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02/24/2010
…NEW YEAR – MORE BUDGET AND PENSION CONCERNS Just as last year at this time, 2010 began with Governor Schwarzenegger releasing a proposed State Budget to close a big, persistent budget deficit ($19.9 billion two-year budget gap.) The Governor’s proposal relies heavily on federal funding. Unfortunately for the Governor, President Obama's Federal Budget plan, as it currently stands, provides only about $1.5 billion. To make matter worse, State Controller John Chiang sent a letter in January to the Governor and legislative leaders warning that the current state cash condition is “marginally better than it was one year ago.” Chiang projects that as of March 30, the state will need to tap emergency cash reserves to meet its obligations and that by April 1, the state will be running a negative $197 million cash balance. Based on current projections, the cash shortfall would grow to negative $1.1 billion by July 29, 2010, which would lead again to the issuing of IOUs.
On the retirement front, 2010 begins with some serious questions about the sustainability of pension benefits in the media. In October, the Chief CalPERS actuary suggested that the retirement system could be facing decades of unsustainable pension costs of on average 15% to 20% of pay for a miscellaneous plan and 35% for a safety plan. CalPERS announced plans to convene stakeholders to discuss the sustainability of pension benefits. In the last few weeks, CalPERS has sponsored several forums in Sacramento and Los Angeles called “California Retirement Dialogue” to examine public pensions and “ideas for ensuring future retirement security.” At the January 29 forum, Governor Arnold Schwarzenegger’s pension advisor, David Crane asserted that CalPERS is banking on overly optimistic investment earnings, an annual average of 7.75 percent. He cited concerns that the state would have to pay for a shortfall, adding to cost increases already being phased in from the historic stock market crash. Faulting CalPERS for failure to disclose, Crane said CalPERS did not tell legislators how SB 400’s benefit formula increases would increase state costs if earnings fell short. The governor proposed last June that pensions for new state employees be reduced to the level in effect before SB 400. The Governor is expected to introduce a bill to roll-back benefit formulas for new hires. At the same forum, John Hamm, CEO of the California Highway Patrol union told the audience that the union was considering negotiating lower pension benefits for new hires. There are also local government movements to roll back benefits for new hires, although proposed ballot initiatives reducing pensions appear to have faltered. … GOVERNOR DOESN’T SUPPORT NEW PENSION BALLOT INITIATIVES The Sacramento Bee reported on February 24th that Gov. Arnold Schwarzenegger and the leading GOP gubernatorial candidate, Meg Whitman, have backed away from supporting a ballot measure that would reduce public employee pensions. Several initiatives have been introduced for signatures to get on the ballot, with the California Foundation for Fiscal Responsibility’s measure being the most prominent one, sponsored by anti-pension advocate, former Assemblyman Keith Richman. They are as follows:
Proponent: John Romano This initiative limits pensions for newly hired state employees at $100,000, though the pensions can be increased but only through Cost of Living Adjustments (COLAs) and they are never to exceed $162,500.
Proponent: Marcia Fritz, President of the California Foundation for Fiscal Responsibility
Political consultants from both major parties said Republicans were worried that such a measure would mobilize public employee unions and bring more liberal voters to the polls in November, when Whitman hopes to be her party's nominee for governor. Schwarzenegger political advisor Adam Mendelsohn said the governor met with Fritz's group and supports its aims. But the governor believes pension reform can be handled legislatively and that other initiatives – especially the water bond and open primary measure – need his full attention and fundraising power. We will likely see more of these initiatives in the future, as the Foundation is committed to eventually getting one on the ballot. The following bills have either been carried over from 2009 to the 2010 Legislative Session or have been newly introduced this year. The bill filing deadline for 2010 was February 19, so we will have a full report on new bills introduced in the March Alert. AB 104 (Calderon) Public Safety Distribution penalty waiver This two year bill brings California into conformity with federal tax laws of the Pension Protection Act by waiving the 10% early withdrawal penalty tax on certain distributions of pension plans for public safety employees. The Franchise Tax Board estimated that it would cost the state $200,000 in lost tax revenue in 2010-11, so it made it out of the Assembly but not the Senate. AB 125 (De Leon) PERS savings program for private sector The bill, from the past session, 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. This bill has been controversial because it puts PERS in the business of offering and administering retirement plans for private sector employees. According to the author, 43% of the state’s workforce work at a job that does not offer them a pension or retirement savings plan to supplement Social Security. AB 446 (Niello) Study on the Cost of Airtime This bill would require PERS to prepare a report to the Legislature on the use of the purchase of additional PERS retirement service credits by PERS participants, otherwise known as “airtime”. Assembly Member Neillo, a Republican from Sacramento, is concerned that airtime purchases may impact PERS’ growing unfunded liability. Airtime is supposed to be “cost-neutral” to the employer and Niello wants verification of this. The bill was watered down and is likely dead at this point, but could turn into a vehicle for another retirement cause as a two-year bill. AB 609 (Conway) County Employees Retirement Administrative Costs County Retirement Act systems are the only system required to annually adopt a budget covering the entire expense of administration of the retirement system and prohibits the expense incurred in any year from exceeding 18/100 of 1% of the total assets of the retirement system. This became an issue because assets dropped recently but operational expenses and needs do not. This bill would instead prohibit expenses incurred in any year from exceeding 18/100 of 1% of the approved actuarial liability of the retirement system rather than be based on assets. Labor had some concerns about the bill and it did not pass last year, but may take on new life again since it is a big priority for the State Association of County Retirement Systems (SACRAS). AB 1651 (De La Torre) Furloughed School Employees This new bill requires that the calculations for retirement allowances for CalPERS school members who are subject to mandatory furloughs include the amount of service and compensation that would have been credited and paid had the member not been subject to mandatory furloughs. AB 1743 (Hernandez) Placement Agents The bill would define placement agents as lobbyists in accordance with the state’s Political Reform Act. Placement agents would be subject to strict gift limits, campaign contribution prohibitions, and be prohibited from receiving compensation contingent upon any investment decision. Placement agents, their firms and employers would be required to report quarterly on their fees and compensation and on any honoraria or gifts. The law would apply to CalPERS, CalSTRS and local retirement systems. Placement agents are persons hired in connection with an investment transaction as a finder, solicitor, marketer, consultant, broker or other intermediary to raise money or investments or obtain access to a retirement system. Recent investigative and enforcement activities in New York and media coverage of PERS in California have revealed a lack of transparency and limited disclosure of placement agent involvement in public pension plan investments, the fees they charge, and the services they provide in exchange for these fees. AB 1987 (Hernandez) Anti-Spiking Bill AB 1987 is an anti-spiking type bill that seeks to prevent changes in compensation principally for the purpose of enhancing a member's benefits in the final year of employment. The bill would limit the calculation of a member's final compensation to the average increase in compensation received within the final compensation period and the 2 preceding years by employees in the same group. The bill also requires each state and local public retirement system to establish an ongoing audit process to ensure that a change in a member's compensation is not made principally to enhance a member's retirement benefits. A 6 months separation from service would also be required before a retiree could perform services for a state or local public employer. SB 1209 (Romero) Post-retirement Death Benefits This new bill increases the death benefit for any school PERS member from $2,000 to $6,163 and is similar to previous bills introduced in past sessions. SB 1425 (Simitian, D- Palo Alto) Anti-Spiking Bill This new bill is very similar in content to AB 1987 above. Following are important dates/deadlines for the 2010 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. 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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