Agenda Item   

AGENDA STAFF REPORT

 

                                                                                                                        ASR Control  11-001050

 

MEETING DATE:

06/21/11

legal entity taking action:

Board of Supervisors

board of supervisors district(s):

All Districts

SUBMITTING Agency/Department:

County Executive Office   (Approved)

Department contact person(s):

Bob Franz (714) 834-4304 

 

 

Patti Gilbert (714) 834-2564

 

 

Subject:  New Elected Members of the Board Retirement Plan

 

      ceo Concur

County Counsel Review

Clerk of the Board

Concur

N/A

Discussion

 

 

3 Votes Board Majority

 

 

 

    Budgeted: N/A

Current Year Cost: N/A

Annual Cost: N/A

 

 

 

    Staffing Impact: No

# of Positions:

Sole Source: N/A

    Current Fiscal Year Revenue: N/A

    Funding Source: N/A

 

    Prior Board Action: N/A

 

RECOMMENDED ACTION(S):

 

Consider instructing staff to develop legislative proposals to implement the following change:

 

a.

Mandate newly Elected Members of the Board of Supervisors as of January 1, 2012 who are not a member of the Orange County Employees Retirement System (OCERS) to participate in Social Security (Federal Insurance Contributions Act, or FICA) with a County bi-weekly contribution of 6.2% and a mandatory employee bi-weekly contribution of 6.2% as their only Defined Benefit retirement plan. Newly Elected Members of the Board of Supervisors would no longer be eligible to participate in the Orange County Employees Retirement System

 

b.

Provide to Newly Elected Members of the Board of Supervisors as of January 1, 2012 an Internal Revenue Code Section 401(a) plan with a County contribution bi-weekly of seven percent (7%) of gross salary. 

 

 

 

 

 

 

SUMMARY:

 

The Board has requested staff to determine what steps are required to place all newly Elected Members of the Board of Supervisors in Social Security as the only Defined Benefit retirement plan option.  At this time there is no legislative authority to do this and State legislation will be required in order to implement this for newly Elected Members of the Board of Supervisors.

 

 

 

BACKGROUND INFORMATION:

 

All County of Orange full-time employees, other than Elected Officials, are required to be in the County of Orange retirement plan administered by the Orange County Employees Retirement System (OCERS).  Elected Officials must make a written election as to whether or not to participate in OCERS.  If an Elected Official chooses not to participate in OCERS, they are defaulted into the County’s Internal Revenue Code Section 401(a) plan.  The County’s 401(a) plan is a defined contribution plan and is not administered by OCERS.

 

For Elected Officials in the 401(a) plan in lieu of OCERS, the County contributes 1.5% of biweekly salary to the 401(a) plan.  Additionally, all Elected Officials receive an 8% contribution of biweekly salary to the 401(a) defined contribution plan, regardless of participation in OCERS.  Therefore, an Elected Official who is in the 401(a) plan in lieu of OCERS receives a 9.5% County contribution to their 401(a) defined contribution plan.

 

Federal tax law provides that a state or other governmental entity is exempt from providing Social Security coverage and taxes if its employees are covered by a retirement system maintained by the state or governmental entity that provides minimum benefits or contributions that are comparable to the benefits the participants would have received under Social Security. Under regulations provided by the Treasury Department, a defined contribution plan provides benefits comparable to the benefits a participant would have received under Social Security if allocations to the participant’s account (excluding earnings) are at least 7.5 percent of the participant’s compensation (including at least the participant’s base pay up to the Social Security wage base) for services to the state or other governmental entity during that period. Contributions may be based on any combination of employer and employee contributions, provided that contributions total at least 7.5 percent of the participant’s compensation.  Since the County’s contribution to a 401(a) plan is greater than 7.5 percent, the County is exempt from providing Social Security coverage for elected officials who opt out of OCERS coverage.

 

The Board has requested staff to determine what steps are required to place all newly Elected Members of the Board of Supervisors who are not currently a member of the Orange County Employees Retirement System (OCERS) in Social Security as the only Defined Benefit retirement plan option. Newly Elected Members of the Board of Supervisors are defined as having been sworn into office after January 1, 2012.

 

Newly Elected Members of the Board of Supervisors to be enrolled in Social Security – Legislative Change Required

Orange County’s retirement system is established pursuant to the County Employees Retirement Law of 1937 (“CERL”).   There is no express authority in CERL for the mandatory exclusion of elected officials.  In the absence of specific statutory authority permitting the mandatory exclusion of elected officers, neither the Board of Retirement nor the Board of Supervisors may take such action. Therefore, legislation will need to be drafted to provide statutory authorization to be added to CERL allowing the mandatory exclusion of elected Members of the Board of Supervisors from OCERS. If enabling legislation is enacted, California case law suggests elected Members of the Board of Supervisors may be mandatorily excluded from OCERS. 

Currently, there are two bills, one in the Assembly (AB 738), one in the Senate (SB 523), that exclude local elected officials from membership in ’37 Act systems, PERS and STRS.  It applies to all local elected officials elected after January 1, 2012 except for those who were already in an elected office and a member of the system prior to that date, who get re-elected to the same office. However, your Honorable Board has expressed concerns regarding the language in the two pieces of legislation. CEO/Legislative staff will need to work with the authors to amend the two pieces of legislation in order for your Honorable Board to support them. Alternatively, the County could seek legislation that only applies to the County of Orange elected Members of the Board of Supervisors.

 

Future Elected Members of the Board of Supervisors, Who Already are Members of OCERS, Probably Cannot be Excluded from OCERS

 

In addition, current employees or elected officials probably cannot be excluded from OCERS in regards to future service upon reelection, election or appointment to County office.  Elected Members of the Board of Supervisors can be divided into two groups.  The first group is elected Members of the Board of Supervisors who are reelected to their same position.  The second group is all County employees and elected officials who participate in OCERS who, without a break in service, are elected or appointed to an office within the County. 

 

Elected Members of the Board of Supervisors who are reelected to their same position cannot be excluded from the County’s retirement system.  When entering office, elective Members of the Board of Supervisors are impliedly promised certain pension benefits and these benefits include both the right to receive the vested pension benefits upon retirement, as well as the collateral right to earn future pension benefits through continued service, on terms substantially equivalent to those then offered.  A right to pension benefits payable upon fulfillment of age, service and other requirements may not be destroyed, once vested, without impairment of a contractual obligation. 

 

There is no case law that directly addresses whether the second group, current employees and elective officials who currently participate in OCERS and later, without a break in service, are elected to a new position which they currently do not hold, may be excluded from OCERS. 

Legislation that would implement the changes discussed by the Board would provide that Newly Elected Members of the Board of Supervisors who are not a member of the Orange County Employees Retirement System (OCERS) would participate in Social Security with a County bi-weekly contribution of 6.2% and a mandatory employee bi-weekly contribution of 6.2% as the only Defined Benefit retirement plan. Newly Elected Members of the Board of Supervisors would no longer be eligible to participate in the Orange County Employees Retirement System.

Extension of Social Security Coverage to Elected Members of the Board of Supervisors

 

Mandatory participation in Social Security is required under “Section 210” of the Social Security Act for public employees who are not provided with a “FICA (Social Security) replacement qualifying plan” by their employer.  Such employees are mandatorily enrolled in Social Security with both employer and employee paying a 6.2% of payroll to Social Security. 

 

In order for the County to establish Social Security as the only Defined Benefit retirement plan for newly Elected Members of the Board of Supervisors under Section 210 of the Social Security Act, the County must reduce the amount it contributes to the 401(a) defined contribution plan for newly Elected Officials to less than 7.5%.  If the County contribution to the 401(a) plan is less than 7.5% then it is not a “FICA (Social Security) replacement qualifying plan” and therefore newly Elected Officials would be mandatorily enrolled in Social Security under Section 210 of the Social Security Act.  (Note: if the County 401(a) contribution is 7.5% or higher, a “referendum” (vote) of all incumbent elected Members of the Board of Supervisors must be held prior to implementing a mandatory enrollment of future elected officials in Social Security, creating additional legal and administrative issues to address.  Staff believes the approach described above more clearly meets the intent of the Board for future elected Members of the Board of Supervisors.)

The plan put forward establishes County payments to Social Security in the same amounts as private sector employers and employees.  It would not increase County pension obligations.

 

Government Code Section 7507 requires that the County engage an actuary to provide a statement of the actuarial impact upon future annual costs, including normal cost and any additional accrued liability, of any changes in retirement benefits or other postemployment benefits prior to the Board of Supervisors authorizing such changes. Section 7507 requires that the actuary’s report be made public at a public meeting at least two weeks prior to the adoption of any changes in public retirement plan benefits or other postemployment benefits.  Finally, Section 7507 requires, with respect to any such changes, that the County Executive Officer (CEO), acknowledge in writing that he or she understands the current and future cost of the benefit as determined by the actuary. If the Board approves going forward with the mandatory Social Security program for future elected Members of the Board of Supervisors, staff working with County Counsel will determine if Section 7507 requirements apply to the program prior to final approval by the Board.

 

Measure J:

 

The best interpretation of Measure J is that the Measure applies only to benefits payable through participation in the Orange County Employees Retirement System, or a successor defined benefit retirement system, or to benefits that impose a similar long-term ongoing obligation on the County.  Other interpretations of Measure J may apply the Measure more broadly.  To minimize risk of violating the Measure, it would be best to confirm that the proposed changes will not result in a net retirement benefit increase to any employee group.  As the proposed Social Security contributions will only apply to future elected Members of the Board of Supervisors who will be excluded from participation in OCERS, we do not believe that any of the proposed changes will result in an overall increase in retirement benefits to any employee group.  We have reviewed this question preliminarily with the County’s consulting actuary Bartel and Associates whose opinion is attached.

 

Cost:

The mandatory Social Security program would result in no increase in retirement benefits or UAAL – see attached statement from Bartel and Associates (Exhibit I). 

 

 

 

FINANCIAL IMPACT:

 

The mandatory Social Security program would result in no increase in retirement benefits or UAAL – see attached statement from Bartel and Associates (Exhibit I). 

 

 

 

STAFFING IMPACT:

 

N/A

 

EXHIBIT(S):

 

Letter from Bartel and Associates - (Exhibit I)