BILL ANALYSIS AB 1987 Page 1 Date of Hearing: April 21, 2010 ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL SECURITY Alberto Torrico, Chair AB 1987 (Ma) - As Amended: April 15, 2010 SUBJECT : Public retirement: final compensation: computation: retirees. SUMMARY : Establishes minimum requirements that all public retirement systems must be operated in accordance with including specifying what may be used in determining an employee's final compensation, requiring the establishment of an ongoing audit process with penalties for noncompliance, and prohibiting, for a period of at least 180 days, a retiree from returning to employment with the public employer on a part-time or contract basis. Specifically, this bill : 1)Makes various findings and declarations regarding the manipulation of retirement benefits, including pension spiking, and the duties of the retirement systems to employ sound and equitable principles of oversight and the treatment of compensation. 2)Requires each retirement system to establish accountability provisions for participating employers that include an ongoing audit process and penalty provisions for noncompliance. 3)Authorizes a retirement system to not include in retirement calculations any compensation they determine was paid for the principal purpose of enhancing a member's retirement benefit. 4)Limits cash conversions of accrued employee benefits, as specified, and prohibits final settlement or termination pay from being included in retirement calculations. 5)Prohibits a retiree from returning to work as a retired annuitant or as a contract employee for a period of 180 days after retirement. This requirement will apply to anyone retiring on and after January 1, 2011. 6)Limits the compensation used in retirement calculations for members who are not in a group or class to the average increase in compensation received during the final AB 1987 Page 2 compensation period and the proceeding two years by employees in the same or related group as the member. 7)Specifies that all other provisions of the bill become operative for all active and future members of the retirement system beginning July 1, 2011. 8)Specifies that this bill will not become operative unless SB 1425 (Simitian) of this year is also enacted. EXISTING LAW : 1)Authorizes over 40 public retirement systems for the State's public employees, including CalPERS; CalSTRS; the 20 counties operating retirement systems under the County Employees' Retirement Law of 1937 ('37 Act); and independent public retirement systems, mostly for cities and special districts. These systems provide defined benefit retirement allowances based on employees' years of service, age at retirement, and final compensation (highest paid 12 or 36 months of employment). 2)Through laws, rules, local ordinances, and collective bargaining agreements allows public employers to pay differentials, bonuses, overtime, separation pay, holiday pay, and other forms of compensation in addition to base pay and require that participating employers accurately and timely report to the retirement boards the amount of compensation paid to employees, including special forms of pay, changes in employment status, leaves, and other factors that impact compensation. 3)Allows a retired public employee or teacher to return to public employment with an employer covered by the retirement system he or she retired from on a part-time basis, as specified. An employee who exceeds the limited time base or earnings, as specified, may be subject to reinstatement into the retirement system and reduction or cessation of his or her retirement allowance or earnings. FISCAL EFFECT : Unknown. COMMENTS : According to the author, "Sensible reforms will prevent abuse, level the playing field and protect taxpayers. Retirement systems have a duty to protect the health of their AB 1987 Page 3 retirement system for the public employers and for the public employees who depend on a secure and adequate retirement. And the Legislature has a duty to taxpayers to guard against abuses that threaten the health of the system by making sure that resources are used fairly and equitably. "AB 1987 attacks abusive practices, preventing a few individuals from putting retirement at risk for the vast majority of honest, hard-working public servants, and gives retirement systems the tools to keep their assets safe and secure. Specifically, this bill would place the following restrictions and responsibilities on all public retirement systems in California: All retirement boards will have the same power to deny intentionally spiked or manipulated pension payments to those few who claim them. Employees and employers would have to prove that the pension increase was justified. Employees will no longer be able to accrue years of vacation time and cash it all in at the end of their work to increase the base on which their pensions are calculated. The only thing that can be counted will be what an employee earns within a single year. Large severance or settlement pay for an employee headed out the door to retirement will no longer be allowed to be factored in towards pensions. Additionally, pay raises for a single individual, such as a city manager, or Fire Chief, can't be counted unless others get similar raises. Double-dipping will be addressed by prohibiting a newly retired individual from returning to work without re-instating and suspending their retirement allowance, for an employer covered by the retirement system they retired from, for at least six months, even if they attempt to come back as an independent contractor. State and local retirement systems will be required to establish accountability provisions that include regular audits and impose penalties for inaccurate or misleading information provided by employers or employees. Provides retirement systems with the ability to recalculate and reduce retirement allowances if they determine that someone's reported salary, and the benefit AB 1987 Page 4 calculated based on that salary, has been intentionally spiked." Those organizations adopting an "oppose unless amended" position on the bill have raised objections to requiring a 180 day break in service between the date a person retires and the date he or she may return to work as a paid retiree. The Judicial Council of California states that this prohibition would "?disrupt court calendars and increase the existing backlog in criminal and civil cases." The California State Association of Counties (CSAC) states that "a six-month wait for every retiree is overly broad and is an inappropriate interference on a local public employer's ability to choose the best candidate for a job and to efficiently and effectively manage resources." CSAC also believes that a better way to address pension spiking abuses would be to restrict final compensation earnable to base salary or wage compensation only. SB 1425 (Simitian) is a companion measure to this bill and is intended to strengthen anti-spiking provisions in the Teachers' Retirement Law and the Public Employees' Retirement Law. REGISTERED SUPPORT / OPPOSITION : Support John Chiang, California State Controller (Sponsor) California Federation of Teachers Glendale City Employees Association Organization of SMUD Employees Peace Officers Research Association of California San Bernardino Public Employees Association San Luis Obispo County Employees Association Santa Rosa City Employees Association Opposition California Association of School Business Officials (unless amended) California State Association of Counties (unless amended) Judicial Council of California (unless amended) Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916) 319-3957