BILL ANALYSIS Ó
AB 89
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Date of Hearing: May 4, 2011
ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL
SECURITY
Warren T. Furutani, Chair
AB 89 (Hill) - As Amended: April 14, 2011
SUBJECT : Retirement: public employees.
SUMMARY : Requires all public retirement systems in California
to adhere to the federal compensation limit under Internal
Revenue Code (IRC) Section 401(a)(17) when calculating
retirement benefits for members who first join the retirement
system on or after January 1, 2012, and prohibits a public
employer from making contributions to any qualified public
retirement plan based on any portion of compensation that
exceeds that amount.
EXISTING FEDERAL LAW : Section 401(a)(17) of the Internal
Revenue Code limits the amount of annual compensation that can
be taken into account under qualified retirement plans. The
compensation limit for the 2011 calendar year is $245,000. The
compensation limit is only applicable to persons who first
became members or participants in a qualified retirement system
on or after July 1, 1996. The compensation limit does not limit
the salary an employer can pay an employee, but rather limits
the amount of compensation taken into account under the
retirement plan.
FISCAL EFFECT : Unknown.
COMMENTS : Under federal law, public institutions can be exempt
from the compensation limits. According to recent media
reports, in 1999, the University of California Retirement System
(UCRS) sought an exemption from the 401(a)(17) limits from the
Internal Revenue Service. The exemption was granted in 2007
thus allowing UCRS to calculate pensions on the employees' total
salaries. The university, however, never implemented the
change.
Recently, 26 high-level UC executives sent a letter to the Board
of Regents demanding the UC calculate their retirement benefits
on their entire salaries. Currently, UCRS recognizes only the
first $245,000 of the income of UCRS members subject to the IRC
Section 401(a)(17) limits. According to the UC, the retirement
AB 89
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benefits the executives are seeking would add $5.5 million a
year to the pension liability and an additional $51 million to
make the changes retroactive to 2007, as the executives are
demanding.
According to the author, "Preventing public agencies from making
contribution based on any portion of a salary above
$245,000/year is necessary to ensure that taxpayer money is used
to fund services, not to provide exorbitant retirement benefits
for already highly compensated executives."
The California Public Employees' Retirement System has taken a
"support in amended" position on the bill. They are asking for
amendments that will ensure that the state law incorporates the
whole body of 401(a)(17) that exists including regulations, IRS
guidance, and private letter rulings. Also, according to
CalPERS, with these amendments, if federal law is amended this
provision would not need to be amended.
Below are the CalPERS proposed changes:
7503.5. (a) Notwithstanding any other law In addition to any
other benefit limitations prescribed by law , for the purposes of
determining a retirement benefit paid to a person who first
becomes a member of a public retirement system on or after
January 1, 2012, to the extent the benefits payable under such
system are subject to the compensation limits prescribed by
Section 401(a)(17) of Title 26 of the United States Code , the
maximum salary, total compensation, or payrate upon which a
defined retirement benefits benefit shall be based maximum
salary, compensation, or payrate taken into account under the
plan for any year shall not exceed the amount specified in
permitted to be taken into account under Section 401(a)(17) of
Title 26 of the United States Code, or it successor.
(b) A public employer shall not make employer contributions to
any qualified public retirement plan or plans on behalf of an
employee who first becomes a member of the retirement system on
or after January 1, 2012, based on that portion of the amount of
total compensation that exceeds the amount specified in Section
401(a)(17) of Title 26 of the United States Code, or its
successor.
REGISTERED SUPPORT / OPPOSITION :
Support
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California Public Employees' Retirement System (if amended)
Opposition
None on file
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957