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
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          ____
          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.
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          ____
                            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
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          ____

          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.