Legislative Alert October 2012Categories: California Developments,Legislative Updates
In this Alert:
PUBLIC EMPLOYEES’ PENSION REFORM ACT (PEPRA) BECOMES LAW
CONTROLLER CRITICIZES CALSTRS’ PENSION SPIKING OVERSIGHT
FINAL STATUS OF RETIREMENT-RELATED BILLS
This is the last Alert for the legislative season. It will resume in February once the new legislative session gets underway. In the meantime, check the News Center for further news and developments on public employee retirement.
PUBLIC EMPLOYEES’ PENSION REFORM ACT (PEPRA) BECOMES LAW
In the last Alert, we reported that the most significant pension reform legislation in decades had passed on the last day of the state legislative session after last minute negotiations between the Governor and Democratic legislative leaders. On September 12, the Governor signed Assembly Bill 340/Senate Bill 827 (and clean-up bill AB 197), enacting the Public Employees’ Pension Reform Act (PEPRA), which goes into effect on January 1, 2013. The following is a summary and analysis of major provisions of the bill.
For the purpose of pension reform and lower formulas under PEPRA, a “new member” is defined as an employee who changes to or enters into a new retirement system, but only if no “reciprocity” exists between those systems. For the most part, PEPRA pertains to these new members and distinguishes them from new employees hired by a public agency who have been in the state retirement systems already.
On the school side, all CalSTRS-covered school districts are considered one employer. An individual changing employment from one school employer to another would not be considered a new member, even if the individual has a break in service greater than six months. Likewise on the municipal side, if an individual retires from a city for more than six months and then returns to that same city, the individual will not be a new member. However, for cities participating in CalPERS, if an individual retires from one city, separates from service for more than six months, and then takes a new job with a second city that participates in CalPERS, that person would be considered a new member for purposes of benefit eligibility when reinstated to CalPERS membership. If an employee moves between employers of the same retirement system or pension systems with reciprocity within six months, the employee must be provided the benefit plan offered by the new employer effective prior to January 1, 2013.
Since savings will be realized only when new members are hired in the future, short term savings will very minimal.
At a recent PERS PAC seminar, one public agency manager asked if the intent of the new law was to encourage the hiring of out-of-state or private sector employees, who would be considered new members and therefore subject to lower cost retirement formulas. To the contrary, the latest formulas for new members will make it more difficult to attract out-of-state and private sector executives and management unless salaries are boosted to compensate for lower retirement benefits.
New Pension Formulas
The new tier has a single benefit formula for general members and three benefit formulas for safety members that must be implemented by all public agency employers. The general member formula is 2% at age 62 with an early retirement age of 52 and a maximum benefit of 2.5% at age 67. The safety members formula requires a normal retirement age of 50 and a maximum retirement age at 57. The maximum benefit is 2.7% at 57.
The implications are that employees in the future will work longer. For future employees, there is a steeper penalty (formula reduction) for retiring earlier. Problems with quality of work, productivity, or physical capabilities might increase due to longer term service for certain types of positions and individuals.
Cap on Pensionable Salary
The amount of compensation that can be used to calculate retirement benefits for all new public employee retirement system members will be capped at the Social Security wage index limit ($110,100 in 2012) for employees participating in Social Security, or 120% of that limit ($132,120 in 2012) for those not in Social Security. The cap is increased in future years by the Consumer Price Index.
This compensation cap is aimed at limiting benefits to higher paid management and executive staff in the future, with possible implications for recruiting and retaining such employees in future years. Supplemental defined contribution plans can be used to pay additional benefits for those over the cap. However, PEPRA also limits the amount an employer can contribute in excess of the cap.
Final compensation for all members will be based on a three-year highest average annual compensation. This change is meant to hinder pension spiking, especially in situations where major abuses occurred, such as in the City of Bell. In addition, the Act prohibits any compensation outside of normal, recurring pay from being used to calculate retirement benefits. Pay for unused leave or time off, unplanned overtime, housing or vehicle allowances, employer contributions to defined contribution plans, and bonuses may not be counted towards pensionable compensation.
Return to Work
To prevent double dipping (receiving a salary and pension simultaneously), after January 1, 2013, all public employee retirement system members will have to wait at least 180 days before returning to work part-time for a public employer after retiring. For an employee who retires between now and the end of the year, the 180-day requirement to “sit out” still applies. Even though such a retirement is effective prior to the effective date of PEPRA, the member will be within the 180-day window. So if the employee were to retire on November 30, for example, they would need to wait 149 days starting January 1 (180 days minus the 31 days for December).
There is an exception to the 180-day “sit-out” requirement for a CalPERS retiree returning to work if the employer: 1) certifies that the appointment is necessary before 180 days have passed in order to fill a critically needed position, and 2) approves the appointment at a public meeting of the Board, where it was an action item but not on a consent calendar. However, if the retiree accepted an early retirement incentive, they are not eligible for this exception.
For a CalSTRS retiree, returning to work before 180 days have passed is an option but the earnings limit will be zero – every dollar earned will reduce the retirement benefit by a dollar. However, the same exemption as above is allowed for retirees of at least age 60 (or age 62 for new members) if they: 1) did not take an early retirement incentive, 2) the CalSTRS Board prepares a resolution (that can’t be placed on a consent calendar) finding it necessary to fill a critically needed position before 180 days have passed, and 3) the retiree’s retirement cannot be the reason for the need.
PEPRA requires all new public employees hired on or after January 1, 2013, to pay at least 50% of the normal cost of their pension. The employer can negotiate with current and new employees for the payment of additional contributions but are not mandated to do so. In addition, it creates an expectation that existing employees pay at least 50% of the normal cost for pensions going forward through collective bargaining. However, if that is not accomplished through negotiations by 2018, employers could increase employee contributions up to eight% of pay for local miscellaneous and school members, up to 12% of pay for local police, firefighters, and county peace officers, and up to 11% of pay for all other local safety members.
PEPRA states equal cost sharing of total normal cost for current employees “shall be the standard” but does not appear to require this “standard” or that current employees contribute any portion of normal costs.
All public employers are now prohibited from offering new employees/members a defined benefit plan, or combination of such plans, on compensation in excess of the cap. This means that no defined benefit plans may be offered to supplement a public employee pension. However, supplemental plans that are defined contribution plans (401a, 457, or 403b) are allowed. Employers can provide a defined contribution plan in addition to a pension for compensation in excess of the cap on pensionable income, provided the employer contribution to the supplemental plan does not exceed the federal limit of income that can be credited to a defined benefit plan (currently $250,000). Any agency wanting to establish a supplemental defined benefit plan needs to adopt a governing board resolution for a plan quickly (before 1/1/13). If interested, contact PARS ASAP.
The Act prohibits public employers from allowing any members to purchase credit for service not actually worked, otherwise known as “airtime.” There are rumors that this may be litigated in court as a vested rights issue.
Retroactive benefit enhancements are prohibited under the Act. Future benefit increases will only apply to service performed on or after the date of the improvement.
Public employers are prohibited from taking “pension holidays”, meaning they may no longer suspend contributions necessary to fund annual pension costs, even if there is a fiscal year budget surplus.
PEPRA also requires all public officials and employees to forfeit retirement benefits if convicted of a felony relating to their professional duties.
CONTROLLER CRITICIZES CALSTRS’ PENSION SPIKING OVERSIGHT
On September 5, Controller Chiang released his review of CalSTRS’ ability to detect and prevent pension spiking. The review found that CalSTRS did not adequately audit school districts, missed opportunities to reduce instances of suspicious or unjustified salary increases, and failed to adequately use existing systems designed to identify pension spiking. Specifically, the CalSTRS audit program was found to not adequately detect or deter pension spiking. Although more than 1,900 agencies are a part of CalSTRS, the pension plan averages only 40 audits a year. At that rate, each district would be audited only once every 48 years. The Controller therefore recommended more auditors to provide adequate oversight of the reporting by districts to CalSTRS.
The review also evaluated pay increases granted prior to retirement and found that 40% lacked documentation to justify pay increases granted to their employees immediately prior to retirement, such as board or executive approval or written performance evaluations. In addition, CalSTRS was found to not have reviewed or followed up on pay increases that were flagged by a system that electronically identifies instances in which an employee’s monthly pay increase exceeds a certain percentage, or when “special compensation” exceeds a specific dollar amount in one year.
The findings and recommendations from this review were presented at the September meeting of the CalSTRS Audit and Risk Management Committee. The Controller also plans to perform a similar review of pension-spiking at CalPERS.
FINAL STATUS OF RETIREMENT-RELATED BILLS
The following is a final disposition of retirement-related bills for the second year of the 2011-12 legislative session. All the retirement bills below were enacted into law by the Governor. None of the retirement related bills that were sent to the Governor were vetoed.
AB 178 (Gorell) STRS Postretirement Earnings
AB 178 was amended May 31 to extend certain CalSTRS post-retirement earnings limit exemptions until June 30, 2013. Eligible exempted positions include retired members approved by the Superintendent of Public Instruction, California Community College Board of Governors, or a county superintendent to serve as a trustee, administrator, or fiscal advisor for districts to address academic or financial weaknesses. Also exempted are retired members that do not work for at least 12 consecutive months after retirement and then return to perform CalSTRS-eligible work. This bill was signed by the Governor as Chapter 135 on July 17 and immediately became law as a result of an urgency clause.
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. This bill was signed by the Governor on September 30.
AB 2663 (Assembly Retirement Committee) STRS Housekeeping Bill
Among other things, STRS Housekeeping Bill: 1) for employees of multiple employers, requires that unused excess sick leave days 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 post-retirement reductions in an annuity payment for retired members of the Cash Balance Program who perform creditable service. This bill was signed by the Governor on September 30.
SB 987 (Negrete McLeod) PERS Housekeeping Bill
This is the annual bill sponsored by CalPERS 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 CalPERS 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. CalPERS 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. This bill was signed by the Governor on September 30.
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. This bill was signed by the Governor on September 28.
This is the last Alert for the legislative season. It will resume in February once the new legislative session gets underway. In the meantime, feel free to contact PARS with any question or requests for further information. Additional news and an archive of past Legislative Alerts are available “News Center” and then click on “Legislative Updates” or “State Developments.”
Vice President, Public Affairs
(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.