BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair AB 89 (Hill) Hearing Date: 8/15/2011 Amended: 6/23/2011 Consultant: Maureen Ortiz Policy Vote: PE&R 5-0 _________________________________________________________________ ____ BILL SUMMARY: AB 89, an urgency measure, requires all public retirement systems to adhere to federal compensation limits in determining retirement benefits for members who first join the retirement systems on or after January 1, 2012. The bill also allows the County of San Mateo to implement lower retirement tiers for safety employees represented by the Probation and Detention Association. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2011-12 2012-13 2013-14 Fund Retirement benefits ------------unknown future savings-------------- Specials* San Mateo pension formula ---potentially millions in future savings---- Local *Public Employees Retirement System and State Teachers Retirement System * Judges Retirement System and Legislators' Retirement System _________________________________________________________________ ____ STAFF COMMENTS: Section 401(a)(17) of the Internal Revenue Code limits the amount of annual compensation that can be used to calculate a benefit under qualified retirement plans. This federal compensation limit for the 2011 calendar year is $245,000, only applies 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 that can be used to calculate a public retirement benefit. AB 89 (Hill) Page 1 In spite of that limit, employers can request exemptions from the federal limits from the Internal Revenue Service. For instance, in 2007 the University of California (UC) Regents sought, and was granted, an exemption from the limits. Although this exemption would allow the UC to calculate pension benefits based on the individual's entire salary, the university has not implemented this change to date. 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. According to the UC, those calculations would result in an additional pension liability of $5.5 million. If the change were made retroactive to 2007 when the exemption was granted, there would be an additional $51 million in costs. The cap on compensation limits for retirement calculation purposes will apply to members of the Public Employees Retirement System, State Teachers' Retirement System, Judges Retirement System II, Legislators' Retirement System, and the '37 Act Counties. AB 89 additionally prohibits public employers from making contributions to qualified public retirement plans on any compensation exceeding the limited amount. The County of San Mateo has recently negotiated a new six year Memorandum of Understanding with the Probation and Detention Association that will require new hires to choose reduced retirement formulas of either 2% at age 50, or 3% at age 55 (the formula for current employees is 3% at age 50). AB 89 provides the statutory authority for the county to implement this new retirement formulas. Employees will be able to choose between the two new formulas. It is expected that the County of San Mateo will save nearly $23 million in pension costs over the next ten years.