BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 1139| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ UNFINISHED BUSINESS Bill No: SB 1139 Author: Correa (D) Amended: 8/9/10 Vote: 21 SENATE PUBLIC EMP. & RET. COMMITTEE : 6-0, 4/12/10 AYES: Correa, Ashburn, Corbett, Cox, Ducheny, Liu SENATE FLOOR : 35-0, 4/15/10 AYES: Aanestad, Alquist, Ashburn, Calderon, Cedillo, Cogdill, Corbett, Correa, Cox, DeSaulnier, Florez, Hancock, Harman, Hollingsworth, Huff, Kehoe, Leno, Liu, Lowenthal, Maldonado, Negrete McLeod, Oropeza, Padilla, Pavley, Price, Romero, Runner, Simitian, Steinberg, Strickland, Walters, Wolk, Wright, Wyland, Yee NO VOTE RECORDED: Denham, Ducheny, Dutton, Wiggins, Vacancy ASSEMBLY FLOOR : 52-24, 8/19/10 - See last page for vote SUBJECT : Public Employees Retirement Law SOURCE : Public Employees Retirement System, Board of Administration DIGEST : This bill makes several technical and non-controversial changes to various sections of the Government Code administered by the Public Employees' Retirement System (PERS) and grants PERS authority to offer and manage expanded retirement savings options currently CONTINUED SB 1139 Page 2 authorized under federal law. Assembly Amendments : 1.Allows a public agency that contracts with PERS for health care coverage to elect, as a contract option, to provide health care coverage to eligible survivors who are not receiving a survivor allowance but were receiving health care coverage from the agency prior to them contracting with PERS. 2.Eliminates the requirement that the lease rates are to be equal to fair market value and sufficient to pay reasonable rate of return for the costs of construction and maintenance of the leased portions of the buildings and improvements. 3.Eliminates the provisions that restrict the period of time for which the board may retain the same certified public accountant to audit the financial statements of the system. ANALYSIS : Existing Law 1.Requires up to a two percent annual cost-of-living adjustment (COLA) in May for state and school employee retirees (depending on the Consumer Price Index) and a two percent to five percent adjustment (subject to contract options) for local public employee retirees, and requires that retiree pensions be increased annually in January to preserve 75 percent of original purchasing power for state and school employee retirees and 80 percent of original purchasing power of retirees of local public agencies contracting with PERS. 2.Provides a comprehensive set of rights and benefits for judges. That law, the Public Employees' Retirement Law (PERL) and the Judges' Retirement System (JRS) II Law, set forth the provisions of the delivery of benefits, including benefits, including benefits for retired judges, administered by PERS. CONTINUED SB 1139 Page 3 3.Provides that (a) PERS may offer 403(b) and 457 deferred compensation retirement plans to local public agencies and school districts in which participants make pre-tax contributions for retirement savings, (b) the State Teachers Retirement System (STRS) may offer a Roth Individual Retirement Account (IRA) for the purpose of rolling over assets held in an annuity contract or custodial account offered by the system, and (c) the Department of Personnel Administration (DPA) may administer 401(k) and 457 retirement accounts to most State employees, including employees of the Legislature, Judicial and California State University (CSU) system. This bill makes several minor or technical amendments to various sections of the Government Code administered by the California Public Employees' Retirement System (PERS) that are necessary for the continued efficient administration of the system. Specifically, this bill: 1.Changes the month in which the Purchasing Power Protection Adjustment (PPPA) is assessed from January to May in order to coordinate the timing of the adjustment with the cost-of-living allowance (COLA). 2.Requires that state employees, managers and appointed officials subject to mandatory furloughs by their appointing authority in fiscal year (FY) 2010-11 receive the PERS retirement service credit they would have received had they not been furloughed. 3.Clarifies that a judge may leave office without retiring and still maintain health benefits under the conditions currently specified in the Judges Retirement System II Law (JRS II). 4.Changes references in existing law from "deferred compensation" to "tax-preferred retirement savings," thereby expanding the types of retirement savings programs the PERS Board of Administration (Board) may establish to include those with after-tax payments. 5.Allows a public agency that contracts with PERS for health care coverage to elect, as a contract option, to provide health care coverage to eligible survivors who CONTINUED SB 1139 Page 4 are not receiving a survivor allowance but were receiving health care coverage from the agency prior to them contracting with PERS. 6.Changes the accounting treatment of PERS' headquarters facilities to conform to changes in government accounting standards, and removes certain limitations on contracts with accounting firms for purposes of auditing PERS' financial statements. 7.Establishes a list of eligible survivors to the Peace Officers and Firefighters (POFF) Supplemental plan statutes in the absence of a participant's designation. 8.Provides conformity with federal healthcare reform legislation. Comments The following information was provided by PERS: 1. Coordinate Timing of Annual COLA and PPPA Adjustments . PERS pays two types of benefits to retirees to ensure that retirement allowances maintain purchasing power despite inflation: the PPPA and the COLA. Many factors affect these benefits, including retirement year, membership type, and former employer's contract provisions. The COLA benefit is an annual cost-of-living increase that begins in the second calendar year after retirement and is adjusted each May after that. The PPPA is an added protection against inflation for those members whose benefits fall below a specified percent of their original purchasing power based on the Consumer Price Index for all cities. Unlike the COLA, there is no specific timetable for when a retiree can become eligible for the PPPA. The PPPA adjustment occurs in January of each year for eligible retirees. This bill conforms the annual COLA adjustment and the PPPA in the same month each year. In the first year of implementation, the PPPA adjustments will be deferred from January to May to synchronize the two benefits, with CONTINUED SB 1139 Page 5 retroactive application to January to adjust for the delay. Implementation must be deferred to January 1, 2012, so that required automation changes can be developed, built, and tested after PERS' new automation system is installed and operating. 2. Furloughed State Employees . Under existing law, a full-time member that accrues at least 10 months of service will still earn a full year of retirement service credit. However, under three day per month furloughs, part-time Making certain that furloughed state employees receive the retirement benefits they would have received absent a furlough is consistent with previous chaptered legislation that protected state employees subject to mandatory furloughs in FYs 2008-2009 and 2009-2010 either through an Executive Order, or the order of a state employer not subject to the Governor's authority (such as California State University, the Legislature and State Courts). Extending this protection to FY 2010-2011 will ensure that all active state members of PERS that are subject to furloughs are treated equitably, and that the disability and retirement benefits they must rely upon for income once they leave state service are not reduced by another temporary furlough order. PERS members, and those full-time members hired or retired mid-year that are unable to reach the 10-month threshold, will experience a reduction in the overall amount of service credit accrued. The language in this bill amends the Public Employees' Retirement Law to ensure that all state employees subject to a 2010-2011 Executive order requiring mandatory furloughs receive the retirement benefits they otherwise would have received had the furloughs not been in effect. 3. Health Benefits for Judges that Leave Office Early . The JRS II was established in 1994 to create a fully funded, actuarially-sound retirement system for Supreme and Appellate Court justices, Superior Court judges, and Municipal Court judges appointed or elected on or after November 9, 1994. As of September 2009, it includes 1130 active members and 17 retirees. The JRS II offers a combination of two basic types of retirement benefits: a defined benefit plan and a CONTINUED SB 1139 Page 6 monetary credit plan. The defined benefit plan provides a lifetime monthly benefit of up to 75% of final annual salary (percentage is based on age at retirement and years of service). The monetary credit plan allows for a refund of member contributions, a portion of the employer contributions, and interest. Lifetime benefits are not provided under the monetary credit plan. Under JRS II, a judge is eligible to retire upon attaining both age 65 and 20 or more years of service, or upon attaining age 70 with a minimum of five years of service. It also includes early retirement provisions that outline retirement benefits for a judge who "leaves judicial office" after specified numbers of years. The Public Employees Medical Hospital Care Act (PEMHCA) outlines access to PERS health benefits after "retirement" pursuant to JRS II. Currently, statutes in PEMHCA and JRS II use different terminology to describe a judge who leaves office after accruing five or more years of service and becomes eligible to receive JRS II benefits. JRS II specifies the retirement benefits of "a judge who leaves judicial office after accruing five or more years of service." PEMHCA outlines the health benefits of a judge who "retires." This bill changes the language in PEMHCA from "retires" to "leaves judicial office" to align it with the language in JRS II and eliminate any ambiguity between the two statutes. 4. The PERS Supplemental Income Program . SB 2026 (Craven), Chapter 1659, Statutes of 1990, authorizes PERS to establish a deferred compensation program for PERS members, and created the Public Employees' Deferred Compensation Fund under the exclusive control of the PERS Board of Administration. The statute granted broad authority for PERS to offer a 457 plan, 403(b) plan, or any other form of deferred compensation arrangement authorized by the Internal Revenue Code and approved by the PERS Board. The program is self-funded through fees assessed against participating employees and/or contracting employers and invested and administered in a series of accounts established within the Public Employees' Deferred Compensation Fund. CONTINUED SB 1139 Page 7 Several changes in federal and state law have occurred since enactment of the enabling statutes authorizing establishment of the PERS Deferred Compensation Program in 1991. The enabling statutes for PERS' deferred compensation program predate many of these changes, including the imposition of governmental plan trust requirements for 457(b) plans, and the creation of certain forms and features of deferred compensation arrangements now authorized under federal law, including ROTH-type and other after-tax or non-traditional deferred compensation savings arrangements. By allowing the program to offer any form of after-tax retirement savings arrangement, the enabling statutes provided fairly broad authority. However, it has been 15 years since they were amended, and so, existing law does not necessarily reflect the full range and scope of the subsequent changes to federal tax law. Therefore, this bill allows PERS to expand the tax-preferred retirement savings arrangements and make technical and conforming changes to its deferred compensation program statutes. 5.The Los Angeles Community College District (LACCD) contracted with PERS for health benefit coverage, effective January 1, 2010. LACCD's long-standing policy and agreement with their members is to provide employer-paid lifetime health benefits coverage to their retirees, and the surviving spouse or domestic partner of the retiree, once vesting criteria is met. Under PEMHCA, surviving family members must receive a monthly survivor allowance to meet the definition of annuitant. This bill allows employers that are electing to be subject to PEMHCA a means to provide survivors of annuitants without an allowance the ability to receive health coverage through a contract option. 6. Headquarters Accounting . Existing law requires the Board to establish a building account for the transfer of money from the retirement fund for the cost of the acquisition of real property and the construction, maintenance, and improvement of PERS facilities. It also specifies that the headquarters land, building, etc. must constitute an investment in the retirement fund and carried on the CONTINUED SB 1139 Page 8 books in accordance with generally accepted accounting practices (GAAP). Approximately 10 years ago, PERS adopted Governmental Accounting Standards Board (GASB) Statement No. 25, which required a change in the accounting treatment and financial reporting of the PERS Headquarter Building Account from an investment asset to property, plant, and equipment used in operations. PERS staff and external auditors determined that recognition of the Headquarters Building as an investment asset does not conform to GASB 25. This provision resolves inconsistencies between existing law and PERS practice. 7. Statutory Survivors . Unlike PERS' pension plans, the POFF program has no statutory listing of survivors eligible to receive payment upon the death of a participating member when the member has not designated a beneficiary. This bill adds such a statutory list, based on the statutes provided in California probate code. 8. Definition of Family Member . The term "family member" as it applies to health care coverage under the PEMHCA, has always included unmarried children as eligible dependents. With the passage of the federal healthcare reform bill, all children under age 26 must be covered, not simply those who are unmarried. This bill conforms statute to federal law. FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local: No SUPPORT : (Verified 8/20/10) Public Employees' Retirement System, Board of Administration (source) ASSEMBLY FLOOR : AYES: Ammiano, Arambula, Bass, Beall, Block, Blumenfield, Bradford, Brownley, Buchanan, Caballero, Charles Calderon, Carter, Chesbro, Coto, Davis, De La Torre, De Leon, Eng, Evans, Feuer, Fong, Fuentes, Furutani, Galgiani, Gatto, Gilmore, Hall, Hayashi, Hernandez, Hill, CONTINUED SB 1139 Page 9 Huber, Huffman, Jones, Lieu, Bonnie Lowenthal, Ma, Mendoza, Monning, Nava, V. Manuel Perez, Portantino, Ruskin, Salas, Saldana, Skinner, Solorio, Swanson, Torlakson, Torres, Torrico, Yamada, John A. Perez NOES: Adams, Anderson, Tom Berryhill, Blakeslee, Conway, DeVore, Fletcher, Fuller, Gaines, Garrick, Hagman, Harkey, Knight, Logue, Miller, Nestande, Niello, Nielsen, Norby, Silva, Smyth, Audra Strickland, Tran, Villines NO VOTE RECORDED: Bill Berryhill, Cook, Jeffries, Vacancy CPM:cm 8/20/10 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED