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Cuts in Retiree Benefits Avoided By Governor's Pension Reform Plan
by: Dave Muir
Chair, Legislation Committee
Governor Jerry Brown released his “Twelve Point Pension Reform Plan” on October 27, 2011. I’m happy to report it does not include any proposal that would reduce retiree benefits. Some of Brown’s proposals are concepts that have yet to be fully defined. Here is a quick summary:
1.Equal Sharing of Pension Costs – Current Employees and Employers
All new and current employees would be required to contribute at least 50% of the annual cost of their pension benefits. The increased contribution levels would be phased in “at a pace that takes into account current contribution levels, current contracts and the collective bargaining process.”
2.“Hybrid” Risk-Sharing Pension Plan – New Employees
The new plan would include a reduced defined benefit component and a defined contribution component (presumably a 401(k) plan) that would be managed professionally. Those two components would be combined with Social Security in a way that envisions a retirement benefit that replaces 75% of an employee’s salary. For those employees not in Social Security, the goal of 75% salary replacement would be comprised of two-thirds from the defined benefit component and one-third from the defined contribution component. The State Department of Finance is tasked with designing the plan that includes a cap on the defined benefit portion so that employers “do not bear an unreasonable liability for high-income earners.”
3.Increased Retirement Ages – New Employees
New employees would have to work to a later age to qualify for full retirement benefits. For general members, the age would be the Social Security retirement age (now 67). The retirement age for safety members is still under discussion. Brown’s Plan specifies it will be “less that 67, but commensurate with the ability of those employees to perform their jobs in a way that protects public safety.”
4.Three-Year Final Compensation – New Employees
Pension benefits would be based on the highest average annual compensation over a three-year period. Brown’s proposal explains: “[The one-year] rule encourages games and gimmicks in the last year of employment that artificially increase[s] the compensation used to determine pension benefits.”
5.Calculation of Benefits Based on Regular, Recurring Pay Only – New Employees
Benefits would be based only on the normal rate of base pay, excluding special bonuses, unplanned overtime, and payouts for unused vacation or sick leave, and other pay perks.
6. Limited Post-Retirement Employment – All Employees
Retired public employees would be limited to working 960 hours or 120 days per year for a public employer. This limit currently applies to all LACERA retirees. In addition, retired employees who serve on public boards and commissions would be barred from earning retirement benefits for that service.
7. Forfeiture of Pension Benefit by Felons – All Employees
Public officials and employees would forfeit pension and related benefits if they were convicted of a felony in carrying out official duties, in seeking an elected office or appointment, or in connection with obtaining salary or pension benefits.
8. Retroactive Pension Increases Prohibited – All Employees
Pension enhancements could be applied prospectively only, not to service already performed.
9.Contribution Holidays Prohibited – All Employees and Employers
Employers would be prohibited from suspending employer and/or employee contributions necessary to fund annual pension costs.
10. Purchase of “Airtime” Prohibited – All Employees
“Airtime” refers to service credit for time not actually worked. The purchase of “airtime” would be prohibited.
11. Increased Pension Board Independence and Expertise – CalPERS Board
Two independent, public members with financial expertise would be added to the CalPERS Board. As to other pension systems, Brown’s proposal states: “And while my plan starts with changes to the CalPERS board, government entities that control other retirement boards should make similar changes to those boards to achieve greater independence and greater sophistication.”
12. Reduction to Retiree Health Care Costs – State Employees
More state service would be required in order to qualify for health care benefits at retirement. New employees would have to work for at least 15 years to be eligible. They would not be eligible for maximum benefits until they worked for the state for 25 years. Further, all retirees would have to look to Medicare to the fullest extent possible. The Governor’s plan encourages local governments to make similar changes.
* * * * * *PENSION REFORM ON THE BACK BURNER IN SACRAMENTO
by: Dave Muir
Chair, Legislation Committee
RELAC monitors pending legislation and works to see that the retirement rights of public employees are protected. RELAC also pursues legislation through efforts coordinated by the California Retired County Employees Association (CRCEA), of which RELAC is a member.
Assembly Bill No. 340, now pending in the state Legislature, contained several specific pension reform measures that would have applied to LACERA and other county retirement systems. On September 7, 2011, the bill was amended to delete all of its provisions and to insert the following:
"It is the intent of the Legislature to convene a conference committee to craft responsible comprehensive legislation to reform state and local pension systems in a manner that reflects both the legitimate needs of public employees and the fiscal circumstances of state and local governments."
Four days later, on September 11, 2011, the Los Angeles Times reported that Governor Brown is "expected to propose a new pension plan for public employees that could directly pit labor against business." As of this writing, the Governor's proposal has not yet been released.
The "conference committee" mentioned in AB 340 will be a special purpose committee of the Legislature composed of members of both the Assembly and the Senate. The committee is expected to hold public hearings on various pension reform proposals. RELAC will closely monitor the conference committee proceedings and report on further developments in the Newsletter. Between Newsletter issues, updated reports will appear on the RELAC Website, www.relac.org.
* * * * * *Supreme Court Decision Adds to Protections for Retiree Health Benefits
Los Angeles County retirees' right to health insurance is made more secure
By:Dave Muir,
RELAC Vice-President Elect
The California Supreme Court, in a remarkable unanimous decision, ruled that a county can be bound by an implied agreement to provide lifetime health benefits to retirees if that was the government’s intent. A written contract expressly stating that the benefits are vested for life is not required.
The case before the Court involved the retiree health care program in Orange County. The Orange County Board of Supervisors began making its health care plans available to retirees in 1966. Initially, premiums were determined separately for active and retired employees. The County contributed towards payment of premiums for the active employees, but retirees were required to pay the entire premium themselves.
In 1984, the County began pooling active and retired employees in the rate setting process. Because it is more expensive to insure retirees, this pooling arrangement resulted in higher premiums for active employees and lower premiums for retirees. The combined pooling arrangement had the effect of the County partially subsidizing retiree premiums. According to pleadings filed in the case, the pooling arrangement resulted in average savings per year per retiree of over $3,000.
Beginning January 1, 2008, the County reverted to its prior practice of separately determining premiums for active and retired employees. This caused the retirees’ premiums to rise dramatically. The Retired Employees Association of Orange County sued the County in federal court, arguing that the County’s “decades-long practice” of subsidizing retiree premiums created an implied agreement to continue the pooling arrangement and that the Board of Supervisor’s action eliminating the subsidy violated a vested contract right.
The U. S. District Court entered judgment against the retiree association, holding that under California law the County can only be bound to obligations set forth in a written agreement, and there was no written agreement stating that the pooling arrangement would continue in the future. The retiree association appealed, and the federal appeals court asked the California Supreme Court to rule on whether, under California law, “a California county and it employees can form an implied contract that confers vested rights to health benefits on retired county employees.”
The California Supreme Court issued its opinion on November 21, 2011, holding that a California county and its employees can indeed form an implied contract that grants vested health benefits.
LACERA retirees are in a much stronger position than Orange County retirees, because there are written agreements between LACERA and the County clearly conferring vested lifetime health benefits on retirees.
LACERA implemented the retiree health care program in 1971. The Board of Retirement used excess investment earnings to subsidize retiree premiums. The subsidy was based on the number of years of service credit under a formula that remains in effect today. In 1982, the Board of Supervisors entered into a written contract with the Board of Retirement that required the County to take over the funding of the premium subsidy in exchange for certain funding relief LACERA made available to the County that enabled the County to weather a particularly difficult economic period. In 1994 the agreement with the County was amended to delete a provision that the County would only subsidize premiums as long as the County provided a health insurance program to active employees. The elimination of that provision now obligates the County to continue the retiree health care program even if it stops providing health insurance to active employees.
LACERA retirees do not have to rely on an implied contract, as is the case in Orange County. But the Court’s decision is nevertheless important because it demonstrates the Supreme Court’s recognition that retiree health care benefits can be vested and entitled to the Court’s protection.
* * * * * *Our Office Hours Have Changed
For some time now, the RELAC office has been open on Monday through Thursday from 9:00 a.m. to noon, and 1:00 p.m. to 4:00 p.m.; and on Fridays from 9:00 a.m. to noon.
Effective immediately, our office is open for service on Monday through Thursday from 9:00 a.m. to 4:00 p.m. We will remain open through the lunch hour; however we are closed on Fridays.
Should you wish to contact us outside of office hours, you may leave us a message by calling (626) 308-0532 or (800) 537-3522. Office staff will call you back during the next working day. We remain committed to being responsive to the needs of our members!
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