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7/27/2010
Pension reform continues to be a focus for the Governor, the candidates for Governor, and the legislature. Union political strength may impede any changes this year, but this is clearly a topic that will be in the political arena and media for a while. Governor’s Agreement with State Unions On June 16, the Governor announced tentative contract agreements with four state unions that include, as he called it, “significant first step towards pension reform and reining in the state’s growing pension costs”. The agreements roll back the expansion of pension benefits adopted in SB 400 in 1999 and will move pension contributions for all employees in the four unions to a minimum of 10%. The union agreements also make changes to benefits for new employees including requiring new hires to work additional years to receive full benefits and basing final retirement compensation on the highest three years of wages instead of highest year. Since then, Schwarzenegger has struck tentative agreements with two more state employee unions. As with the previous agreements, pension benefits were rolled back to pre-1999 levels. In addition, the agreements aim to reduce the unfunded liability for retiree healthcare costs, including starting in July 2012, having current employees pay 0.5 percent of salary towards pre-funding retiree health benefits and increasing the number of years new employees will have to work before qualifying for them from 20 to 25 years. Both unions also agreed to one day of unpaid personal leave per month during fiscal year (FY) 2010-11, the equivalent of just under a 5 percent pay cut. These agreements are projected to save the state $66 million on top of the $72 million in savings from four previous union agreements covering 23,000 employees in FY 2010-11. If similar agreements are reached with the state’s six other employee unions, state savings in FY 2010-11 would total $2.2 billion, with $1.2 billion of that from the General Fund. The Candidates Weigh-in Republican candidate for Governor, Meg Whitman, has also proposed to cut state worker pension; however she refused to back the Richman pension initiative because she didn’t want it on the ballot while she was running for office, thus attracting too many labor voters in November. Whitman advocates switching most new state hires, except for police and firefighters, to 401(k)-type plans. 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. On July 23rd, Democratic candidate (and former Governor) Jerry Brown joined in with a more detailed proposal to reform pensions. He proposes: final 3 highest years compensation, renegotiated benefits for new state hires, no retroactive benefit enhancements, increased employee contributions, no pension “holidays”, further curbs on placement agents, and independent oversight of pension funds. Pension Reform Legislation The pension reform language also made it into Senate Bill 919, introduced by Senate Minority Leader Dennis Hollingsworth. 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. 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. The bill died recently but continues to be part of the budget negotiation process. …EARLY RETIREE REINSURANCE PROGRAM UNDERWAY The U.S. Department of Health & Human Services is now accepting applications for the Early Retiree Reinsurance Program (ERRP). The ERRP was established with funding of $5 billion on June 1, 2010 for the temporary program ending no later than January 1, 2014. ERRP will provide reimbursement to successful applicants to help them maintain health care coverage for early retirees age 55 and older who are not yet eligible for Medicare. The program provides reimbursement to sponsors of participating employment-based plans for a portion of the cost of healthcare benefits for early retirees and their spouses, surviving spouses, and dependents. The Secretary will reimburse sponsors for certain claims between $15,000 and $90,000. The purpose of the reimbursement is to make healthcare benefits more affordable for plan participants and sponsors so that health benefits are accessible to more Americans than they would otherwise be without this program. The reimbursement must be used to lower costs for the sponsor's plan, and thus can be used to reduce premium costs, premium contributions, copayments, deductibles, co-insurance, or other out-of-pocket costs for plan participants. The program is open to businesses, unions, schools and local governments and applications will be evaluated on a first-come, first-served basis. The following are the retirement-related bills that are still alive in the 2009-10 Legislative Session. We will continue to monitor these bills and any others for “gut-and-amends”. The Legislature has been on recess since July 2 but reconvenes August 2. They will no doubt be focusing on budget negotiations when they return, but the last day for any bills to be passed is August 31st. 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 them 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 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. 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 25/100 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 passed out of the Senate policy committee at the end of June. 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 but was sent to the Senate Appropriations suspense file on July 15. 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 passed the Senate policy committee on June 30 and is now in Appropriations. 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 has now passed both houses. 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 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 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 passed the Senate and looks likely to pass the Assembly on the consent calendar. 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. Amendments are now being considered to SB 1425, which may include changing the STRS compensation from the proposed soft cap described above to a hard cap counted towards the DB pension and the addition of a grandfathering provision. Also being considered is an amendment that would grandfather-in people covered by contracts in effect on July 1, 2010, until those contracts expire. We will keep you updated of any proposed amendments that make it into the bill. 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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