3/30/09

In this Alert:

 . . . CALPERS AND CALSTRS UPDATE

. . . BUDGET WOES CONTINUE

. . . NEWLY INTRODUCED RETIREMENT-RELATED BILLS

. . . CALPERS AND CALSTRS UPDATE

CalPERS and CalSTRS have suffered similar losses in the stock market crash, but they have different recovery plans. CalPERS has loosened asset allocation targets to avoid forcing sales that would lock in losses. CalSTRS is seeking gains through a short-term move that could shift more than $5 billion from stocks to high-yield debt instruments. The CalSTRS plan would shift up to 5 percent of its assets from stocks to various kinds of debt instruments purchased from “distressed sellers” in three classes: fixed income, real estate and private equity.

CalPERS usually adjusts its investment allocation between stocks, bonds and other asset classes every three years. In addition to widening asset allocation targets in December, CalPERS has added new asset classes: infrastructure, commodities, timber and inflation-risk bonds. CalPERS has also told local government officials that a contribution increase is likely and that there could be an increase in employer contribution rates of 2 to 5 percent of payroll, if the value of the investment portfolio drops by 20 percent during the fiscal year ending in June. CalPERS has the power to set pension contribution rates, but CalSTRS rates are set in statute and can only be changed by legislation.

The two state retirement systems joined eight other big public pension funds in March in calling for regulatory reform to rebuild trust in the financial markets. The 10 funds control portfolios totaling $900 billion. In a five-point declaration of principles, the funds call for greater disclosure and transparency and more clout for shareholders, among other changes. The declaration comes as Congress is expected to consider a broad range of changes in the way financial markets are regulated. However, another of the principles outlined by the pension funds is a warning not to limit funds' ability to put money into a broad range of investments. Although there are not yet any specific proposals to curtail investments in things like hedge funds, some worry that regulators may try to place limits on institutional investors’ investment classes – a move they say could diminish their ability to maximize returns.

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. . . BUDGET WOES CONTINUE

Since the Legislature is preoccupied with fiscal matters rather than legislation right now, it might helpful to summarize the sorry financial condition of the state at this point in time. The Legislature's budget analyst, Mac Taylor, declared recently that the newly enacted budget package of spending cuts, new taxes and loans aimed at closing the state's $40 billion budget deficit will fall short by $8 billion because the state's economy is continuing to falter. Consequently, the Legislature and Governor will need to find additional solutions to make up those billions of dollars in the coming months to bring the 2009-10 budget back into balance.

Even worse, the LAO predicts that since many of the measures adopted in the budget are temporary, the state's operating deficits will reappear in future years - growing from $12.6 billion in 2010-11 to $26 billion in 2013-14. The LAO report will probably renew the Capitol's fight over spending cuts and new taxes, fueling calls on the left for more tax increases and those on the right for deeper spending cuts. Of course, this estimate hinges on the successful passage of the package of ballot measures slated to go before the voters at the May 19 special election.

In regard to federal stimulus funds, the State Treasurer and Director of the Department of Finance have agreed that the amount of revenue expected from the federal government is below the trigger amount set in the budget to avoid higher taxes and deeper cuts. The LAO agrees with the estimate of $8 billion that may be counted as state General Fund relief. This is $2 billion short of the $10 billion trigger outlined in statute to avoid about $1 billion in cuts and about $1.8 billion in tax increases approved as part of the 2009-10 budget.

Furthermore, because much of the budget package relies on the passing of ballot measures, making up ground on the deficit may be a tall order, considering California anger towards political leaders and their proposals. A new poll released March 25 by the Public Policy Institute of California shows that none of the key measures in the May 19 special election is garnering majority support among likely voters. Proposition 1C, for example, would allow the state to borrow $5 billion against revenues from the state lottery, but is backed by only 37 percent of likely voters. In addition, Schwarzenegger's approval rating has dropped to 33 percent, while the Legislature gets positive ratings from only 11 percent of likely voters.

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. . . NEWLY INTRODUCED RETIREMENT-RELATED BILLS

The following new bills have been introduced for the 2009-10 Legislative Session as the bill filing deadline has closed. In the last Alert, we provided a partial list of retirement-related bills introduced. The following are bills introduced since the last Alert.

AB 399 (Brownly) PERS – Accumulated Contributions

This bill would require that a member who is permanently separated from all service covered by PERS and who attains the age of 70, be given an election to withdraw contributions or, if vested, an election to either apply for service retirement or withdraw contributions. Failure to apply for service retirement or to make an election to withdraw contributions within 90 days would be deemed an election to withdraw contributions.

AB 506 (Furutani) STRS Post-retirement Earnings Limits

This bill extends the post-retirement earnings limits under STRS until June 30, 2012. It applies a limitation of $0 to retired employees during the first six months after service retirement if the member is below normal retirement age (age 60) starting June 30, 2010.

AB 654 (Mendoza) STRS – Penalties and Fees

This bill would allow STRS to: 1) charge interest on installment payments to purchase “air-time”, 2) charge interest on delinquent contributions, and 3) assess penalties or fees on late or improper reports from schools and agencies.

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AB 704 (Calderon) PERS – Deferred Retirement Option Program

This bill would establish the “Deferred Retirement Option Program” or “DROP”, a voluntary program in PERS for certain state employee groups. The program would provide eligible members at retirement a lump sum in addition to a monthly retirement allowance.

AB 966 (Committee on Public Employees, Retirement and Social Security) PERS Housekeeping Bill

Among other provisions, this bill would provide that an employee whose appointment or employment contract does not fix a term of full-time, continuous employment in excess of 6 months is excluded from PERS membership unless exceptions apply such as if it requires service equivalent to an average of 20 hours per week for one year or longer or if a person completes 125 days or 1,000 hours. This bill is similar to the PERS housekeeping bill from last session that was vetoed by the governor.

AB 1267 (Eng) STRS Credit

This bill would eliminate the sunseting of the “longevity bonus” for STRS members who have 30 or more years of service. Currently the bonuses are scheduled to sunset as of December 31, 2010. It is unclear whether the STRS Board will support this bill, given the longer term future costs of extending these benefits.

AB 1354 (Fong) County Employees Retirement 415 limits

This bill would prohibit the amount payable to a County Act Retirement System member to exceed Internal Revenue Code 415 limits. Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under retirement plans, which are adjusted annually for cost-of-living increases.

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SB 280 (Calderon) STRS Golden Handshake

This bill eliminates the provision that a STRS member would forfeit his or her 2 years of service credit golden handshake if re-employed within 5 years after retirement as a substitute teacher by the school district from which he or she retired.

SB 519 (Ashburn) PERS Death Benefits

PERS provides pre-retirement death benefits for the surviving spouse or children of state and school members not covered by Social Security and provides that a surviving spouse becomes eligible for the benefits when he or she attains 60 years of age. On January 1, 2010, the surviving spouses’ eligibility age is to increase to age 62. The bill will maintain the benefits indefinitely that are currently in effect

SB 628 (Ashburn) PEMHCA Program for County Retirement Systems

This bill would authorize a county board of supervisors to contract with the PERS PEHMCA program to provide a 2-tiered health benefit system for the county's annuitants.

SB 634 (Committee on Public Employees and Retirement) STRS Housekeeping Bill

This bill makes technical changes to STRS Law. Among others, there is a provision to make membership election irrevocable for substitute teachers and other part-time employees who optionally select to participate in the STRS Defined Benefit Program and remain in effect until the member terminates employment. (Participation in the STRS is not mandatory for part-time employees.) The bill also covers changes in eligibility for reduction-in-service, domestic partner rights, documentation for post-retirement earnings, beneficiary law, and other matters.

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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,

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.

 

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