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6/25/2010
…UNIONS AGREE TO ROLL BACK PENSION BENEFITS The California Highway Patrol officers' union and three other state unions have agreed with Governor Schwarzenegger to roll back pension benefits for new state hires. The three other unions are the California Department of Forestry Firefighters, the California Association of Psychiatric Technicians and the American Federation of State, County and Municipal Employees. The affected contracts cover 23,000 state employees, including patrol officers, firefighters, health and social service professionals, and psychiatric technicians. The agreements roll back the expansion of pension benefits adopted in SB 400 in 1999 and will increase pension contributions for all employees in the unions to a minimum of 10 percent. The agreements also require new employees to work additional years to receive full benefits and base final retirement compensation on the highest three years of wages instead of the highest year. These agreements are projected to save the state $72 million in FY 2010-11. If similar agreements are reached with the state’s eight other employee unions, the state could save up to $2.2 billion total and $1.2 billion from the General Fund. …CALPERS INCREASES CONTRIBUTION RATES On June 16, 2010, the CalPERS Board approved 2010-11 employer contribution rates for the state and schools. The action brings the 2010-11 contribution rate for K-12 and community college employers to 10.707%, up from the 9.709% rate in effect for the current year. The fund's actuaries recommend requesting $3.9 billion from the state for the new fiscal year, $400 million more than Gov. Schwarzenegger planned for in his original 2010-11 budget proposal. Last June, the fund estimated that it had about 60 percent of the assets it needed to cover the pension promises made to state workers. PERS is responding to a recent actuarial study that revealed longer-than-expected member life expectancies, earlier retirement ages, and higher salary levels. 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. …STRS MAY REDUCE INVESTMENT RETURN ASSUMPTION At its June 4, 2010 meeting, the STRS Board delayed action on staff-recommended reductions in the investment return assumption used to determine the funded status of the STRS pension fund. This means that the current 8% investment return assumption will be used to prepare the overdue June 30, 2009 actuarial assumption, which will be presented to the Board at its September meeting. STRS has been contemplating a reduction of its investment return rate assumption by half a percentage point, from 8% to 7.5%, a move that could cost state and local taxpayers hundreds of millions of dollars. STRS staff has been recommending the move for months to increase the funding level of STRS and keep the fund financially healthy. STRS has not altered the investment return assumption since 1995. But in light of the market crash and continued volatility, STRS, like other pension funds around the country, has been contemplating lowering their forecast. Schwarzenegger’s administration wants STRS investment forecasts to be lowered even more, to around 6 or 6.1 percent, claiming that STRS (and PERS) has been ignoring its financial problems. The Board now plans to vote on the matter in November. If it adopts a lower investment return assumption, that assumption could be used for the next actuarial valuation of the fund, which will be done in April. Any reduction in STRS' investment forecast will have a huge part in determining how much taxpayers will have to spend to support the $139 billion fund. Already severely underfunded, STRS has been preparing to ask the Legislature to increase the contributions from the state and local school districts. (Unlike PERS, STRS does not have authority to increase contribution rates.) A reduced forecast could translate into a 20% increase in contributions to STRS at a time when school districts and administrators are already facing intense budget pressures. PERS is just beginning to examine the issue and isn't planning a board vote on lowering its investment return rate assumption until next February. The following is the status of retirement-related bills introduced in this session. The deadline has now passed for bills to be passed by the house in which they were introduced. The last day for any bills to be passed is August 31st. We will continue to monitor the bills that have made it through thus far and any others for “gut-and-amends”. With the budget deadline already passed, the Legislature will be preoccupied by budget negotiations for the foreseeable future. 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, and is most likely dead at this point. 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 a pension or retirement savings plan to supplement Social Security. This bill is probably dead, having had no action since 2009. Fiscal pressures make it unlikely that PERS will expand into the private sector any time soon. 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. 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). This bill is technically still alive though it has had no action since 2009. AB 1651 (De La Torre) Furloughed School Employees This bill requires that the calculations for retirement allowances for PERS 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. This bill is still alive. 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 is still alive and moving. AB 1856 (Fong) PERS Service Credit Payments This bill would allow a member authorized to pay for credit for service in after-tax installments to elect in writing to suspend payments for up to 12 months. This bill is alive and looks likely to make it to the consent calendar for passage. 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 companion bill to SB 1425 (below) passed the Assembly unanimously and looks likely to make it through the Senate as well. AB 2260 (Committee on Public Employees, Retirement and Social Security) STRS Housekeeping Bill This bill makes clarifying and technical changes to STRS law, including reimbursing STRS for erroneous overpayments. This bill has passed the Assembly and looks likely to pass the Senate. SB 919 (Hollingsworth) Public Employee Pension Reform Bill This bill would raise the retirement age for non-safety employees from 55 to 65 and for safety employees 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. SB 919 failed to pass out of the Senate and is likely dead. The bill was opposed by nearly all California labor unions who argued that retirement and health benefits are negotiable issues and should be dealt with at the collective bargaining table. SB 1139 (Correa) PERS Housekeeping Bill SB 1139 makes technical and clarifying changes to PERS law, including renaming the "deferred compensation program" as the "tax-preferred retirement savings program” and expanding the types of programs the Board may establish to include those with after-tax payments such as Roth 401K. This bill is still alive. SB 1209 (Romero) Postretirement Death Benefits This bill 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 annually adjusted from $5,000. SB 1209 is similar to previous bills introduced in past sessions. This bill would have created an additional benefit to an already cash-strapped system and therefore failed to pass out of committee and is now dead. SB 1425 (Simitian, D- Palo Alto) Anti-Spiking Bill This bill is very similar in content to AB 1987 above and also unanimously passed the Senate. This bill also looks like to pass through the Assembly. Following are important dates/deadlines for the rest of 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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