BILL ANALYSIS Ó AB 7 Page 1 Date of Hearing: March 30, 2011 ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL SECURITY Warren T. Furutani, Chair AB 7 (Portantino) - As Introduced: December 6, 2010 SUBJECT : State employment: salary freeze. SUMMARY : Prohibits certain state employees whose annual base salary is over $150,000 from receiving a salary increase or a bonus until January 1, 2014. Specifically, this bill : 1)Prohibits state employees whose base salary is greater than $150,000 per year from receiving a salary increase or a bonus, until January 1, 2014, while employed in the same position or classification. 2)Defines "person employed by the state" as any person employed by the executive, legislative or judicial branches of government, appointees to state boards and commissions, and employees of the California State University system. Specifies that local trial court employees are excluded from this definition. 3)Exempts from these provisions state employees whose salaries are governed by a Memoranda of Understanding, pursuant to a collective bargaining agreement, a person who occupies a classification that is deemed necessary to public safety and security by the Governor through an executive order, or a person whose salary is set by the State Constitution. 4)Authorizes the Controller to reject a request for a disbursement of funds that violates these provisions. 5)Urges the University of California system to adopt this policy. 6)Specifies that this section will remain in effect until January 1, 2014. EXISTING LAW : 1)Requires the Department of Personnel Administration (DPA) to set and adjust salaries for each classification in state AB 7 Page 2 service. DPA also has special salary setting authority for certain statutorily exempt employees, primarily department and agency secretaries, commissioners, and directors allowing DPA to make salary determinations on a case-by-case basis after considering a number of factors, including growth in the position's stature and responsibilities, compensation paid in similar positions in other jurisdictions, the need to avoid salary compaction, and special recruitment needs. 2)Authorizes the California State Teachers' Retirement System (CalSTRS) and the California Public Employees' Retirement System (CalPERS) to set the compensation for specified key executive and investment positions, including the chief executive officer, system actuary, chief investment officers, and other investment officers and portfolio managers whose positions are designated as managerial. FISCAL EFFECT : Unknown. COMMENTS : According to the author, "California is currently grappling with a fiscal crisis. As a result of the recession and a $25 billion plus California budget shortfall, important state services and programs have already been cut or eliminated, with more likely to come next year. California is continuing to face an economic crisis that could soon leave the state without cash to pay its expenses. Given the state fiscal crisis and with unemployment rates in California hovering around 12%, it is not unreasonable to place a salary freeze upon the highest paid state employees." Opponents state, "The California State University has serious concerns with this proposal and its effects on the ability of the system to govern itself and attract and retain the best available faculty, staff and executives to lead this complex institution through these difficult fiscal times." The University of California is all opposed to the bill stating, "This prohibition would directly affect the University's ability to carry out its core educational mission of teaching, research, and public service with the highest quality. It could compromise UC's academic reputation nationally and internationally with the loss of renowned faculty drawn to other institutions that are able to offer more competitive salaries, AB 7 Page 3 including the potential for merit increases on a regular basis." CalSTRS is concerned that imposing a salary freeze and eliminating incentive compensation could make it very difficult for them to recruit and retain experienced and talented staff. Currently there are 31 CalSTRS employees whose compensation would be limited by the bill. CalSTRS states that if they were to lose 20% of its senior investment staff, "the board would be required by its fiduciary responsibility to outsource more of the portfolio management, which would cost ten times more than current internal asset management staff, as found by a joint CalSTRS and CalPERS study by McKinsey, which was completed in 2003." This bill is similar to AB 53 (Portantino) from 2009 which was held on suspense in the Assembly Appropriations Committee. It is also similar to the following special session bills from last session: ABX2 1 (Portantino); ABX3 80 (Portantino); and, ABX8 33 (Portantino). None of the three special session bills were heard in committee. REGISTERED SUPPORT / OPPOSITION : Support None on file Opposition California State Teachers' Retirement System (unless amended) California State University University of California Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916) 319-3957