Legislative Alert

California finally has a new budget as of last week. Since the new year, the state legislature has focused on passing a budget to deal with the deficit shortfall for the current fiscal year and one looming for the next fiscal year (’09-’10). Ongoing budget deficit pressures will pre-occupy the governor and legislature this session. In both houses, there is rumored to be a rule this session that any bill resulting in costs over $50,000 will not move. Therefore, we do not expect a significant number of retirement-employee benefits bills this year.

To recap the new budget: The final plan includes $14.8 billion in spending cuts, $12.5 billion in tax hikes, $5.4 billion in borrowing, and $7.8 billion in federal stimulus funds. Republican Senator Abel Maldonado provided the key vote after a 45-hour marathon session and seven unsuccessful votes where he was able to bargain his vote for constitutional reforms including ‘open’ primaries in which voters could cross party lines and candidates of all parties would compete in the same primary.

All the taxes in the budget package will last for two years, but they would be extended another two years if voters approve a permanent spending cap that would be placed on the May 19 ballot. That spending cap would prevent future legislators from raising state spending when California's treasury is flush and instead deposit that money into a rainy-day fund for unexpected deficits. May is also an important month because by then the state will have a much better understanding of the tax revenue picture following April tax-filing by Californians. The so-called “May Revise” will make further budgetary actions necessary.

…PENSION INITIATIVES PLANNED FOR BALLOT

Several new initiatives are being planned to hit the ballot in November related to public employee retirement benefits.

Paul McCauley – Renegotiation of Public Employee Pension Contracts

"The McCauley Public-Employee Pension Reform Act" has been approved for circulation for signatures for possible qualification for this year’s ballot. The initiative is named after proponent Paul McCauley, a certified public accountant in Santa Monica. The proposed amendment would eliminate certain state constitutional restrictions on renegotiating public employee pension contracts. Specifically, the proposal would allow governments to negotiate with employees, retirees, and/or their representatives to reduce vested pension benefits for existing and future public-sector retirees. This proposal would not require governmental entities to negotiate such changes. Some say that the initiative might conflict with established federal law. McCauley has introduced several initiatives before but it is unclear whether he has the dough to gather the signatures necessary to place it on the ballot. Also, this initiative may conflict with federal law related to vested rights.

Keith Richman - Reduce Pension Benefits for Future Public Employees

Former Assemblyman Keith Richman, is also gearing up for another initiative try that he says will be similar, with some minor changes, to an initiative proposed two years ago by his California Foundation for Fiscal Responsibility organization. Given the current economic climate, public employees’ unions are more concerned about this initiative than they were before.

The California Foundation for Fiscal Responsibility also issued a report recently recommending various public pension changes to save dollars for state and local government. It is uncertain whether any or all of these recommendations will be incorporated into the initiative. The budget savings recommendations include:

Temporarily suspend earnings of service credit for pension benefits or require employees to pay employer pension costs
Discontinue purchase of service (“airtime”) credit
Reduce compensated time off to state workers (at least 20% - closer to private sector)
Adopt a second tier pension plan
Eliminate employer pick-up of employee pension contributions
End reciprocity and pension spiking
Standardize disability processing, audit current disability recipients
Retirees pay a portion of health premiums and additional tax on COLA increase
Stop questionable payments for extra pension benefits related to work performed years earlier (cites the County of Orange’s retroactive benefit increases as an example).

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The provisions proposed 2 years ago and they may appear in the initiative include:

Roll back and cap retirement formulas as follows:

Police and Firefighters
Other Safety
All other Non-Social Security
All other Social Security 2.2%@55
1.8%@60
1.5%@SSAge
1.0% @SS Age

Increase retirement age to 55 for safety and for all other groups to Social Security retirement age, 65 to 67.
Minimum vesting requirements – new employees would need to work 5 or more consecutive years for public agencies to qualify for lifetime pension benefits. Retiree health benefits would only be available to new employees who work ten years for public agencies and have at least five consecutive years immediately prior to retirement.
Highest Average Salary change – would be based on average of highest five consecutive years' salary
Require voter approval of all benefit hikes.
Prohibit retroactive benefit increases – no retroactive increases in pension or retiree health benefits to any employee (including current employees).
Prohibit raids on pension and retiree health funds - Public agencies would be required to make full payments to their pension and retiree health care funds each year and money may not be taken out of pension or retiree health care funds for any purpose other than providing the benefits for which they were established.

It’s been a busy year thus far for CalPERS. In January, the state retirement system announced that it would be bringing in Joseph Dear, then Executive Director of the Washington State Investment Board, as its new Chief Investment Officer. Dear inherits the challenge of stabilizing the state pension fund that has lost around 30% of its assets in the past year. The pension fund has lost so much on investments (around $80 billion) that it is no longer the nation’s largest retirement plan, losing that position to the Federal Thrift Savings Plan.

Because of the losses, CalPERS officials have stated that they are considering changes to their investment portfolio. The board will set new percentages for each investment category, and may reduce its assets in stocks while increasing its participation in bonds and treasury bills. In addition to asset allocation changes, PERS is also going to be increasing employer contribution rates this year and probably for some years to follow. The amount of the increases will be dependent on how poorly the fiscal year ends investment-wise and whether there is a significant rebound in the state and national economies.

The following bills have been introduced for the 2009-10 Legislative Session as the bill filing deadline comes to a close. The remaining bills, once in print, will be featured in the March Alert. As mentioned, there is rumored to be a rule this session that any bill resulting in costs over $50,000 will not move. Because of the general focus of the Legislature on fiscal matters this session, we may see relatively few retirement-related bills this session.

Would authorize agencies to include certain airport law enforcement officers in the local safety member classification and exclude them from Social Security. This bill was introduced last session but had the resistance of public agencies for cost reasons and public safety unions seeking to restrict which groups receive safety benefits.

This bill conforms state law to recent changes in the federal Pension Protection Act by waiving the 10% early withdrawal penalty tax on certain distributions of pension plans and distributions from governmental retirement plans for health and long-term care insurance for public safety employees.

Creates the California Employee Savings Program to be administered by PERS to offer one or more individual retirement accounts or defined benefit plans to California private employees. A similar bill received a great deal of press last year because it expands the reach of CalPERS into the private sector. CalPERS itself had concerns and the bill stalled in the legislature.

Would require that contracts for district superintendents include a provision that the superintendent would receive no benefits exceeding what a civil service employee of that district with a substantially similar salary would earn.

This bill would eliminate the provision that requires the Teachers' Retirement Board to send a copy of the benefit payment information to any retired member, disabled member, or beneficiary who has payments transmitted by direct deposit or by mail to a financial institution.

Authorizes the board of retirement of San Bernardino County to establish a trust fund for OPEB benefits available to any local public agency. This bill was vetoed last year by the Governor.

This bill would require PEMHCA to offer a high-deductible health plan and a Health Savings Account option to public employees.

Following are important dates/deadlines for the rest of the 2009 legislative year:

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.

Maureen Toal
Vice President, Public Affairs
Public Agency Retirement Services (PARS)
mtoal@pars.org
(800) 540-6369 ext. 135

PARS is California’s specialist in early retirement incentives as a tool to help public agencies, particularly education agencies, reduce budgets and mitigate layoffs. Contact us for more information if you would like a complimentary analysis of whether an early retirement incentive is feasible for your district.

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.