BILL ANALYSIS AB 1987 Page 1 Date of Hearing: May 12, 2010 ASSEMBLY COMMITTEE ON APPROPRIATIONS Felipe Fuentes, Chair AB 1987 (Ma) - As Amended: April 29, 2010 Policy Committee: P.E.R. & S.S.Vote: 6-0 Urgency: No State Mandated Local Program: No Reimbursable: SUMMARY This bill places new standards and limitations on public retirement systems in California with respect to final compensation calculations, ongoing audits and penalties for non-compliance, and prohibitions against retirees from immediately returning to work on a part time or contract basis. Specifically, the bill: 1)Requires each retirement system to establish accountability provisions for participating employers that include an ongoing audit process and penalty provisions for noncompliance. 2)Excludes cash conversions of accrued employee benefits from being included in retirement calculations. 3)Prohibits final settlement or termination pay from being included in retirement calculations. 4)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 applies to anyone retiring on and after January 1, 2011. 5)Limits the increases in compensation that can be used in retirement calculations by members during their final three years preceding retirement to the average increases in compensation received by similarly situated employees in the same or closely comparable group. Promotions or routine merit increases would not be affected by this provision. 6)Authorizes a retirement system to not include in retirement AB 1987 Page 2 calculations any compensation they determine was paid for the principal purpose of enhancing a member's retirement benefit. 7)Specifies that this bill will not become operative unless SB 1425 (Simitian) of this year is also enacted. FISCAL EFFECT 1)CalPERS indicates that costs associated with this bill would be absorbable. It would incur minor costs to review special compensation or other negotiated provisions before MOU's take effect, offset by decreases in workload associated with making such determinations at the time of individual members' retirement. Also minor and probably absorbable costs for programming changes associated with coding any newly approved special compensation item. 2)DPA indicates that a six month prohibition against returning to work as a contract employee or annuitant may have an adverse impact on the expertise and productivity of state departments. However, it is not possible to quantify the dollar impact of these effects. 3)Significant costs to local pension funds to administer the provisions of this bill, not reimbursable. COMMENTS 1)Purpose . The bill is intended to address pension spiking and other abuses that benefit relatively few at the expense of the overall pension system. The author assert that the bill "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." 2)Background . Existing law authorizes over 40 public retirement systems in California, including CalPERS, CalSTRS, 20 counties operating 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). AB 1987 Page 3 Over the past several years, there have been numerous reported instances of "pension spiking" whereby an employee is provided a dramatic one year boost in pre-retirement compensation, or cashes in large vacation and leave balances and is allowed to use the one-time proceeds in the "final year" compensation calculation. Some forms of these practices are restricted by specific pension funds. For example, in 1994, the legislature passed SB 53, (Chapter 1297/1994), which among other things excludes cash outs of vacation or leave balances in "earnable compensation" used for purposes of the retirement calculations of state CalPERS members. However, there is no statewide law governing these practices. 3)Opposition. Several organizations oppose the bill's provision requiring a 180 day break in service between the date a person retires and returns as a paid retiree. For example, the Judicial Council of California claims this prohibition disrupts court calendars and increases the existing backlog in criminal and civil cases. The California State Association of Counties states that the six month wait period is overly broad and is an inappropriate interference on a local public employer's ability to effectively manage. 4)Contingent enactment . The enactment of this bill is contingent upon enactment of SB 1425 (Simitian), which strengthens anti-spiking provisions in the Teachers' Retirement Law and the Public Employees' Retirement Law. Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081