05
Apr
2013

Legislative Alert-April 2013

Categories: Legislative Updates,State Developments
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CalPERS OKs new actuarial approach that would hike contribution rates

The CalPERS board has tentatively approved an employer contribution rate raise of approximately 50% over the next half dozen years, replacing a smoothing policy that kept rates low during the recession with a plan to reach full funding in 30 years. At the March 19, 2013, meeting CalPERS staff provided the Board a report which outlined five different amortization and smoothing policies. In order for CalPERS to eliminate the unfunded liability and reach full funding, employer contribution rates will have to rise and the length of the smoothing and amortization periods will have to shorten. These changes will result in greater volatility in employer contribution rates.

The CalPERS funding level has not recovered from a $100 billion loss during the deep economic recession and under the current rate policy, is not projected to reach full funding for 30 years. The funding level dropped to 60.8%  in 2009 and in the last valuation (as of June 30, 2011) was back up to 73.6%.

The Board did not act on this issue at its March meeting, so the item will be addressed at its April meeting for a second reading and final adoption.

For K-12 schools, current statute holds the local agency portion of the contribution to a maximum of 13.02%. For community colleges there is no safety net and any increased rate will have a direct and negative impact on local agency budgets.

The proposal for a new actuarial method would show state and local government employers the new rate plan in their next annual valuation report. But a five-year phase in of the rate increase would not begin until fiscal 2014-15 for state and school employers. The rate increase would not begin to phase in until fiscal 2015-16 for the local governments.

Alan Milligan’s proposal would end the current complicated rate policy that uses a radical 15-year period for “smoothing” investment gains and losses, a “corridor” to limit smoothed values and rolling “amortization” that refinances debt each year.

The chief actuary wants to use a “direct” policy that would determine the rate increase needed to reach a funding level of 100% in 30 years then phase in the rate increase over five years.

Median Employer Contribution Rates for the Next Five Years

The tables below compare the projected median employer contribution rate for each method over the next five years.  The results are based on 1,500 projections for 50 years using randomly simulated investment returns.  Projections include impact of changes due to the PEPRA reform law.  Data is as of June 30, 2011.
State Miscellaneous

Method Year 1 Year 2 Year 3 Year 4 Year 5
Current Method 20.9% 21.3% 23.1% 24.4% 25.3%
Method 2 21.1% 21.8% 23.3% 24.9% 26.0%
Method 3 22.2% 24.0% 25.7% 27.4% 28.2%
Method 4 21.8% 23.3% 24.8% 26.5% 28.3%
Method 5 22.0% 23.6% 25.3% 27.1% 29.2%

New bills amend PEPRA

SB 13 PEPRA Clean-up  Bill (Beall): A clean-up bill to California Public Employees’ Pension Reform Act (PEPRA), Assembly Bill (AB) 340 (Chapter 296), is moving quickly through the legislature as an urgency measure.  Several amendments to PEPRA are proposed as follows:

  • Would amend Government Code Section (G.C.) 7522.02 to clarify that an employer can offer a defined contribution plan on or after January 1, 2013, either with or without a defined benefit plan, whether or not the employer offered a defined contribution plan prior to that date.
  • G.C. 7522.30 specifies that new members to the pension system shall have an initial contribution rate of at least 50% of the normal cost rate for that defined benefit plan or the current contribution rate of similarly situated employees, whichever is greater. SB 13 would add language that specifies that if the current contribution rate of similarly situated employees is higher, it must be agreed to through collective bargaining before it could apply to new members.
  • Would amend the reciprocity language in G.C. 7522.02 to apply to concurrent members of CalPERS and CalSTRS.
  • Would add a provision to G.C. 7522.02 to specify that each retirement system is to modify its plans to comply with the code and may adopt regulations. In fact, we are starting to see some draft regulations being developed by CalPERS and CalSTRS to implement PEPRA.
  • Would modify G.C. 7522.10 to clarify that employer contributions to an employee defined contribution plan for compensation in excess of the pensionable compensation limits (either 100% or 120% of Internal Revenue Code Section 403[b], depending on whether the employee is covered by Social Security or not, respectively) cannot exceed the employer’s contribution rate, as a percentage of pay, required to fund the defined benefit plan for income subject to that limitation.
  • Would clarify that the health benefits vesting schedule limitation for nonrepresented employees referred to in G.C. 7522.40 would apply to retiree health benefits and would only apply to employees that did not already have a specific retiree benefit vesting schedule in effect prior to January 1, 2013.

AB 160 (Alejo) Transit Employee Exclusion: This bill would exempt certain multi-employer plans and Union Taft-Hartley Plans from PEPRA, clarifying the original intent of the bill technically.  The bill also seeks to exempt transit employees from PEPRA since the federal government stipulates that these employees’ collective bargaining rights must be preserved. If they are impaired, the agency would lose federal funds for transportation projects.

Other new bills of interest

AB 507 (Garcia) School Member Death Benefits: This California School Employees Association bill would provide retirement school members with a higher death benefit, increasing it to $6,000 from $2,000 by April 1, 2018, then tying future increases to the Consumer Price Index.

AB 761 (Dickinson) Divestment from Firearms Manufacturers: This bill requires CalPERS and CalSTRS to divest all holding in any company involved in the manufacturing, selling, marketing, or distribution of firearms or ammunition. It would affect all retailers who sell guns and ammunition as well.

SB 215 (Beall) PERS Housekeeping Bill: The annual technical bill for CalPERS requires agencies to enter into a contract (not just a resolution) for the first time to participate in PEMHCA. It would give CalPERS the same rights in the contracting relationship as it has with pensions and CalPERS could refuse a contract or amendment. The bill also allows CalPERS to provide paperless benefit statements. SB 215 authorizes CalPERS to reimburse public agencies for the time a governing board member spends on CalPERS Board duties.

AB 410 (Jones-Sawyer) Retiree Health Benefits Eligibility: The bill makes changes to law which requires a person to retire within 120 days of separation to qualify for PEHMCA retiree healthcare. If an employee reinstates to active employment, then the new employer provides all the costs for retiree health benefits when the employee retires again.

AB 215 (Wieckowski) STRS Governance: The bill adds the COO and CFO of STRS to a category of positions for which the Teachers’ Retirement Board must fix compensation and apply conflict of interest provisions. (Currently only applies to the CEO, system actuary, general counsel, chief investment officer, and other investment officers and portfolio managers.)

AB 373 (Mullin) Long Term Act Eligibility Expansion: The bill allows the domestic partners and adult children to enroll in the PERS Long Term Care Program.

AB 822 (Hall) Pension Reform Election Process: The bill by the California Firefighters would require a charter or charter amendment that proposes to alter, replace or eliminate the retirement plans of city or county employees to be submitted to the voter at a statewide general election rather than the next regularly scheduled municipal election. The local agency would also have to arrange for an independent actuary to provide a statement about the actuarial impact of the proposed measure.

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 in the “News Center” by clicking on “Legislative Updates.”

Thank you,

Maureen Toal
Vice President, Public Affairs
Public Agency Retirement Services (PARS)
mtoal@pars.org
(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.