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4/28/2010
…PENSION REFORM BECOMING BIGGER ISSUE In last month’s Legislative Alert we reported on the failure of the pension reform initiative proposed by former Assemblyman Keith Richman’s California Foundation for Fiscal Responsibility to qualify for the November ballot. We then posited that it might be a slow year for retirement issues due to the upcoming election. How quickly things can change. Suddenly, pension reform is shaping up to be a hot issue in 2010. The last few months have seen public statements by Governor Schwarzenegger and candidates hopeful to succeed him on where they stand on public pension reform. The Legislature, as well, has seen that a new reform bill has been added to the proposals already introduced this session. As far back as 2005, Governor Schwarzenegger has had pension reform as a priority, then proposing alongside Richman that newly hired state employees be covered by a defined contribution 401(k)-style plan rather than defined benefit pensions under PERS and STRS. But under intense public employee union pressure the proposal died. Then last year Gov. Schwarzenegger proposed that pensions for new state hires be rolled back to the level before the SB 400 benefit formula increase a decade ago. But again, lack of union support caused the plan to be abandoned. Schwarzenegger is now backing new legislation hoping that pension reform will be part of his legacy. Republican candidate for
Governor, Meg Whitman, also posted a proposal to cut state worker
pension costs on her campaign website. Whitman and her Republican
primary opponent, Steve Poizner are both advocating switching most new
state hires, except for police and firefighters, to a 401(k)-type plan.
The Whitman plan also calls for raising the retirement age from 50 to
55 for public safety employees and from 55 to 65 for non-safety state
workers, qualifying for a pension to take more than five years, and
curbing ‘spiking’ of final pay to boost pensions. Most worker pension
contributions would be increased from 5 to 10 percent of pay.
Democratic candidate (and former Governor) Jerry Brown, on the other
hand, has criticized defined contribution plans because they leave
retirees vulnerable to investment losses when the stock market plunges. The new pension reform legislation proposed this month is Senate Bill 919, introduced by Senate Minority Leader Dennis Hollingsworth. Like Whitman’s proposal, the bill would raise the retirement ages for non-safety employees from 55 to 65 while safety employees would be raised from 50 to 57. The bill would also scale back benefits for new hires and the number of employees who could qualify for some of the more lucrative benefits. Non-safety new hires would be subject to a 2% at 65 retirement formula. Newly hired safety employees would be subject to a 2.5% or 2.7% at 57 retirement formula, depending on their bargaining unit. Pensions would be capped at 90% of final compensation, which would now be based on the highest three years of average annual compensation instead of the current highest one year. In addition to pension reforms, the bill also makes changes to PERS' health care program, PEMHCA. The bill would give the state the authority to purchase healthcare from a provider other than PERS so it could determine more cost effective plans and premium levels. The bill would also permit entities that contract with PERS for health benefits to agree, through collective bargaining, that the employer contribution for new hires may differ from the employer contribution provided to existing employees and annuitants. The bill would provide that these provisions are not subject to labor negotiation impasse procedures. As an urgency bill, SB 919 would require a two-thirds vote for passage, and would take effect immediately upon enactment. The other two bills we reported on in last month’s Legislative Alert deal primarily with the issues of ‘spiking’ and ‘double dipping’. AB 1987 (Hernandez) and SB 1425 (Simitian) attempt to curtail exorbitant public pension payouts. The bills prohibit boosting worker’s pay solely in order to inflate retirement benefits. To limit spiking, the bills limit pay increases in the final year 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, retirees would be required 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. …ANOTHER PERS CONTRIBUTION RATE INCREASE The PERS Board approved new actuarial assumptions at its April meeting that are being used in setting the new contribution rates. The new assumptions are expected to cause another new increase in contribution rates in addition to the estimated employer contribution rate increase previously announced. The previous increase reflected the approximately 25% investment loss experienced by PERS, as well as the Board's adoption of a new smoothing method to phase in the impact of the investment losses on contribution rates. The new actuarial assumptions were proposed in response to a recent study of PERS members. The PERS member study looked at trends in mortality, disability, retirement and salary levels during the decade ending in 2007. Higher-than-expected salaries, increases in life expectancy, and a decrease in retirement age all pointed to a need to change the assumptions on which the funding status is based and will be lowered even more. However, the actual impact of the change won't be known until the PERS Board meets next month and approves any contribution rate changes. The new actuarial assumptions will affect the actuarial valuations of all PERS plans and have a differing impact, depending upon the type of plan. Expectations are that the state contribution for miscellaneous workers should increase another 1.4 percent of payroll. For local governments, contribution rates could jump from 1 to 2 percent of payroll for police and firefighters. The PERS school rate is expected to increase from an estimated 0.5% as well. PERS is also expected to recommend increasing the cost for employees who purchase up to five years of service “air time” to boost their pensions as allowed by AB 719 in 2003. …RETIREMENT-RELATED BILLS UPDATE The following are the retirement-related bills that are still active in the 2009-10 Legislative Session. We will continue to monitor these bills and any others for “gut-and-amends”. With the Governor’s May budget revise coming up, the Legislature may focus next month on budget issues, but as we have seen with SB 919, pension reform is shaping up to be an important issue this year and we could see more amendments in the coming months. 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 this bill would cost the state $200,000 in lost tax revenue in 2010-11, so though it made it out of the Assembly it did not pass 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 Niello, 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 PERS 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. This bill has passed out of policy committee. 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 PERS, STRS, 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. This bill has passed out of policy committee. 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 1764 passed out of policy committee but was sent to the Appropriations suspense file. 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. This bill has passed out of policy committee. SB 919 (Hollingsworth) Public Employee Pension Reform Bill The bill would raise the retirement age for non-safety employees from 55 to 65 while safety employees would be raised from 50 to 57. The bill would also scale back benefits for new hires and the number of employees who could qualify for some of the more lucrative benefits. New non-safety hires would be subject to a 2% at 65 retirement formula. Newly hired safety employees would be subject to a 2.5% or 2.7% at 57 retirement formula, depending on their bargaining unit. Pensions would be capped at 90% of final compensation, which would now be based on the highest three years of average annual compensation instead of the current highest one year. This bill has yet to be assigned to a policy committee. SB 1209 (Romero) Postretirement Death Benefits This bill now increases the death benefit for any school PERS member from $2,000 to $4,000 for deaths of retired school members occurring between January 1, 2011 and January 1, 2012; to $4,500 for deaths between January 1, 2012 and January 1, 2013; to $5,000 for deaths between January 1, 2013 and March 31, 2014. The benefit amount after April 1, 2014 would be an annually adjusted from $5,000. SB 1209 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 and has also passed out of policy committee. 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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