Major Issues in the
Era of Pension Reform
and the Impact on
Contract Negotiations
Presented by:
Sal Villasenor, ACSA Governmental Relations
Gary Stine, Orange County Department of Education
October 8, 2014
Personnel Institute
Irvine, California
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Negotiating Challenges
• Increased Pension Obligations
– Unfunded Liabilities
– Funding Plan
– GASB Reporting
• New Pension Rules
– PEPRA
– Creditable Compensation Regulations
– Creditable Service
– Changing Environment
2
Pension Obligations
• Pension Systems Underfunded
– California State Teachers’ Retirement System
(CalSTRS)
• 66.9% Funded as of 6/2013
• $74.4 Billion Unfunded Liability
– California Public Employees’ Retirement System
(CalPERS)
• 80.5% Funded as of 6/2013
• $12.05 Billion Unfunded Liability
•
Source(s): Governor’s May Revise / CalSTRS 2013 Actuarial Report / CalPERS 2013 Actuarial Valuation
3
CalSTRS and CalPERS
• Rates set by Legislature • Rates set by CalPERS
in Education Code
Board of Administration
• No fluctuation in employer • Employer rates fluctuate
rates
with fund needs
• Legislature increased
• Benefits have not been
benefits in 1990s without
modified, but increased
adjusting contributions
compensation and
membership statistics
have increased costs
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Addressing CalPERS Obligation
• CalPERS Board of Administration
– Reviews actuarial valuations and assumptions
– Modifies assumptions based on membership analysis
and experience studies
– Adjusts rates annually based on fund performance and
projected future liabilities
– Projecting significant increases through 2020-21
5
Addressing CalSTRS Obligation
• Governor’s 2014-15 Budget:
– Addresses CalSTRS Unfunded Liability in 32 Years
– Includes Combination of Rate Increases
• Employer, Employee, and State
– Guarantees 2% Annual Pension COLA (purchasing power)
• School Districts Expected to Absorb Majority of
Increase
6
CalSTRS Re-Payment Timeline
• 2014-15
– Employer rate increased by 0.63% (8.25% -> 8.88%)
– Employee rate increased by 0.15% (8.0% -> 8.15%)
– State rate increased by 0.163% (2.806% -> 2.969%)
• 2015-16
– All rates continue to increase (see schedule)
• 2016-17
– Employee rate capped at 10.25%
– State rate capped at 6.328%
• 2020-21
– Employer rate capped at 19.10% (10.85% increase from
current rate)
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Projected Employer Contributions
CalSTRS Employer Rates
•
•
•
•
•
•
•
•
Current – 8.25%
2014/15 – 8.88%
2015/16 – 10.73%
2016/17 – 12.58%
2017/18 – 14.43%
2018/19 – 16.28%
2019/20 – 18.13%
2020/21 – 19.10%
CalPERS Employer Rates
•
•
•
•
•
•
•
•
Current – 11.442%
2014/15 – 11.771%
2015/16 – 12.6%*
2016/17 – 15.0%*
2017/18 – 16.6%*
2018/19 – 18.2%*
2019/20 – 19.9%*
2020/21 – 20.4%*
* Estimated rates provided by CalPERS
Source: Assembly Bill 1469 (enrolled 6/15/2014)
Source: CalPERS Circular 200-012-14
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CalSTRS Funding Plan Review
• CalSTRS Board must report to the Legislature on or
before July 1, 2019, and every five years thereafter.
The report must include the following:
– Fiscal health of the Defined Benefit Program and the
unfunded actuarial obligation with respect to service credited
to members of the program, before July 1, 2014.
– Identify rate adjustments in order to eliminate, by June 30,
2046, the unfunded actuarial obligation of the Defined
Benefit Program with respect to services credited to
members before July 1, 2014.
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GASB 68
• Governmental Accounting Standards Board (GASB)
– Statements 67 & 68
– Rules turn $74 billion CalSTRS liability into $160 billion
of reported unfunded liability for districts
– Requirement to report unfunded pension liabilities on
financial reports beginning in 2014-15
• Districts will report proportionate share of unfunded
pension liabilities on their financial statements
– CalSTRS liability alone puts district in the RED
– May impact credit rating and ability to borrow funds /
increase cost of bonds
10
GASB 68 (continued)
• According to GASB:
– Local governments have an obligation to realize the
true cost of employment. Total cost of employment
includes salary, benefits, statutory expenses, and
includes future obligations to fund pension and health
benefits.
• Public pensions and future liabilities must be factored
into employment costs.
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CalSTRS DB / DBS Challenge
• Governor’s funding solution addresses unfunded
liability related to Defined Benefit (DB) plan
• Not applicable to Defined Benefit Supplement (DBS)
plan
• Contribution rates associated with DBS
compensation do not change:
– 8% for employees
– 8.25% for employer
•
•
State Department of Finance dislike for DBS.
Refusal to provide additional resources for the DBS as part of dealing
with DB funding.
12
Components of
CalSTRS Pensions
• Most members have two accounts
– Defined Benefit Account (“DB”): Defined benefit
pension program which includes a benefit calculation
formula defined by law (ie: 2% at 60 or 2% at 62)
– Defined Benefit Supplemental Account (“DBS”) : A
hybrid system with a set rate of return and a defined
contribution
13
What compensation is creditable
where?
• Most compensation paid to certificated staff is
creditable to the Defined Benefit (DB) plan and is
used to calculate final compensation and pension
• Common examples of compensation that is
creditable to the Defined Benefit Supplement (DBS)
plan include:
– Compensation paid a limited number of times such as:
•
•
•
•
Off-schedule payments
One-time adjustments
Payment for excess student enrollment
Retention bonus
– Creditable service that exceeds one year (excess)
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Employer pay-back to CalSTRS
members
• Excess service credit is transferred from DB to DBS
plan
– This results in an overpayment of employee (and
employer) contributions
• Proposed plan is to return to the member and
employer contributions to the employer after
CalSTRS annual update around September.
• Each member informed on the amount being
returned in their annual statement.
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Issues with CalSTRS Plan
• Considering requiring the employer confirm they
returned the money.
• Districts are not informed of transfers from DB to
DBS related to excess service credit until
September/October of each year (for year prior)
– Accounting challenge due to split funding or staff
movement
– Tax implications (must return pre-tax contributions)
– Added work for staff
16
CalSTRS – Overview
•
CalSTRS Member – Someone hired to perform creditable service
•
Creditable Service – Defined by Education Code 22119.5
•
Creditable Compensation : The money that counts for retirement
purposes
– Salary, remuneration in addition to salary, and non-creditable
compensation
– Different rules for classic members (Reg’s govern) versus new
members (Statute governs)
– Different rules for DB or DBS
– Class of one (e.g. Superintendent) permissible
– Class of employees defined by similarity of duties performed or
employment in the same type of program
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2015 CalSTRS Creditable
Compensation Regulations
• Background
– Reasons for Regulations
• Guidance provided by CalSTRS in past was provided in
“unofficial” guides or on case-by-case basis
• Interpreted ambiguous statutory language inconsistently
• Findings in district and individual audits which conflicted
with prior guidance
• Stakeholders complaints regarding inconsistent
interpretation used by CalSTRS
• Underground regulations
18
2015 CalSTRS Creditable
Compensation Regulations (continued)
• General Provisions
– Apply to CalSTRS members 2% at 60
– Most provisions effective for service performed on or
after January 1. 2015.
– Exception those provisions regarding consistency of
compensation (Sections 27600 and 27601) are
effective January 1, 2015, regardless of date service
was preformed
– Contracts modified outside standard negotiation
timeframes the year after these regulations take effect
have until January 1, 2016 to restructure
compensation.
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2015 CalSTRS Creditable Compensation
Regulations (continued)
• Specific Provisions
– Criteria for defining “class of employees”
– Definition of creditable compensation
•
•
•
•
Compensation creditable to DB
Compensation creditable to DBS
Compensation no longer creditable (reportable)
Compensation paid a limited number of times
– Definition of “consistent treatment of compensation”
• Process CalSTRS will use to make this assessment
• Adjustments when “inconsistent treatment” is found
– Special rules for restructured compensation
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2015 CalSTRS Creditable
Compensation Regulations (continued)
• Defining “Class of Employees”
– Acceptable Criteria for Defining “Class of Employees”
•
•
•
•
Performs creditable service (EC 22119.5)
Similarity of job duties
Participating in same State/Federal program
Share other similarities related to nature of work
– Prohibited Criteria for Defining “Class of Employees”
•
•
•
•
Retirement formula (PEPRA vs. Classic)
Min. or max. for age or service credit
Working more or fewer hours per day or days per year
Performing only “outgrowth” activities (coaching, department
chair, etc.)
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2015 CalSTRS Creditable
Compensation Regulations (continued)
• Defining Compensation
– Salary
• Payable as cash in accordance with publicly-available
schedule/contract and used as a basis for increases
– Remuneration in Addition to Salary
• Education incentives, longevity incentives, etc.
– Compensation Paid a Limited Number of Times
• Specified end date or number of payments
• Other than a few exceptions, creditable to DBS
– Non-creditable Compensation
• Fringe benefits
• Expenses paid or reimbursed by an employer
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2015 CalSTRS Creditable
Compensation Regulations (continued)
• Non-creditable Compensation – Fringe Benefits
– Definition of Fringe Benefit:
• Good or service for which cost is paid to a third party or
otherwise covered by employer
• Compensation to cover a personal or business expense
that could otherwise be provided by employer
• Cash in lieu of, or cash remaining from, a good or service
– Examples:
• Cash in lieu of benefits
• Expense allowance (auto, cell, etc.)
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2015 CalSTRS Creditable
Compensation Regulations (continued)
• Defining Consistent Treatment of Compensation
– 7-year Evaluation of Increases
• Performed at retirement
• 11 criteria (reasons) increases may be considered
“consistent”
• CalSTRS will evaluate increases based on average
received in position, average received by other staff,
average received by all members
• Only increases (or portion thereof) deemed “consistent”
will be credited to DB
• Remainder (inconsistent portion) is moved to DBS
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2015 CalSTRS Creditable
Compensation Regulations (continued)
• Effective Date
– Regulations regarding class of employees and
creditable compensation will be effective for all service
performed on or after January 1, 2015
– Regulations regarding “consistent treatment” are
effective January 1, 2015, but apply to all
compensation, regardless of when it was earned
25
Opportunity to Modify Contract
• Restructure
– So what do I do about all those allowances in the
Superintendent’s contract?
– Option to restructure
• Must meet “consistency” requirements
• What documents do I need for a restructure?
– “Paper trail” Issues
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Restructure Examples
• Auto Allowance in Contract
– No restructure into Salary
27
Restructure Examples
(continued)
• Auto Allowance in Contract
– Restructured into Salary as of 1/1/2015
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Restructure Examples
(continued)
• Auto Allowance in Contract
– Restructured into Salary as of 4/1/2015
– Increase in creditable compensation as of 4/1/2015 will
be considered consistent under new regulations
29
Restructure Examples
(continued)
• Auto Allowance in Contract
– Restructured into Salary as of 2/1/2016
– Increase in creditable compensation after 1/1/2016
may be considered inconsistent treatment of
compensation and subject to regulations
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CalSTRS : Creditable Service
• Currently under review by CalSTRS and stakeholders
• K – 12, COE’s : Two Part Test
– Credential Required by Law; and
– Duties Based Analysis
• Legislative Solution
– Now, stakeholders and CalSTRS reviewing revisions to
definition of creditable service and create “grandfather”
language for addressing the “Never Properly Enrolled”
group
• Expected legislative solution in 2015 bill
31
New Reality for Districts
• Negotiations becoming more interesting
– Pension contributions increasing
– Cost of health benefits rising each year
• Affordable Care Act adds complexity and expense
– Increasing liabilities related to retiree benefits
(if provided)
32
New Reality for Districts
(continued)
– District Reserve Restrictions
• Increased pension rates take $ off the table
• Restricting district reserve levels moves $ back onto
table
– Local Control Accountability Plan (LCAP)
• Earmarks funds for specific uses
33
New Reality for Districts
(continued)
• Salary increases cannot be negotiated separately
any longer
– The total cost of employment must now be factored
into negotiations
• Compensation Package Includes:
– Salary
– Pension Expenses (increasing each year)
– Health Benefit Costs (increasing each year)
• Including current employees, retirees, and future cost of
employee who will receive benefits in retirement
– Other costs relating to employment in that district
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Additional Resources
• ACSA website: www.acsa.org
• CCSESA website: www.ccsesa.org
• CASBO website: www.casbo.org
• CalSTRS website: www.calstrs.com
• CalPERS website: www.calpers.org
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Questions
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Contact Information
Sal Villasenor, Legislative Advocate
Association of California School Administrators
(800) 608-2272
svillasenor@acsa.org
Gary Stine, Director, Support Services
Orange County Office of Education
(714) 966-4253
gstine@ocde.us
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