Sunday, 13 January 2013

2011-2012 Pension Information

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UPDATED JANUARY 30, 2013

On October 27, 2011, Governor Jerry Brown announced his 12-point pension refrom plan. The initial plan contained general concepts without specific legislative language. Some of proposals were only designed to effect newly hired officers, and some were designed to change the pension plans of current employees. For more information on the initial proposal, click on the link below:

GOVERNOR JERRY BROWN'S 12-POINT PENSION REFORM PLAN

CALIF STATE TREASURER: PENSIONS NEED TO BE FIXED, BUT NOT GUTTED

On November 30, 2011, CalPERS released a statement to give their preliminary response to the Governor's plan. In their statement, CalPERS attached the following four documents.

1) PRELIMINARY ANALYSIS OF THE POTENTIAL IMPACTS

2) A GUIDE TO PENSION FACTS

3) THE VESTED RIGHTS OF CALPERS MEMBERS

4) THE IMPACT OF CLOSING THE DEFINED BENEFIT PLAN AT CALPERS

On December 2, 2011, the California State Legislature began hearings on the Governor's 12-point Pension Reform Plan, and on February 2, 2012, the Governor's office released a series of documents explaining his pension reform plan in more detail. The language is very problematic for several reasons, including:

These are Constitutional Amendments. Locking these changes into the Constitution eliminates the right to bargain over issues that are within the scope of representation.
Some proposals, such as the 50/50 split of normal costs and elimination of air time are drafted to apply to current employees. There is language stating that these will apply to current employees to the extent legal and Constitutional, meaning we will have to file costly and risky lawsuits over these issues.
The hybrid plan does not spell out the benefits, formulas or employer contribution rates. They continue to propose 75% salary replacement, split into one third defined benefits, one third Social Security and one third defined contribution. This formula is extremely punitive to low wage workers and part-time employees.

For more information on the Governor's detailed pension reform legislation, click on the following links:

1) THE GOVERNOR'S TESTIMONY TO THE LEGISLATURE

2) THE GOVERNOR'S PENSION COVER LETTER

3) THE GOVERNOR'S PENSION LANGUAGE (PART 1)

4) THE GOVERNOR'S PENSION LANGUAGE (PART 2)

5) FIELD POLL REGARDING THE GOVERNOR'S PLAN

6) PPIC SURVEY REGARDING CALIFORNIANS AND THEIR GOVERNMENT (INCLUDES PENSION POLLING)

In response to the Governor's proposal, CalPERS recently publised a series of reports designed to add insight for the Legislature as they discuss the Governor's plan. We have also included a link to the most recent CalPERS annual financial report which contains information on the solvency of the system and facts about pension payouts to retired members.

1) CALPERS AVERAGE BENEFIT PAYMENTS

2) BENEFIT REFORM PROPOSALS

3) COMPARISON OF DEFINED BENEFIT, DEFINED CONTRIBUTION, AND HYBRID PLANS

4) CALPERS COMPREHENSIVE ANNUAL FINANCIAL REPORT (YEAR ENDING JUNE 30,2011)

5) ACTUARIAL COST ANALYSIS FOR THE CREATION OF A HYBRID RETIREMENT PLAN

6) NASRA ISSUE BRIEF: STATE HYBRID RETIREMENT PLANS

7) (03/01/12) GAO REPORT ON STATE AND LOCAL PENSION PLANS

8) (03/15/12) CALPERS RESPONSE TO REPUBLICAN PENSION REFORM PROPOSAL

9) (03/15/12) ACUTARIAL COST ANALYSIS OF REPUBLICAN PENSION REFORM PROPOSAL

On March 14, 2012, the CalPERS Board of Directors established a new annual rate of return on for our pension fund. The old annual rate of 7.75% was reduced down to 7.50%. The change in rates will result in a higher employer payment to CalPERS in the coming years. CalPERS has decided to smooth the immediate increase over a three year period. For further information, read the following articles:

On July 10, 2012, Governor Jerry Brown announced that his public pension reform iniitative would not be on the November ballot. Any effort to put a constituional amendment on the ballot would have required a two-thirds vote of the Senate and Assembly.

On July 16, 2012, CalPERS announced its investment returns for the previous year. CalPERS has a fiscal year that runs from July 1 to June 30 each year, and they currently assume a 7.5% return on their overall investment portfolio. CalPERS reported that for the previous year their investments had only made a 1% return. This will impact local governments in the following years when their rates are raised accordingly to make up for those losses. As a result of the low investment returns, the overall funding of CalPERS also dropped to below 65%. What does that mean? In July 2007 (back when CalPERS was very healthy), they had a market value of roughly $250 billion dollars. Using their assumed annual rate of return at the time of 7.75%, that meant they believed the fund would have approximately $363 billion in July 2012. As of today, CalPERS has a total market value of $237 billion dollars. Simply put, it means that if everyone in CalPERS retired today, the fund would be well short of meeting all of our retirement needs. This was a major reason for the pension reform we voted on during the last contract re-negotiations. It is important to note that a moderate unfunded liability is acceptable in any pension fund. They do not need to be 100% funded all the time; however, it is important to keep them as fully funded as possible to sustain the needs of our retirees.

On August 15, 2012, CalPERS announced the implementation of a new five-year strategic plan aimed at securing the retirement and health security of its members. The plan essentially lays out a series of goals, objectives, and priorities for the agency over the next half-decade.

On August 28, 2012, Governor Jerry Brown and the leadership of the California State Legislature introduced Assembly Bill 340 (AB 340) to the State Assembly for consideration. The bill is also known as the California Public Employee Pension Reform Act (PEPRA) of 2013. This bill is a comprehensive pension reform program that will drastically change the way pensions are paid for and offered to public employees in the CalPERS system. The bill effects both current employees and newly hired employees. The bill encompasses many of the provisions that were originally introduced in Governor Brown's 12-Point plan that was originally introduced in October 2011. New employees would be offered different formulas and would be required to pay 50% of the normal costs of their retirement. Current employees would have five years to also pay 50% of the normal cost of their pension subject to the terms of collective bargaining. The bill was very long and contained numerous changes. The Legislature was slated to vote on the bill on Friday, August 31. This is the last day the Legislature is in session for this year, and the last time they can enact a law before November's election.

On August 30, 2012, LBPOA President Steve James sent out an e-mail to all of our members that were registered on our website informing them of the general changes in the bill. To read Steve's letter, click on the link below.

LBPOA PRESIDENT LETTER TO THE MEMBERSHIP

On August 30, 2012, CalPERS released it's preliminary analysis of AB 340 and an Actuarial Cost Analysis of the savings expected from the legislation.

On August 31, 2012, the California State Legislature voted on AB 340. The Assembly passed the bill 50-8, and the Senate passed the bill 36-1. The Governor will sign the bill and it will become law immediately.

DETAILS OF AB 340 (THE CALIFORNIA PUBLIC EMPLOYEES PENSION REFORM ACT OF 2013)

Definition of New Members

A new member is someone who meets one of the following criteria:

They have not been in a public retirement system before 1/1/13
They were previously in a public retirement system and switched to a new system after 1/1/13, that does not have reciprocity (contact the POA for a list of those agencies who do have reciprocity).
After 1/1/13, the employee has a six-month break in service (does not count suspension time, maternity leave, or other normal leaves).

What this means is…if you lateral to another agency, you may be a new hire for them, but you are NOT a new member to CalPERS. Therefore, the parts listed for new members will not apply to you. You are already a member of CalPERS.

New Formulas for Public Safety Officers

The old 3%@50 and [email protected]%55 formulas have been eliminated. By 1/1/13, new members must go into a new formula that is closest (but lower) than the current formula offered.
Our new officers will be on the 2.7%@57 formula; however, they can still retire at 50 years old. The formula starts at 2%@50 and gradually increases each year until it maxes out a 2.7%@57. For a typical new member, it will take around 34 years to reach a 90% retirement. Many of our current officers joined the department with a 2%@55 formula. Under that system, you would have needed to work over 37 years to get 75%. So while the new member formula is less than what we currently enjoy, it is still better than what most of us originally had when we joined years ago.
If we were to get lateral officers who are coming to Long Beach for the first time, they would be given the formula we were offering before 1/1/13. Since our last contract negotiations, we have offered the 2%@50 formula that eventually increases over time to become the 2%@55 (slightly better than the 2%@57 the new members will receive).
To put all of this into perspective, the new formula for our non-safety employees is 1%@52. That means, if they joined at 22 years old and worked 30 years, they will have earned 30% of their salary as a pension. The formula increases over time to become 2%@62 and then 2.5%@67.

Limit on Pensionable Earnings

New members will have their pensionable income capped. The amount will start at $132,120 on 1/1/13, and will increase with a CPI over time; however, the legislature has the right to lower the CPI as needed. This will definitely affect our command level officers in the future (the ones that come from our new hires). They will most likely not have all of their current income count as pensionable income, and governments may have to offer them other forms of compensation (such as a deferred compensation supplement).

Employee Payment of Retirement Costs

Beginning on 1/1/13, new members will have to pay at least half of the ‘normal cost’ of their pension.
Beginning on 1/1/18, current employees may have to pay half of normal cost of their pension (capped at 12%).

What does that mean?

The normal cost of your pension is the amount of money it would cost to fund your pension IF all of the CalPERS assumptions were met. CalPERS assumes many things when they forecast the cost of your pension. They assume they will receive a 7.5% annual investment return on your money, how long you will live after your retirement, what pay raises you will receive in the future, etc. If CalPERS fails to meet any of their assumptions, the resulting extra cost is called an ‘unfunded liability’.
Currently, you pay 9% of your salary towards your pension. The City pays an additional 24%; however, 3% of that is paying down the unfunded liability. That means that the current ‘normal cost’ of our pension is 9% plus 21% for a total of 30% of pay. For every one dollar you are paid today, 30 cents more is paid towards your pension. If you were required to pay 50% of your ‘normal’ pension cost, your 9% to CalPERS would increase to 15%. But remember, the legislature has capped your contribution at 12%.
We are in contract until 9/30/16. That means we have from that date until 1/1/18 to pick up an additional 3% of our pension cost (going from 9% to the legally mandated 12% cap). As we go into our next contract negotiations, we will be looking for a way to resolve this issue.

Other Parts of the New Pension Reform Law

All new members must have their pensionable income determined by a three-year average of their income. You currently have your pension determined by the highest income year of your career; however, as part of our most recent contract change, we have already converted our new hires to the three year average.

Air Time purchase will be eliminated on 1/1/13. You MUST have your papers at CalPERS before 1/1/13. If you are considering an air time purchase, do not delay. Contact the POA immediately to check your numbers. This does not affect the buy back of Military Time which will continue to be offered after 1/1/13.

Employers will not longer be able to offer retroactive benefits. When the [email protected] formula was first offered back in 2001, it was also applied to all of the years worked before 2001. Employers will not be allowed to do this again for any new benefit change. All future enhancements will have to be given on a ‘go forward’ basis.

Employers will no longer be able to take a ‘contribution holiday’. When CalPERS was super funded, many employers stopped making payments to the pension system. This will no longer be an option.

The new law has some restrictions on post-employment government work within the same retirement system; however, public safety employees are exempt. You can still come back to work as a dinosaur after retirement at a maximum of 960 hours per year.

If you are convicted of a felony that arises out of the performance of your official duties, you will forfeit your pension back to the date of the commission of the first felony. There are some other provisions to this section, and it will most likely be litigated in the courts, but the bottom line is…don’t commit a felony.

There was also a very positive change to the Industrial Disability Retirement system. Currently, if you suffered an injury and were forced to retire, you would receive 50% of your pay tax-free. However, some employees who had many years of service but had not yet reached 50 years old would actually end up with a retirement benefit that was less than their normal service retirement. The new law fixes the flaw in the current system. Contact the POA for further information.

CLICK HERE FOR FREQUENTLY ASKED QUESTIONS ON THE PENSION REFORM LAW

On October 24, 2012, CalPERS held a pension reform discussion and training session. The LBPOA sent representatives to the meeting and the following information is available for your review:

On November 9, 2012, the National Institute on Retirement Security produced a webinar training event and released a research package showing the dangers of switching defined benefit employees into a defined contribution retirement system. The study concluded the following:

Public employers would attract a different labor force if they switched retirement benefits away from pensions. Public employees would be less committed to employers and thus less likely to invest in nontransferable skills that are critical to delivery of taxpayer services.
Employee turnover would increase under individual DC accounts and cash balance plans. These types of retirement benefits no longer defer compensation into the future and thus offer fewer economic incentives for employees to stay with public employers.
Moving from a pension structure would result in higher cost for public employers and employees because of higher investment and administrative costs for alternative retirement plans.
Public employers and employees overwhelmingly choose to stay with pensions rather than moving to alternative benefits when faced with a choice, illustrating the high value of pensions to public sector employers and employees.

For more information on the study, click on the links below:

On December 3, 2012, CalPERS issued a public letter to of their employees explaining the implementation of the Public Employees Pension Reform Act of 2013 (PEPRA).

CALPERS LETTER RE: PEPRA

On December 28, 2012, CalPERS announced announced that a variety of specialty pays will still be counted towards a retiree's pension benefits. There had been controversy over whether or not pension benefits for new hires would be based soley on their hourly rate, or if certain reoccuring specialty pays would be included. The CalPERS decision came as a result of a case out of Ventura County. For further on the decision, click on the link below:

CALPERS DEFINES PENSION PAY

OTHER ARTICLES OF INTEREST

We will keep you updated as new information becomes available.