Legislative Alert May 2013

Categories: Legislative Updates
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CalPERS Adopts New Actuarial Standards

Republican Bill to Prefund of Retiree Healthcare Rejected

Congress Scrutinizing State and Local Pension Plans

Bill Process


CalPERS Adopts New Actuarial Standards

As mentioned in the last Alert, CalPERS was about to approve new actuarial policies related to amortization and smoothing that will have a significant impact on employers’ rates. On April 17, the Board adopted a policy intended to return the system to fully funded status over the next 30 years. Some have projected that employer contributions will rise by almost 50% over a five year period starting with the 2015/2016 fiscal year. Employee contributions are not affected.

Currently, the majority of CalPERS plans are underfunded by 20% to 35% on average, and the prospects only look worse with liabilities increasing faster than assets accrue. As a result, changes to the 15-year rolling asset smoothing period (adopted in 2004 to address volatile employer contribution rates) and the 30-year rolling amortization period were recommended in order to accelerate progress towards the goal of attaining fully funded status. After this change, CalPERS will employ an amortization and smoothing policy that will pay for all gains and losses over a fixed 30-year period with the increases or decreases in the rate spread directly over a 5-year period.

The new amortization and smoothing policy will be used for the first time in the June 30, 2013 actuarial valuations. These valuations will be performed in the fall of 2014 and will set employer contribution rates for the Fiscal Year 2015-16.

Last week CalPERS released Circular Letter 200-019-13 which estimates the increase to employer contribution rates for fiscal years 2015/2016 – 2019/2020 based on the Board’s action.  The letter implies that contribution rate increases to be less than originally projected. The overall impact of the increase will depend on the employer’s current contribution rates and asset volatility ratio (AVR).

The Circular Letter provides an example of how the estimated increases will affect an employer’s contribution rate; however these are just estimates for now.

Republican Bill to Prefund of Retiree Healthcare Rejected

On April 22, the Senate Public Retirement Committee rejected a Republican bill (SB 774) to begin pre-funding retiree healthcare for new state employees to reduce its approximately $64 billon obligation based on the June 30, 2012 actuarial valuation.

The $64 billion unfunded liability (more than 2/3rds of this year’s state budget) is more than a $57 billion unfunded liability for state and local pensions reported by CalPERS in its latest annual financial report.

The bill’s author (Senator Mimi Walters) stated to the committee that: “As retiree healthcare costs rise faster than the rate of growth of tax revenues, a growing percentage of government revenues must be devoted to providing these benefits and fewer revenues are available for other critical state functions, such as, public safety, education and infrastructure.”

Many public employee unions indicated that they support the policy of prefunding actuarial obligations for retiree healthcare benefits, but believe that employees should be able to exercise their statutory rights to negotiate wages. A who’s who of state and local employee unions lined up against it, illustrating the challenges at the state and local level of getting labor to agree to pre-fund OPEB.

The Glendale City Employees Association, Organization of SMUD Employees, San Bernardino Public Employees Association, San Luis Obispo County Employees Association, and Santa Rosa City Employees Association noted in a joint letter that local employers have the ability to voluntarily refund retiree healthcare costs and stated that if this bill were to be enacted, it seems likely that many public agencies would eliminate retiree health benefits completely.

Many local public agencies pre-fund their benefits through the CalPERS and PARS Trusts which are the two largest OPEB trusts in California.

Congress Scrutinizing State and Local Pension Plans

In recent years, Congress has begun to hold hearings, issue reports, and introduce bills that would scrutinize and regulate public pensions that have traditionally been subject to much less federal oversight than private sector pensions. While none of these bills have made it into law this unprecedented attention to public pensions reflects a media and political trend.  A California Congressman’s bill is one of the latest examples of this trend.

Congressman Devin Nunes (CA-22) re-introduced the Public Employee Pension Transparency Act in the House of Representatives on April 18th. First introduced by Rep. Nunes in December 2010, the House legislation requires enhanced transparency for state and local pension plans while prohibiting the federal government from bailing out those systems.

The bill, whose principal authors also include Budget Committee Chairman Paul Ryan (WI-1), Senator Richard Burr (NC), and Oversight and Government Reform Committee Chairman Darrell Issa (CA-49), has been endorsed by a wide array of conservative watchdog groups and other organizations, including Americans for Tax Reform, the Council for Citizens Against Government Waste, the American Conservative Union, the National Taxpayers Union, the U.S. Chamber of Commerce, Free Enterprise Nation, and the National Federation of Independent Businesses.

Author Devin Nunes offered the following statement: “Often hidden by opaque accounting practices, the costs of public pension funds are driving an increasing number of states and municipalities toward insolvency. This bill will increase the funds’ transparency and eliminate deceptive accounting practices that are already shunned in the private sector, giving the American people a clearer understanding of these funds’ true fiscal condition.”

The Public Employee Pension Transparency Act would establish new transparency rules allowing plans to report their existing financial data but also requiring them to report their methods and assumptions. Public employee pension plans will also have to report their liabilities using a uniform accounting standard that will provide realistic rates of return and tie assets to more reasonable fair market valuations.

State and local officials should welcome increased public pension transparency as a tool to increase public finance soundness. However, plan sponsors may decide against reporting this information. To incentivize transparency, the bill links the creation of new federally subsidized debt at the state and local level with an honest accounting of current public pension liabilities. Failure to report will result in the suspension of all federal tax-exempt bonding authority for jurisdictions whose employees are covered by the non-compliant plan.

Bill Process

Most of the public employee retirement bills have now had hearings and been reported out of the policy committees or been rejected. Most now move onto the Appropriations Committees where they will have hearings prior to the Legislature shifting its focus to getting a budget out by July 1. We will provide a full run down of where the bills are (as reported in the April Legislative Alert) in the next Alert.

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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