7% over the last five years, 5.4% over the last decade, and 7.2% over the last 20 years.
CalSTRS recently adopted an actuarial valuation (as of June 30, 2012) that also reflects a 2% decrease in the funding status from the previous year, as the final impact of the extraordinary losses in 2008-09 was recognized. This year was the third and final of the three-year smoothing period CalSTRS used to phase in the investment losses. The latest valuation revealed a funding level of 69%, leaving the fund with a $64.5 billion funding shortfall.
The CalSTRS Board determines the amount of postretirement earnings it allows retirees to earn each year. The board voted in May to continue the 2011-12 limit of $31,020 through June 30, 2013. Earnings over this limit by retired CalSTRS members who return to CalSTRS-covered work will cause a dollar-for-dollar reduction in their retirement benefits. The law allowing a number of exemptions from this earnings limitation is due to sunset on June 30, 2012.
Assembly Bill 2275 (Achadjian) was introduced this year to extend the current earnings limit exemptions through 2013-14. This bill has an urgency clause, meaning that, if passed, it will take effect as soon as it is signed by the governor, but it also requires a two-thirds vote of each house of the legislature for passage. Along with most other retirement-related legislation, the bill was referred to the Conference Committee on Pension Reform which may delay action until after the sunset date.
2012 SUMMARY OF RETIREMENT-RELATED BILLS
The following are the retirement-related bills that are still alive for the 2011-12 Legislative Session. Nine of the public pension reform bills that follow were referred in April to be studied by the Conference Committee on Pension Reform. Many of the rest of the retirement-related bills are two-year bills meaning they survived year one and so are technically still viable. We don’t expect to see much movement on these bills until the conference committee reports its legislative proposals in the coming months.
Bills Referred to the Conference Committee
- 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 1649 (Smyth) Pension Forfeiture for Public Employee Felonies: AB 1649 requires a public employee convicted of any violent or serious felony or a sex offense arising out of his or her official duties to forfeit retirement benefits.
- AB 1653 (Cook) Pension Forfeiture for Public Officer Felonies: This bill would require any public officer or staffer hired after Jan 1, 2013 to forfeit all retirement benefits if convicted of a felony.
- AB 1681 (Smyth) Pension Forfeiture for School Employee Felonies: This bill requires a school employee convicted of a felony arising out of his or her official duties to forfeit retirement benefits.
- 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 re-employment 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: AB 2275 extends STRS postretirement earnings limit exemptions until June 30, 2014.
- AB 2429 (Hagman) Part Time Elected Officials: This bill prohibits local officials elected to office on or after January 1, 2013 and working less than full time from becoming members of a retirement system or receiving health benefits during service or post employment health benefits.
Other Retirement Related Bills
- 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 re-employed 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.
- AB 1248 (Hueso) Social Security Mandate: AB 1248 originally required cities and counties to provide Social Security coverage to all employees not covered under a defined benefit plan, and would have made it extremely difficult for those employers to move part-time, seasonal, and temporary employees in Social Security to a less costly alternative defined contribution plan in the future. On May 21, however, the bill was amended to pertain only to the City of San Diego.
- 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 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.
- 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 only, 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 and benefits disclosure form to be posted by each public agency on their website.
2012 Legislative Calendar
Following are important dates/deadlines for the upcoming legislative year:
June 15 – California Constitution requires Budget Bill passed by midnight
June 30 – Constitution requires the Budget Bill be enacted by the Governor
July 6 – Last day for policy committees to meet, summer recess begins
August – Legislature returns from summer recess
August 17 – Last day for fiscal committees to meet and report bills to the Floor
August 31 – Last day for Legislature to pass bills and send to Governor
September 30 – Last day for Governor to sign or veto bills
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