1 Major Issues in the Era of Pension Reform and the Impact on Contract Negotiations October 8, 2014 Personnel Institute Irvine, California Presented by: Sal Villasenor, ACSA Governmental Relations Gary Stine, Orange County Department of Education

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 in Education Code No fluctuation in employer rates Legislature increased benefits in 1990s without adjusting contributions Rates set by CalPERS Board of Administration Employer rates fluctuate with fund needs Benefits have not been modified, but increased compensation and membership statistics have increased costs 4

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

Addressing CalSTRS Obligation Governor’s 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 –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%) –All rates continue to increase (see schedule) –Employee rate capped at 10.25% –State rate capped at 6.328% –Employer rate capped at 19.10% (10.85% increase from current rate) 7

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% Source: Assembly Bill 1469 (enrolled 6/15/2014) CalPERS Employer Rates Current – % 2014/15 – % 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: CalPERS Circular

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, –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,

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 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. 11

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) 14

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. 15

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 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 17

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 –Exception those provisions regarding consistency of compensation (Sections 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. 19

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 20

2015 CalSTRS Creditable Compensation Regulations (continued) Defining “Class of Employees” –Acceptable Criteria for Defining “Class of Employees” Performs creditable service (EC ) 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.) 21

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 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.) 23

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 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 26

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/

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 30

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 34

Additional Resources ACSA website: CCSESA website: CASBO website: CalSTRS website: CalPERS website: 35

Questions 36

Contact Information Sal Villasenor, Legislative Advocate Association of California School Administrators (800) Gary Stine, Director, Support Services Orange County Office of Education (714)