Agency Watch – Winter 2012

Categories: Legislative Updates
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Eye on Sacramento

PEPRA: What’s next?

The most significant pension reform law in decades went into effect on January 1 – The Public Employee Pension Reform Act (PEPRA). PEPRA creates a lower tier of benefits for new public employees and makes several changes to the retirement structure for current employees. Now that PEPRA has been dissected, processed, and implemented — what’s next?

Already there are “clean-up” bills. SB 13, an urgency measure, is moving very quickly through the legislature. This non-controversial bill proposes multiple changes to PEPRA, including:

  • Clarifies CalPERS and CalSTRS reciprocity for legacy employees
  • Allows an employer that already has a pension plan in place prior to 1/1/13 to add a defined contribution plan
  • Confirms that in determining normal cost, the actuary may use single rate contributions (as in CalPERS), or age-based contribution rates (as in the 1937 Act County Retirement Associations)
  • Clarifies that employer contributions to an employee defined contribution plan for compensation in excess of the compensation limits cannot exceed the employer’s contribution rate
  • Clears up ambiguities regarding post-retirement healthcare vesting for unrepresented legacy employees

Another bill, AB 160, addresses transportation unions’ discontent over the inclusion of Taft-Hartley union plans under the PEPRA umbrella. The bill would exempt transportation authorities from PEPRA due to its potentially adverse ramifications for federal funding. The Teamsters’ sponsored bill would exclude 20,000 local and regional mass transit workers in California. AB 160 assumes that PEPRA changes violate a condition of mass-transit federal grants requiring an agency to preserve whatever employees collective bargaining rights are authorized in that state. The author contends that $2 billion annually in mass transit funds are at stake. At the local level, unions are also suing various County Act Systems to overturn PEPRA restrictions as to how pensions are calculated.

PEPRA: How does it affect retirement incentives?

PEPRA prohibits new IRS 401(a) supplemental defined benefit plans, the vehicle used to design locally controlled, customized retirement incentives – a valuable fiscal tool used to prevent layoffs and reduce labor costs. Supplemental defined benefit plans allow post-employment employer contributions needed for a retirement incentive. Fortunately, school and community college districts can use 403(b) defined contribution plans, which allow post-employment contributions and are not affected by PEPRA. Non-educational agencies cannot use 403(b) plans. PARS has been designing incentives for educational agencies using this unique 403(b) plan approach for the last seven years.

CalPERS and CalSTRS update

CalSTRS Offers Funding Proposal to Legislature

For the first time in over 10 years, CalSTRS has asked the legislature to help close the gap caused by its funding shortfall. CalSTRS is proposing employee and employer contribution hikes. The burden of this increase would be placed upon employers’ shoulders, impacting K-12, community college districts, and the state. The Teachers’ Retirement Board believes that SRC 105 is the best way to ensure that retirement benefits are funded. CalSTRS states in SRC 105 that PEPRA had little impact on its pension system and therefore the system is requesting to raise employee contributions more than 50% for new members. Although a date is not specified, CalSTRS suggests the sooner the better for the contribution increases.

By the year 2047 there will be no more reserves and the retirement benefit liability will have to be funded on a pay-as-you-go basis, according to CalSTRS’s actuarial analysis.

State Pension Funds Report Investment Earnings

At the end of the plan year, both CalPERS and CalSTRS reported investment earnings far shy of their anticipated returns (although 12/31 investment earnings have been much stronger at around 13%). CalPERS reported a 1% annual return while CalSTRS’ return was a little better at 1.8% for the plan year. Both pension systems use a discount rate (what they expect their investments to earn in the long term) of 7.5%. Such low earnings will likely lead to higher contribution rates for the state and CalPERS participating agencies, even as contribution rates continue to rise from the smoothing of the market losses of 2008-09.

Controller Criticizes CalSTRS’ Pension Spiking Oversight

In the Fall, Controller Chiang released his review of CalSTRS’ ability to detect and prevent pension spiking. The review found that CalSTRS does 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.

2012 enacted retirement-related bills

The following are enacted retirement-related bills, outside of those that became part of PEPRA, and took effect 1/1/13. None of the retirement-related bills were vetoed.

  • AB 178 (Gorell) STRS Postretirement Earnings: AB 178 extends certain STRS postretirement 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.
  • 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 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: 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 expands the ability for a PERS member to purchase service credit for the time spent away from work. Under previous 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.
  • SB 1234 (DeLeon) Golden State Retirement Savings Plan: DeLeon’s bill created a state sponsored retirement plan for private sector employees which involves a risk-free savings vehicle for employees based on voluntary contributions by private sector employees.

Eye on Washington

IRS may change definition of governmental plan

Last November the IRS released advanced notice that it will propose new regulations redefining what will be considered a “governmental” plan. As currently written, it may be that many charter schools and other quasi-governmental entities fail to meet all of the proposed eligibility requirements to be considered governmental plans. Criteria for whether agencies are governmental include board selection and role, sovereign authority, and responsibility for debt. If entities ultimately fail the new eligibility criteria, then private sector rules would technically apply to them, along with nondiscrimination, minimum participation rules, and minimum funding standards. Charter school pension plans would cease to be “government” plans and participants would be forced out of CalSTRS. According to CalSTRS, 590 out of a total 908 charter schools, and over 10,000 existing charter school employees in STRS will likely be deemed ineligible under the tests specified in the advance rulemaking notice.

After another regulations proposal and public comment period, the IRS is expected to issue final regulations near the beginning of 2014.

New GASB rules could lower pension funding levels

The Government Accounting Standards Board (GASB) released new rules last year overhauling public pension fund financial reporting. GASB Statements 67 and 68 will require government employers to recognize costs earlier and, in certain cases, make more conservative projections of future investment earnings. The new rules will force larger funding shortfalls for California’s public pensions and
others around the country. According to a recent Boston College study, CalPERS was 83% funded in 2010 under the old accounting rules, but would have been only 65% funded under the new rules. CalSTRS, which was 71% funded in 2010, would have dropped to 60% or below.

The new GASB rules may also require school districts to account for individual pension liabilities for the first time on their financial statements, even though they participate in a state retirement system and are subject to state mandated contribution rates. The new rules go into effect in 2014.


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