BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 89
                                                                  Page  1

          CONCURRENCE IN SENATE AMENDMENTS
          AB 89 (Hill)
          As Amended August 22, 2011
          2/3 vote.  Urgency 
           
           ----------------------------------------------------------------- 
          |ASSEMBLY:  |75-0 |(May 26, 2011)  |SENATE: |37-0 |(August 30,    |
          |           |     |                |        |     |2011)          |
           ----------------------------------------------------------------- 
            
           Original Committee Reference:    P.E.,R. & S.S.  

           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.  This bill also allows the County of San 
          Mateo to implement lower retirement tiers for safety employees 
          represented by the Deputy Sheriffs Association.  

           The Senate amendments  allow San Mateo County to implement 
          recently negotiated lower pension tiers for safety members 
          represented by the Deputy Sheriffs Association.

           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.

           AS PASSED BY THE ASSEMBLY  , this bill required all public 
          retirement systems in California to adhere to the federal 
          compensation limit under IRC Section 401(a)(17) when calculating 
          retirement benefits for members who first join the retirement 
          system on or after January 1, 2012, and prohibited a public 
          employer from making contributions to any qualified public 
          retirement plan based on any portion of compensation that 








                                                                  AB 89
                                                                  Page  2

          exceeds that amount.

           FISCAL EFFECT  :  According to the Senate Appropriations 
          Committee, the provisions of the bill affecting San Mateo County 
          could potentially result in millions of dollars in future 
          savings to the county.

           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 
          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 County of San Mateo has recently negotiated a new six yea 
          Memorandum of Understanding with the Deputy Sheriffs 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.


           Analysis Prepared by  :    Karon Green / P.E., R. & S.S. / (916) 








                                                                  AB 89
                                                                  Page  3

          319-3957

                                                               FN:  0002036