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