Legislative Alert-August 2013

Categories: California Developments,Legislative Updates
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The PEPRA “Clean Up” Job 

On January 1st, the Public Employees Pension Reform Act (PEPRA), or Assembly Bill 340, went into effect. As you know, PEPRA forced large changes to California’s public pension system, with standard benefit formulas being lowered and cost sharing implemented for new members of retirement systems. Certain provisions of the bill are very unclear however, and as a result, the legislature has been working on “clean-up bills” to clarify PEPRA’s language. The bills specifically focusing on this legislative “clean up” are:

AB 160 (Alejo) PEPRA Taft-Hartley Exclusion Bill:  This bill excludes from PEPRA certain Taft-Hartley multiemployer retirement (union) plans for public employees whose collective bargaining rights are protected by the Federal Transit Act. Specifically the Teamsters-sponsored bill would exclude 20,000 local and regional mass transit workers from PEPRA due to the potentially adverse federal funding ramifications.  AB 160 assumes that the changes in PEPRA violate a condition of mass-transit federal grants that require an agency to preserve the employee’s collective bargaining rights that are established in that state. The author of the bill contends that $2 billion in mass transit funds would be held back annually if the amendment to PEPRA is not passed.

AB 1380 (Committee on Public Employees, Retirement and Social Security) PEPRA 37 Act Amendments:  This bill coordinates and subordinates the County Act System Law with PEPRA. Generally, the bill would specify that certain provisions of the County Act Law do not apply to members who are currently subject to PEPRA because they were first employed after January 1, 2013. In addition, the bill would prohibit the purchase of non-qualified service credit “airtime” and retroactive benefit increases. Furthermore, it would also exempt the County Act Systems from any PEPRA rules concerning the calculation and adjustment of contribution rates.

SB 220 (Beall) PEPRA Clean-Up Bill:  This bill would require the PERS Board to administer each of its retirement systems in conformance with PEPRA. The bill would provide that if there is a conflict between the provisions of PEPRA and the respective provisions of the CalPERS system, then the provisions of PEPRA take precedence. The bill would also make various changes in California’s Public Retirement Law (PERL) and it would change the existing Public Employee Medical and Hospital Care Act  (PEMHCA) to conform with PEPRA.

AB 1381 (Jones-Sawyer) STRS PEPRA Clean-Up Bill:  This bill makes various technical corrections and conforming changes that align the Teachers’ Retirement Law with PEPRA. Specifically, it:

  1. Makes age factors and normal retirement ages consistent with PEPRA.
  2. Excludes 2%-at-62 members from using a one-year final compensation formula if they have 25 or more years of service credit or a collective bargaining agreement.
  3. Prohibits 2%-at-62 members from receiving any benefits from STRS in excess of the federal limit (by excluding them from the Replacement Benefits Program).
  4. Restricts the purchase of non-qualified service or “airtime.”
  5. Makes various changes to post-retirement employment.

SB 13 (Beall) PEPRA Amendment Clean-Up Bill:  This bill is drafted by the author of PEPRA and it is meant to clarify the original intent. It does some of the following:

  1. Clarifies that PEPRA does not prohibit an employer from offering a defined contribution (DC) plan in the future and does not force employers to only provide DC plans to new hires.
  2. Changes all references of “new employees” in the bill to “new members.”
  3. Clarifies that normal cost calculations should include all factors that an actuary would use to calculate benefit costs and must include ancillary benefits such as COLAs and disability benefits.
  4. Clarifies that an employer’s contribution to a DC plan on income earned above the pensionable earnings cap cannot exceed the percent of pay the employer paid towards the defined benefit (DB) plan. For instance, if the employer contributed 5 percent into an employee’s DB plan, then they cannot contribute any more than 5 percent into the subsequent DC plan.
  5. Allows a retirement system to terminate member contributions that are currently being made above the salary cap.
  6. States that an employer is not required to change the vesting schedule of an employee who was subject to (or contracted to) a specific vesting schedule prior to January 1, 2013.
  7. Clarifies that the 180-day break in service exception only applies to safety employees who are being re-employed as an annuitant. Specifically, it states that if a safety employee goes back to work in a job that could be performed by a general employee, then they must abide by the 180 day break in service rule.

Funding Changes and Investment Updates to CalPERS and CalSTRS

As previously reported, for the first time in over 10 years, STRS has asked the legislature to help close the gap caused by the funding shortfall by increasing both employee and employer contributions.  The burden of this increase would be placed on employers’ shoulders and would therefore impact K-12, community college districts, and the State. The Teachers’ Retirement Board believes that SRC 105, a state senate non-binding resolution, is the best way to ensure that retirement benefits are funded. STRS states in SRC 105 that PEPRA had little impact on its pension plan and therefore, they are requesting to have employee contributions raised even higher than 50 percent for new members. An effective date has not been specified yet, and the legislature will now not move on this issue in 2013, but STRS suggests that contribution increases need to occur as soon as possible.

Although the effects of the current liability will not be immediately felt, 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. Therefore, it is imperative that re-strategizing is completed now, to ensure that the reserves will not be drained in the future.

At present, investment returns seem to be well above the 7.5 percent target rate for both PERS and STRS. PERS recently announced that it just ended the fiscal year with a 12.5 percent return – a big rebound from the paltry 1 percent return last year. In addition, STRS experienced a 13.8 percent return, a big increase from the 1.8 percent profit they saw in 2012.

In all, both funds benefited from a year-long increase in global stock prices. STRS and PERS have both made significant changes to their investment portfolios since the Great Recession, with PERS overhauling its real estate portfolio to create more predictable results, and the STRS’ Investment Committee recently making a decision to move holdings out of opportunistic assets into the core category. Additionally, STRS also noted that its international portfolio has dropped significantly in size over the last few years, primarily because it has emphasized U.S. core investments and liquidated higher risk investments in the global market. They are now looking to start reversing this course however, and are also trying to reduce their commercial real estate assets which currently stand at $22.3 billion.

According to a report by the investment consultant Wilshire Associates, U.S. public pension plans booked a median gain of 12.4 percent for the 12 months through June 2013 powered by a surge in U.S. stock prices. Bloomberg News says that according to U.S. Census Bureau figures, pension funds chalked up an annualized three-year median return of 11.4 percent while their assets surpassed a pre-recession peak to reach $2.9 trillion. However, although assets are rising, a July report from Standard & Poor’s says that unfunded liabilities continue to grow due to the increased longevity for beneficiaries and previously granted benefit increases. The average plan funded ratio dropped slightly in 2011, indicating that while plans are showing signs of improvement, significant improvements in funded ratios will take many more years to come.

Update on Bills

The following is an update on other public employee retirement-related bills for the 2013-2014 Legislative Session. A report on bills that passed on the floor and were sent to the governor for signature will be provided in the September 30th Legislative Alert.

AB 382 (Mullin) Alternate Investment Bill:  At present, county and statewide retirement systems may invest in alternative investment vehicles such as private equity funds, venture funds, hedge funds, or absolute return funds in their quest to maximize earnings.  However, these alternative investment vehicles must be publicly disclosed under the Brown Act even though the same business records are currently exempted from disclosure under the California Public Records Act (PRA).  This bill, sponsored by the State Association of County Retirements Systems, seeks to resolve the inconsistency by adding alternative investments to the list of written records currently exempt from the Brown Act at public hearings.  In addition, the bill seeks to clarify that a local agency that invests pension funds may hold a closed session to simply consider information related to alternative investments, rather than only to consider the purchase or sale of particular, specific alternative investments, under a strict reading of the statute.

AB 822 (Hall) Local Government Retirement Plan – Elections:  This bill would require a charter or charter amendment that proposes to alter, replace, or eliminate the retirement benefit plan of employees of the city/city and county to be submitted to voters at a statewide general election. At present, the adoption of a charter or amendment to a charter of a city or city and county may be submitted to the voters at a statewide general, statewide primary, or regularly scheduled municipal election.

SB 215 (Beall) PERS Housekeeping Bill:  This annual bill deals with a number of PERS issues including the following:

  1. Provides the option to elect the STRS exclusion when the member of PERS was employed to perform a service that requires membership in STRS within the 120 day period prior to the member’s PERS date of hire.
  2. Allows employers that contract for health care with PERS to add part-time employees, as required by the Affordable Care Act.
  3. Allows a PERS member who has remarried a former spouse to again name that person as an optional settlement beneficiary.
  4. Gives PERS flexibility to decide whether to send statements by mail or electronically.
  5. Permits PERS, at its discretion, to require local agencies to enter a contract for coverage in lieu of, simply filing a resolution.

We will continue to update you on the status of these bills as the Legislative session comes to a close in next month’s Legislative Alert.

Legislative Calendar

The following are important dates and deadlines in the months ahead:

Aug. 30  Last day for Fiscal Committees to meet and report bills to floor

Sep. 6  Last day to amend bills on the floor

Sep. 3-13  Floor Session Only. No Committees, other than conference committees and Rules committee, may meet for any purpose

Sep. 13  Last day for each house to pass bills. Interim Study Recess begins at the end of this day’s session

Oct. 13  Last day for Governor to sign or veto bills passed by the Legislature on or before September 13th and in the Governor’s  possession after September 13th

Jan. 1  Statutes take effect

Jan. 6  Legislature reconvenes

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

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.


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