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10/30/2008
LEGISLATURE WILL COME BACK FOR LAME DUCK BUDGET SESSION On the heels of a new budget, Governor Schwarzenegger announced on October 27th that he will call lame duck lawmakers back into session next month to deal with a shortfall that is much bigger than the $3 billion projected just weeks ago. The Legislature closed up the 2007-2008 session once the Governor signed a $103.4 billion general-fund spending plan last month, officially ending the state's longest-ever budget delay at 85 days. The Legislature resolved a $15.2 billion budget gap with spending cuts, internal borrowing and accounting maneuvers, and the Governor vetoed $510 million in line-item expenditures. But the Department of Finance is now reporting that the state is already facing another huge budget gap. State tax revenues are lagging significantly behind projected revenues for the current budget – creating a large deficit and cash-flow problem. The governor’s office estimated the current size of the gap at between $5 billion and $8 billion, while Senate President Pro Tem Don Perata put the figure at $10 billion. Schwarzenegger is reported to be pushing for a sales tax increase but to also expect cuts of more than $2 billion in school spending and further cuts to state services. The Governor threatened to veto bills as the budget impasse continued through September. In the end, Schwarzenegger signed 775 bills and vetoed a large number as well - 415 bills. A final list of signed and vetoed retirement-related legislation is included in this Alert. MARKET DOWNTURN AFFECTS PENSION FUNDS Trouble in the nation’s financial sector is having even more negative impact than just budget cuts. The U.S. House Committee on Education and Labor held a hearing on October 7, 2008 on the effects of the recent turmoil in the financial markets on retirement security. The Congressional Budget Office reported that the decline in the value of financial assets cost pension funds roughly $1 trillion from the second quarter of 2007 to the second quarter of 2008 and the decline in assets over the past year and a half could total about $2 trillion. Volatile stock and commodities markets have slashed the portfolio values at the state’s large public pension systems. According to Bloomberg data, CalPERS’ market value declined to $193.7 billion as of Oct. 9, from $260.6 billion a year earlier losing almost $67 billion in 12 months, more than 25 percent of its value, as stock markets tumbled. The losses, if not recovered by the end of the fiscal year ending June 30, could lead to increased contributions of up to 4% from state and local government and school district employers, beginning mid-2010, CalPERS workers told board members at a meeting in San Luis Obispo. The fund's losses have mitigated four years of double-digit returns leading up to the 2007-08 fiscal year. CalSTRS, who had $216M exposed to AIG and Lehman, saw its value drop from $162.2 billion on June 30 to $147 billion on Sept. 30. FINAL REPORT ON RETIREMENT-RELATED BILLS – END OF 2007-2008 SESSION The following summarizes the action on retirement-related bills sent to the Governor that PARS has been tracking during the 2007-2008 session. As the fiscal problems of the State continue to mount there is a fair chance that there will be a correspondingly lower number of bills of this nature put forward and/or acted upon in the first year of the next session. The following bills have been signed into law: AB 591 (Dymally) Community Colleges: Part-Time Temporary Faculty AB 591 raises the limit on how much individual part-time faculty members can work at any one community college from 60 percent to 67 percent of a full-time professor’s load. AB 1480 (Mendoza) STRS – Roth IRA This bill permits STRS to administer a Roth IRA for the purpose of accepting a rollover from an annuity contract or custodial account offered by the system to the extent the rollover complies with the federal tax law. The bill will permit the system to provide for the administration of the Roth IRA by a qualified 3rd-party administrator who would provide custodial, investment, recordkeeping, or administrative services. AB 1626 (Galgiani) ’37 Act Counties – Normal Retirement Age This bill permits the board of a retirement system, subject to the County Employees Retirement Law of 1937, to implement the Pension Protection Act of 2006 in order to determine the normal retirement age of a member, if a member is a public safety officer consistent with federal tax law. AB 1844 (Hernandez) Public Employee Benefits Fraud AB 1844 makes it a crime for a person to make or present false material statements and representations in connection with retirement systems' benefits and applications or to aid or abet someone in this regard. The language requiring agencies to report their GASB 45 actuarial valuation to the Controller was amended out. AB 1936 (Emmerson) Nonprofit Mutual Water Companies This bill permits a nonprofit mutual water company that operates pursuant to specified provisions of law and that meets certain requirements, to enter into a contract to participate in PERS. AB 1963 (Carter) Same Service Credit for 2 County Retirement Systems This bill specifies that a participant in a retirement system established under the ’37 County Act is permitted to concurrently participate in individual account retirement plans and is permitted to concurrently participate in, and to receive credit for service in, a supplemental defined benefit program maintained by his or her employer. AB 2191 (Mullin) STRS – 403(b) Program This bill expands STRS’ 403(b) programs – Pension2, 403bCompare, and 403bComply – to state employees currently eligible to purchase 403(b) products through the State Controller. AB 2202 (Caballero) PERS – PT, Seasonal, Temporary Employee Information This bill requires every state agency, school employer, or contracting agency of PERS to provide information to the PERS board regarding the service and compensation earned by its part-time, seasonal, or temporary employees who do not meet the requirements for mandatory coverage by the system. AB 2390 (Karnette) STRS Post-retirement Earnings This bill extends the post-retirement earnings limits of STRS members until June 30, 2009, but in some cases only for those who retired prior to January 1, 2007. AB 2673 (Feuer) ’37 Act Counties Death Benefits The County Employees Retirement Law of 1937 provides that any death benefits, optional retirement allowances, or survivor's allowances accorded to a spouse may be accorded to a domestic partner. This bill makes that provision inapplicable to any member whose death occurs on or after January 1, 2009. SB 1123 (Wiggins) Retiree Health Benefits and California Actuarial Advisory Panel This Governor’s Commission bill requires local entities to prepare an actuarial study and make it public at least two weeks before changes to postemployment benefits (and not on consent calendar). It also creates the California Actuarial Advisory plan to provide expert and independent information to encourage greater transparency and understanding of actuarial methodologies and assumptions. The following bills have been vetoed: AB 376 (Nava) Airport Police Officers – Local Safety Members AB 376 allows contracting agencies to include their airport law enforcement officers as local safety members through an optional contract amendment. The bill was amended to exclude designated airport law enforcement officers. These types of bills tend to get vetoed because the Governor and public safety groups historically have resisted expansion of costly safety retirement benefits. AB 3041 (Comm. on Public Employees, Ret. and Soc. Sec.) PERS Housekeeping Bill This bill provides that a PERS employee serving on a basis of less than full-time for 6 months is excluded from the system unless that person comes within specified exceptions. The bill also revised the exception to include in PERS a person that completes 125 days or 1,000 hours. This bill would provide that a PERS employee serving less than full-time for 6 months must join PERS at the time the person completes 125 days or 1,000 hours of work, instead of current language which vaguely states that the person must join some time “after” exceeding the threshold. A recent amendment also revises the threshold to include in PERS any employee working 20 hours or more a week for a period of over 1 year. PERS believes that these changes will close up “loopholes” and clarify exactly when an employee is mandated into PERS. The bill met its demise, like many other bills, because the Governor vetoed many bills for fiscal implications and for political reasons as part of the budget stalemate. SB 1376 (Wiggins) STRS Housekeeping Bill This is the yearly STRS housekeeping bill. A section of the bill requires an employer that hires a retired STRS member to work under an exemption to the post-retirement earnings limit to submit required documentation to STRS by the end of the school year. While it is unusual for a housekeeping bill to be vetoed, this bill, like the PERS version, got caught up in the budget issues. 403(b) and 409(a) Regulations to Take Effect Soon In July 2007, the Internal Revenue Service (IRS) issued final 403(b) regulations that will apply to most agencies on January 1, 2009. The regulations will require significant changes to how educational and non-profit entities administer 403(b) plans for their employees, diminishing the extent to which 403(b)s differ from other salary reduction arrangements such as 457 and 401(k) plans. Employers must now create plan documentation spelling out rules of the plan, creating transparency for employer-created plan information. In addition, under the new "universal eligibility" rules, employers must also regularly notify all eligible employees working 20 hours or more (excluding temporary instructors, non-resident aliens and students) of their ability to participate. Sales of "extra" insurance will now be prohibited as well. Final regulations under new IRC section 409(a) for "ineligible deferred compensation" were released by the IRS in 2007 and take effect on January 1, 2009, as well. These regulations may impact public agencies that defer compensation or cash benefits to employees into future years. As defined by the IRS under the new regulations, deferred compensation is considered to be any arrangement under which services are performed in one taxable year, but compensation is received in a later year. The regulations, however, do not apply to benefits provided through retirement programs such as 401(a), 457, and 403(b) plans. Arrangements that may be impacted include:
Agencies are encouraged to review the new regulations to determine whether any benefit or compensation arrangements run afoul of the new regulations. The IRS will impose heavy tax penalties on employees and retirees if they are part of ineligible deferred compensation arrangements through their employers. This will also be the last Legislative Alert for the year but we will begin tracking any new bills that are introduced for next session starting in December and January, which we will update in our monthly “Legislative Alert” e-mail publication to be sent out again beginning in February 2009. Feel free to contact PARS with any question or requests for further information. Additional news and an archive of past Legislative Alerts is available on the PARS website at www.pars.org. Thank you, PARS HAS ESTABLISHED TWO INNOVATIVE MULTIPLE-EMPLOYER TRUSTS TO ASSIST PUBLIC AGENCIES WITH PRE-FUNDING THEIR OPEB (POST RETIREMENT HEALTH CARE) OBLIGATIONS UNDER GASB 45. FOR MORE INFORMATION, CONTACT: MAUREEN TOAL 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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