Legislative Alert – March 2013

Categories: California Developments,Legislative Updates,OPEB/GASB 45/75
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PEPRA: What’s next?

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

Already there are “clean-up bills” like SB 13, an urgency measure 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 Defined Benefit 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 DC plan for compensation in excess of the pensionable compensation limits (cannot exceed the employer’s contribution rate)
  • Clears up ambiguities regarding post-retirement healthcare vesting for unrepresented legacy employees

Another newly introduced bill, AB 160, addresses transportation unions’ discontent over the inclusion of Taft-Hartley 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 an annual $2 billion in mass transit funds are at stake. At the local level, unions are also suing various County Act Systems to overturn parts of PEPRA that restrict how pensions are calculated.

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 the funding shortfall and increase employee and employer contributions.  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 plan and therefore the system is requesting to have employee contributions raised more than 50% for new members. Although an effective 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 retirement benefit liability will have to be funded on a pay-as-you-go basis, according to CalSTRS’s actuarial analysis.

Funds report investment earnings

CalSTRS and CalPERS are beginning to see some light at the end of the tunnel when it pertains to investment returns. CalSTRS reported a return of 13.5% while CalPERS performed a little shy of that figure at 13.3% in calendar year 2012. Both pension systems use a discount rate (what they expect their investments to earn in the long term) of 7.5%. Even with the good news, both pensions are facing funding shortfalls.  CalPERS will likely resort 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.

IRS proposes changes to 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, 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 public agencies to account for individual pension liabilities for the first time in California, even though they participate in a state retirement system and are subject to mandated contribution rates.

The new rules go into effect in 2014.

Please feel free to contact PARS with any question or requests for further information. Additional news and an archive of past Legislative Alerts are 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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