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3/28/2010 In this Alert:
…PENSION REFORM INITIATIVE FAILS AGAIN In last month’s Legislative Alert we reported on another public pension reform initiative being spearheaded by former Assemblyman Keith Richman’s California Foundation for Fiscal Responsibility. The current initiative has now suffered the same fate as previous reform efforts, with the Foundation halting plans to move forward. The proposal, which had been cleared for circulation, would have used a smaller percentage of the employees' annual salary to compute retirement benefits for new hires, resulting in lower pension benefits compared to current employees. It also would have limited retiree health care benefits for new employees. According to the Foundation’s President, Marcia Fritz, the reason the initiative is not moving forward is that the Foundation could not come up with the estimated $2 million it would have cost to gather the signatures required to qualify the initiative for the ballot. Proponents needed to obtain 694,354 signatures of registered voters to qualify the initiative for the ballot. The decision not to go forward was influenced by politics as well as Governor Schwarzenegger and Republican Gubernatorial candidate Meg Whitman both decided to refrain from supporting the measure and that would also affect fundraising. While their most recent attempt at pension reform may be dead, the Foundation plans to develop in the near future an initiative that would provide 401(k)-type defined contribution plans for new hires. This is something Whitman has publicly stated she prefers as well. …BILLS TARGET PENSION SPIKING AND DOUBLE DIPPING Two new bills introduced this session are targeting two of the most controversial public pension issues: ‘spiking’ and ‘double dipping’. These bills are the priority of the public employee retirement committees to squelch media attention about abuses such as spiking that detract support from pensions in general. Amid outcry against publicized pension system abuses, the language of AB 1987 (Hernandez) and SB 1425 (Simitian) attempt to curtail the practices that lead to exorbitant public pension payouts. The bills prohibit boosting worker’s pay solely in order to inflate retirement benefits and place local public pension systems under tighter state control. To limit spiking, the bills would limit pay increases in the final year, for the sake of calculating an employee's pension, to no more than the average increase similar employees received in the previous two years. Employees will also no longer be able cash in unused vacations or sick leave in their final compensation. To limit double-dipping, they require retirees to wait at least six months before working for any other public entity. Under the bills, retirement boards would block intentionally spiked or manipulated pension payments and require that the employer and employee prove that the increase was justified. The bills would apply to all public pension systems in the state, including PERS, STRS, and the 1937 Act County Systems. …STATE RETIREMENT FUNDS PONDER INVESTMENT RETURN ASSUMPTION PERS and STRS are considering reducing their official forecasts of future investment returns. If a change is made, it could have a huge impact on taxpayers and public employees. Reducing the return rate assumption would mean that funding levels would dip even more for the funds, which are already underfunded after dealing with huge losses during the economic crisis. STRS has an 8 percent return rate assumption while PERS has its rate set at 7.75 percent. Both are now being pressured by consultants to lower their estimates saying they are unrealistic in the current economic climate. Public pension funds across the country have reduced or are considering reducing their investment forecasts. Although pension funds have recouped some of their investment losses incurred since the economic downturn, the prospect of a slow recovery is prompting them to lower their expectations. Although both California funds re-examine their assumptions every three years or so, STRS hasn't changed its assumption rate since 1995 and PERS has been at 7.75 percent since 2003. In the meantime, PERS is imposing contribution increases of about 6 to 10 percent on the state and local governments. STRS, which needs the Legislature's approval to raise rates, plans to petition lawmakers for an increase sometime next year. Employee contributions might go up as well. The STRS Board plans to decide in September if it should lower the investment return estimate. PERS is just beginning to examine the issue and doesn't plan a board vote until next February. The following are the retirement-related bills that 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. We have updated the list we reported last month but there has been no movement on any of the bills so far this year. We will continue to monitor these bills and any others for “gut-and-amends”. Keep in mind that the Legislature will no doubt be focused on budget related matters up-to and through the Governor’s May budget revise. Focus will also be on the November elections, so it may be a slower year for retirement legislation. 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 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 systems 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 that 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 1764 (Portantino) State Employee Executive Salary Freeze AB 1764 would prohibit state employees earning more than $150,000 per year from receiving overtime pay and from receiving a salary increase while employed in the same position. Employees can be exempted by executive order of the Governor or if their salaries are set by the State Constitution. This bill attempts to reign in public employee compensation during the state’s current financial crisis and would be in effect until January 1, 2013. 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 month separation from service would also be required before a retiree could perform services for a state or local public employer. SB 1209 (Romero) Postretirement 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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