Legislative Alert September 2012Categories: California Developments,Legislative Updates
In this Alert:
…MAJOR REFORM PASSES
…EFFECTS OF NEW PENSION RULES
…PROPOSED IRS CHANGES COULD AFFECT CHARTER SCHOOLS
… MAJOR PENSION REFORM PASSES
In the last week of the legislative session, the Governor and Legislature finally agreed upon long-awaited major pension reform and on August 31, 2012, the legislature passed the bill. The Governor is expected to sign it. The main provisions of the proposal (Assembly Bill 340/Senate Bill 827) include a cap on pensionable compensation, lower pension formulas, higher retirement ages, and language to eliminate abuses such as pension spiking and double-dipping. The broad goal was to create a pension system that both the state and local governments could afford and that provides pension security to public employees. This legislation will go into effect on January 1, 2013. Below are the major reforms included in the legislation.
For new employees:
- Caps the amount of compensation that can be used to calculate a retirement benefit for all new members of a public retirement system equal to the Social Security wage index limit ($110,100) for employees who participate in Social Security, or 120% of that limit ($132,120) if they are not in Social Security.
- Prohibits employers from offering a defined benefit (DB) plan, or combination of DB plans, on compensation in excess of the cap.
- Changes public retirement system pension formulas to 2% at age 62 for non-safety public employees with an early retirement age of 52 and a maximum benefit of 2.5% at age 67.
- Three new defined benefit formulas are created for safety public employees with a normal retirement age of 50 and a maximum retirement age at 57. The maximum benefit is 2.7% at 57.
- Requires final compensation be based on the highest average annual compensation over a three-year period.
For all employees (current and new):
- Eliminates double dipping by requiring all public employees who retire to wait 6 months before returning to work.
- Requires public officials and employees to forfeit retirement benefits if convicted of a felony relating to their professional duties.
- Prohibit retroactive benefit enhancements.
- Eliminates “pension holidays” by prohibiting employers from suspending contributions necessary to fund annual pension costs.
- Eliminate “airtime” by prohibiting service credit purchases.
- Requires employees to contribute 50% of the normal cost of their pension benefits.
- Prohibits any compensation outside of normal, recurring pay from being used to calculate a retirement benefit, including pay for unused leave or time off, unplanned overtime, housing or vehicle allowances, employer contributions to DC plans, and bonuses.
- Prohibits public employers from providing a better health benefit vesting schedule to non-represented employees than for represented employees in the same retirement class.
PARS will provide more information on this bill to the Alert List at a later date.
…EFFECTS OF NEW PENSION RULES
In last month’s Legislative Alert we reported that the Government Accounting Standards Board (GASB) had released new rules overhauling how public pension funds report on their financial health. The new rules, which go into effect in two years, require public agencies to recognize costs earlier and make more conservative actuarial assumptions. We speculated that the new rules would generate larger funding shortfalls for public pensions around the country, creating additional fiscal pressure.
In addition, bond-rating firm Moody’s announced in late July that it was also making changes to its accounting rules, effective at the end of August. Among other things, the new rules limit the rate of return on future investments that pension funds can assume for accounting purposes. Besides the effect on funding levels, Moody’s warned that bond rating downgrades could be on the horizon for some local governments with accompanied increased borrowing costs for funding new projects.
…PROPOSED IRS CHANGES COULD AFFECT CHARTER SCHOOLS/SPECIAL DISTRICTS
The IRS is also proposing new changes that could cause thousands of California charter school employees to become ineligible for CalPERS and CalSTRS. In addition, many special districts that are part of 1937 Act counties could face similar eligibility questions. The IRS is also looking at whether public pension systems qualify for certain tax deferrals, such as using excess earnings to fund retiree health care. The proposed IRS rule would exclude non-government employees from public pensions, and could make more than 10,000 charter school employees now in CalSTRS ineligible for the retirement system. CalPERS and CalSTRS claim that 590 out of a total 908 charter schools will likely be deemed ineligible. Criteria for whether agencies are governmental include details on board selection and role, sovereign authority and responsibility for debt.
In addition, the 20 ’37 Act county retirement systems, which have about 170 separate government employers including numerous special districts, may face eligibility questions because of rules that allow excess investment earnings (amounts exceeding 1 percent of total assets) to be used to fund retiree health, which gives retirees an added benefit while reducing employer contributions. The argument against such a practice is that if a county system diverts excess earnings in good years, then that money which would normally offset losses in bad years is not there to do so, and that gap must be made up by additional contributions. The first of the California county systems being reviewed by the IRS is Orange County, and any changes needed or adopted there could become a model for the rest.
… RETIREMENT-RELATED BILLS
The following is a list of retirement-related bills that were sent to the Governor. The Governor has until September 30th to sign or veto the bills. We will provide a comprehensive summary of all retirement bills that passed, failed, or are vetoed in next month’s Legislative Alert.
AB 1248 (Hueso) Social Security Mandate: City of San Diego
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 or a defined benefit plan 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 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 987 (Negrete McLeod) – PERS’ Housekeeping Bill
This is the annual bill sponsored by PERS to “clean up” the provisions in the law it administers. There are several technical issues included in this bill, like the inclusion of the term “domestic partner” in certain code sections that currently only refer to spouses.
A more significant “fix” in this housekeeping bill would expand the ability for a PERS member to purchase service credit for the time spent away from work. Under current law, an employee can purchase retirement service credit if they have been on an extended leave of employer-approved absence for temporary disability or have had a serious illness. PERS wants to add “injury” to that list. Various provisions of the PERL relating to benefits for members experiencing a work-related disability have been conditioned on the member suffering some form of illness or injury. But, as these statutes were amended over the years, the phrase “or injury” was inadvertently omitted from a section of the PERL that authorizes service credit purchases for a work-related temporary disability.
SB 1234 (DeLeon) Golden State Retirement Savings Plan
DeLeon’s bill would create a state sponsored retirement plan for private sector employees which would involve a risk-free savings vehicle for employees based on voluntary contributions by private sector employees. The bill is co-authored by Senate Pro Tem Darryl Steinberg.
Please contact PARS with any questions or requests for further information.
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.