BILL NUMBER: AB 1585 CHAPTERED 09/25/03 CHAPTER 520 FILED WITH SECRETARY OF STATE SEPTEMBER 25, 2003 APPROVED BY GOVERNOR SEPTEMBER 24, 2003 PASSED THE ASSEMBLY AUGUST 28, 2003 PASSED THE SENATE AUGUST 25, 2003 AMENDED IN SENATE AUGUST 18, 2003 AMENDED IN SENATE JUNE 18, 2003 AMENDED IN ASSEMBLY APRIL 28, 2003 AMENDED IN ASSEMBLY MARCH 25, 2003 INTRODUCED BY Committee on Public Employees, Retirement and Social Security (Negrete McLeod (Chair), Levine (Vice Chair), Chan, Correa, Kehoe, Laird, and Nakanishi) FEBRUARY 21, 2003 An act to amend Sections 31452, 31510.2, 31529.9, 31597, 31597.1, 31899, 31899.1, and 31899.2 of, to amend the heading of Chapter 3.9 (commencing with Section 31899) of Part 3 of Division 4 of Title 3 of, to amend and renumber Sections 31899.7, 31899.8, 31899.9, and 31899.10 of, to amend, renumber, and add Section 31899.4 of, to add Section 31603 to, to repeal Section 31899.6 of, and to repeal and add Section 31899.5 of, the Government Code, relating to county employees' retirement systems. LEGISLATIVE COUNSEL'S DIGEST AB 1585, Committee on Public Employees, Retirement and Social Security. County employees' retirement systems. (1) Existing law authorizes the board of retirement or, if applicable, the board of investments of a retirement system subject to the County Employees Retirement Law of 1937 to invest the funds of the retirement system for the benefit of the members of the system and in a manner consistent with their fiduciary duties. This bill would authorize the board of retirement or, if applicable, the board of investments of one of those retirement systems to obtain a loan, secured by a portion of the assets of the retirement system, if the board finds that an emergency exists affecting the national banking system or financial markets that makes the loan necessary to pay benefits when due. The costs of the loan would be a charge against investment earnings of the retirement fund. (2) The County Employees Retirement Law of 1937 also authorizes the board of retirement in specified counties to contract with county counsel or private attorneys or employ staff attorneys for legal services. This bill would authorize the board of retirement in any county subject to the County Employees Retirement Law of 1937 to contract for or employ legal staff for legal services, if the board of retirement, by resolution, makes those provisions applicable to the county. (3) The County Employees Retirement Law of 1937 requires the county treasurer to file a sworn statement of the financial condition and financial transactions of the county's retirement system with the county auditor and county board of supervisors within 4 months after the end of the calendar or fiscal year. This bill would instead require that statement to be filed within 6 months after the end of the calendar or fiscal year. (4) Existing law establishes a replacement benefits program for members of retirement systems subject to the County Employees Retirement Law of 1937, other than Los Angeles County, whose retirement benefits may exceed the pension payment limitations of Section 415 of the Internal Revenue Code. Existing law establishes a separate program, known as plan F, for members of the retirement system in Los Angeles County. This bill would revise and recast those provisions relating to the replacement benefits program and would require each county and district subject to the County Employees Retirement Law of 1937, including Los Angeles County if it terminates plan F, to establish and administer a replacement benefits program, as specified. The bill would also authorize counties, pursuant to a contract with a district, to administer the district's program and authorize the retirement board to assist in the administration of the program to the extent permitted by federal law. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 31452 of the Government Code is amended to read: 31452. The right of a person to a pension, annuity, retirement allowance, return of contributions, the pension, annuity, or retirement allowance, any optional benefit, any other right accrued or accruing to any person under this chapter, the money in the fund created or continued under this chapter, and any property purchased for investment purposes pursuant to this chapter, are exempt from taxation, including any inheritance tax, whether state, county, municipal, or district. They are not subject to execution or any other process of court whatsoever except to the extent permitted by Section 31603 of this code and Section 704.110 of the Code of Civil Procedure, and are unassignable except as specifically provided in this chapter. SEC. 2. Section 31510.2 of the Government Code is amended to read: 31510.2. (a) The board of supervisors of any county subject to this article shall establish two defined contribution retirement plans authorized by Section 401 of the Internal Revenue Code of 1986. The terms of the plans shall be mutually agreed to by the employer and employee representatives of affected employees prior to adoption or amendment by the board of supervisors. The plans shall be known as General Plan F and Safety Plan F and are referred to collectively as plan F. (b) Any general member described in subdivision (f) of Section 31510 shall participate in General Plan F, and any safety member described in subdivision (f) of Section 31510 shall participate in Safety Plan F, after commencement of his or her participation in the prior plan. (c) The board, upon the advice of the actuary, shall determine the portion of the member contributions otherwise required under the prior plan that shall be credited to plan F in lieu of being credited to the other plan. In doing so, the board shall provide for the level of contributions to plan F that is the minimum amount sufficient to satisfy the purposes set forth in subdivision (b) of Section 31510. (d) The right of the member to benefits derived from member contributions vests under plan F upon the commencement of participation in plan F. (e) If a member or beneficiary becomes entitled to receive a benefit in the form of an annuity under the terms of the prior plan, the member's account in plan F shall be converted to the same form of annuity as is payable to the member or beneficiary from the prior plan. The amount of the annuity payable under the prior plan, calculated prior to the application of this article (including the limitations set forth in Section 415 of the Internal Revenue Code of 1986), shall be reduced by the amount of the annuity generated under plan F as described in the preceding sentence. The amount payable from plan F shall be paid at the same time and in the same manner as the annuity payable from the prior plan and may be provided through an annuity contract purchased from an insurance company, at the discretion of the board. Notwithstanding the foregoing, if the member's account in plan F does not exceed three thousand five hundred dollars ($3,500), it shall be paid to the member or beneficiary as a lump-sum payment, in lieu of the benefit otherwise payable under plan F. (f) If a member or beneficiary becomes entitled to receive the member's accumulated contributions and interest from the prior plan, the member or beneficiary shall receive the member's account balance from plan F consisting of the member's accumulated contributions and actual earnings at the same time and in the same manner. (g) In applying the limitations set forth in Section 415 of the Internal Revenue Code of 1986, benefits or annual additions in qualified retirement plans maintained by an employer separate from the retirement system shall be reduced first. Any additional reduction shall be made to the benefits from plans within the retirement system other than plan F, and then lastly to the annual addition to plan F. (h) Plan F shall be administered in accordance with subsection (a) of Section 401 of the Internal Revenue Code of 1986 and the Treasury Regulations issued thereunder. The plan shall state that it is intended to be a profit-sharing plan wherein contributions are determined without regard to current or accumulated profits. (i) For the purpose of this article, the term "annuity" means the combined benefit provided by an annuity, as defined in Section 31457, and the pension, as defined in Section 31471. (j) To the extent any county subject to this article terminates General Plan F or Safety Plan F, or both of them, with respect to any group of members and in accordance with their terms and adopts a replacement benefits program under Section 31899.4 for those members in lieu of that plan or plans, this section shall be inoperative in that county with respect to those members. In any event, the election made pursuant to subdivision (b) of Section 31510, the provisions of subdivisions (c), (d), (e), (f), and (h) of Section 31510, and the provisions of Section 31510.3 shall remain operative in that county. SEC. 3. Section 31529.9 of the Government Code is amended to read: 31529.9. (a) In addition to the powers granted by Sections 31529, 31529.5, 31614, and 31732, the board of retirement and the board of investment may contract with the county counsel or with attorneys in private practice or employ staff attorneys for legal services. (b) Notwithstanding Sections 31529.5 and 31580, the board shall pay, from system assets, reasonable compensation for the legal services. (c) This section applies to any county of the 2nd class, 7th class, 14th class, 15th class, or the 16th class as described by Sections 28020, 28023, 28028, 28035, 28036, and 28037. (d) This section shall also apply to any other county if the board of retirement, by resolution adopted by majority vote, makes this section applicable in the county. SEC. 4. Section 31597 of the Government Code is amended to read: 31597. Before June 30th of each year the retirement board shall file in the office of the county auditor and with the board of supervisors a sworn statement that shall exhibit the financial condition of the retirement system at the close of the preceding December 31st and its financial transactions for the year ending on that day. SEC. 5. Section 31597.1 of the Government Code is amended to read: 31597.1. Before December 31 of each year, the retirement board shall file in the office of the county auditor and with the board of supervisors a sworn statement that shall exhibit the financial condition of the retirement system at the close of the preceding June 30th and its financial transactions for the fiscal year ending that day. This section is not operative in any county until the board of supervisors, by resolution adopted by a majority vote, makes the provisions of this section applicable in the county. After the filing of the first fiscal year accounting under this section, the provisions of Section 31597 do not apply in the county. SEC. 6. Section 31603 is added to the Government Code, to read: 31603. The board of retirement or the board of investments, as applicable, may obtain a loan and pledge a portion of the assets of the retirement fund as security for the repayment of the loan if the board finds all of the following: (a) An emergency exists affecting the national banking system or financial markets. (b) The emergency prevents the association from readily accessing its funds. (c) The loan is necessary to promptly deliver benefits when due. The assets of the retirement fund pledged as security for the loan shall be subject to execution and other processes of the court only in connection with a proceeding to enforce the loan. The costs associated with securing and repaying the loan, including interest, shall be a charge against investment earnings of the fund. SEC. 7. The heading of Chapter 3.9 (commencing with Section 31899) of Part 3 of Division 4 of Title 3 of the Government Code is amended to read: CHAPTER 3.9. INTERNAL REVENUE CODE COUNTY COMPLIANCE AND REPLACEMENT BENEFITS PROGRAM SEC. 8. Section 31899 of the Government Code is amended to read: 31899. The purpose of this chapter is to ensure the federal tax-exempt status of the county employees' retirement systems, to preserve the deferred treatment of federal income tax on public employer contributions to public employee pensions, and to ensure that members are provided with retirement and other related benefits that are commensurate, to the extent deemed reasonable, with the services rendered without violating the intent and purposes of Section 415 of the Internal Revenue Code. To achieve this purpose, this chapter incorporates certain pension payment limitations and elects the "grandfather" option in Section 415(b)(10) of the Internal Revenue Code. Also, this chapter provides for certain replacement benefits. SEC. 9. Section 31899.1 of the Government Code is amended to read: 31899.1. (a) The definitions in Chapter 3 (commencing with Section 31450) of this part shall apply to this chapter. (b) The term "Internal Revenue Code" includes all regulations, revenue rulings, notices, and revenue procedures issued by the Internal Revenue Service. SEC. 10. Section 31899.2 of the Government Code is amended to read: 31899.2. (a) In accordance with Section 31899.3, the retirement benefits for any person who for the first time became a member of the system on or after January 1, 1990, shall be subject to the payment limitations of Section 415 of the Internal Revenue Code. The retirement benefits for any person who became a member of the system before January 1, 1990, also shall be subject to the payment limitations of Section 415 of the Internal Revenue Code to the extent that those benefits are not exempt from those limitations under the "grandfather" election that has been made under that section and this section. (b) The "grandfather" election in Section 415(b)(10) of the Internal Revenue Code is hereby made. All members of a retirement system who joined the system prior to January 1, 1990, are exempt from the Section 415 limits to the extent permitted by the Internal Revenue Code. (c) This section does not apply in a county of the first class as defined in Section 28020, as amended by Chapter 1204 of the Statutes of 1971, and Section 28022, as amended by Chapter 43 of the Statutes of 1961, which county is instead subject to Article 2.1 (commencing with Section 31510) of Chapter 3. SEC. 11. Section 31899.4 of the Government Code is amended and renumbered to read: 31899.3. (a) Notwithstanding any other provision of law, the retirement rights conferred by this chapter and by Chapter 3 (commencing with Section 31450) of this part upon any person who for the first time becomes a member of a retirement system on or after January 1, 1990, shall be subject to the limitations in the Internal Revenue Code upon benefits that may be paid by public retirement systems. That person may not have any retirement right or benefit that exceeds those limitations, and no retirement right or benefit may accrue to or vest in that person under Chapter 3 (commencing with Section 31450) that exceeds those limitations. That person may, however, have retirement rights and benefits under the replacement benefits program established under this chapter. (b) Each retirement board shall provide to each employer a notice of the content and effect of subdivision (a) for distribution, prior to employment, to each person who may become a member and to each person who for the first time becomes a member on or after January 1, 1990. (c) Chapter 3 (commencing with Section 31450) shall be construed as if it included this section. (d) This section does not apply in a county of the first class as defined in Section 28020, as amended by Chapter 1204 of the Statutes of 1971, and Section 28022, as amended by Chapter 43 of the Statutes of 1961, which county is instead subject to Article 2.1 (commencing with Section 31510) of Chapter 3. SEC. 12. Section 31899.4 is added to the Government Code, to read: 31899.4. (a) Each county and district shall provide a program to replace the benefits that are limited by Section 415 of the Internal Revenue Code for members whose retirement benefits are limited by Section 415 and cannot be fully maximized pursuant to Section 31538. The replacement benefits program shall provide benefits that, together with the benefits provided by the retirement system, are the same as, and may not exceed, the benefits that would be paid by the retirement system but for the application of the limits of Section 415. Notwithstanding the foregoing, the county or district may modify its replacement benefits program and may add, modify, or eliminate any replacement benefits, as necessary, to carry out the purpose of this chapter. A replacement benefit may not be reduced if the reduction would impair the vested rights of any person. (b) Each county shall establish and administer its own replacement benefits program for members whose retirement benefits are limited by Section 415 of the Internal Revenue Code. (c) A county may, pursuant to a contract with a district, agree to administer the district's replacement benefits program for the district's members whose retirement benefits are limited by Section 415 of the Internal Revenue Code. The county may charge each district a reasonable fee for administering the district's program and the county and district may agree on any other conditions relating to that administration. If a district does not contract with the county to administer its replacement benefits program, it shall establish and administer its own replacement benefits program. (d) Upon the recommendation of the retirement system's actuary, and in accordance with its obligation to recommend county and district contribution rates under Sections 31453 and 31453.5, the board shall adjust the contributions required to be made by a county or district to the extent that benefits are payable under a replacement benefits program of that county or district. (e) The county, and any district that establishes and administers its own program, shall enact an ordinance or prescribe regulations or other written documentation setting forth the terms of its replacement benefits program. (f) Notwithstanding any other provision of this chapter, a county of the first class, as defined in Section 28020, as amended by Chapter 1204 of the Statutes of 1971, and Section 28022, as amended by Chapter 43 of the Statutes of 1961, is not required to provide replacement benefits to any member under this section if that member participates in General Plan F or Safety Plan F under Article 2.1 (commencing with Section 31510) of Chapter 3. SEC. 13. Section 31899.5 of the Government Code is repealed. SEC. 14. Section 31899.5 is added to the Government Code, to read: 31899.5. Each county, and each district that establishes its own replacement benefits program, shall administer the replacement benefits program established by it pursuant to this chapter. The board may, pursuant to an agreement with the county or the district that establishes its own program, assist in the administration of the replacement benefits program to the extent permitted under the Internal Revenue Code. SEC. 15. Section 31899.6 of the Government Code is repealed. SEC. 16. Section 31899.7 of the Government Code is amended and renumbered to read: 31899.6. If the Internal Revenue Service determines that any provision of Chapter 3 (commencing with Section 31450) of this part or this chapter cannot be given effect without placing a retirement system administered under this chapter or Chapter 3 (commencing with Section 31450) of this part out of conformity with Section 415 of the Internal Revenue Code, that provision, only to the extent that it causes that nonconformity and only with respect to the affected parties shall become inoperative with respect to the payment of benefits pursuant to Chapter 3 (commencing with Section 31450) of this part, as of the effective date of the determination. The retirement board shall notify the Secretary of State of inoperation under this section. SEC. 17. Section 31899.8 of the Government Code is amended and renumbered to read: 31899.7. (a) If Section 415 of the Internal Revenue Code is amended to exclude public retirement systems, or if the application of Section 415 of the Internal Revenue Code to public retirement systems is invalidated by the final decision of an appellate court of proper jurisdiction, all sections of this chapter, except this section, shall become inoperative as of the effective date of that amendment or decision. The retirement board shall immediately notify the Secretary of State whenever any provision of this chapter becomes inoperative pursuant to this section. (b) Whenever all sections of this chapter, except this section, become inoperative pursuant to this section, and to the extent not prohibited by the Internal Revenue Code, the retirement board, county, and districts shall do all of the following: (1) Remove the pension limitations imposed by Section 415 of the Internal Revenue Code for prospective payments to annuitants. (2) Eliminate the replacement benefits, and pay benefits that are due under the system to the affected annuitants without regard to any limitations of Section 415 of the Internal Revenue Code. (3) Take any and all other actions they deem necessary and feasible. SEC. 18. Section 31899.9 of the Government Code is amended and renumbered to read: 31899.8. It is the sole intent of the Legislature, in enacting this chapter, to fully comply with the provisions of the Internal Revenue Code that apply to public retirement systems in order to maintain and ensure the federal income tax exempt status of the county employees' retirement systems, to elect the "grandfather" option in Section 415(b)(10) of the Internal Revenue Code, and to require that each county and district provide benefits that replace the benefits that are limited by Section 415 of the Internal Revenue Code for affected members of the county employees' retirement systems. The Legislature finds and declares that all costs of local public agencies and local public retirement systems of complying with Section 415 of the Internal Revenue Code are a federal mandate within the meaning of Section 6 of Article XIII B of the California Constitution and Part 7 (commencing with Section 17500) of Division 4 of Title 2, as construed in City of Sacramento v. State of California (50 Cal. 3d 51). It is the intent of the Legislature that this chapter not be construed to impose upon local public agencies that are maintaining county retirement systems pursuant to Chapter 3 (commencing with Section 31450) of this part, state-reimbursable, state-mandated local program benefit costs within the meaning of Section 6 of Article XIII B of the California Constitution and Part 7 (commencing with Section 17500) of Division 4 of Title 2. If either the Commission on State Mandates or a court determines that this chapter imposes upon any local agency, state-mandated local program benefit costs, notwithstanding any other provision of law, no reimbursement therefor shall be made from the State Mandates Claims Fund pursuant to Part 7 (commencing with Section 17500) of Division 4 of Title 2 or from any other state fund. SEC. 19. Section 31899.10 of the Government Code is amended and renumbered to read: 31899.9. The Legislature reserves the power and right to amend this chapter, as needed to effect its purposes. This chapter shall be controlling over any memorandum of understanding reached between employers and employees pursuant to Chapter 10 (commencing with Section 3500) of Division 4 of Title 1.