BILL ANALYSIS                                                                                                                                                                                                    

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          PROPOSED CONFERENCE REPORT NO.  1   -  August 28, 2012
          AB 340 (Furutani)
          As Amended September 7, 2011
          Majority vote

          |ASSEMBLY:  |     |(September 9,  |SENATE: |      |(September 8,   |
          |           |     |2011)          |        |      |2011)           |
                                 (vote not relevant)                       
                                (vote not relevant)
          |Ayes:|Allen, Furutani            |Ayes:|Negrete McLeod,          |
          |     |                           |     |Simitian                 |
          |     |                           |     |                         |
          Original Committee Reference:    P.E.,R.& S.S.  

           SUMMARY  :  Implements comprehensive public employee pension 
          reform through enactment of the California Public Employees' 
          Pension Reform Act of 2013 (PEPRA) and related statutory 
          changes.  Specifically,  the conference committee amendments  :

          1)Establish PEPRA which will apply to all public employers and 
            public pension plans on and after January 1, 2013.
          2)Exclude the University of California and charter cities and 
            counties that do not participate in a retirement system 
            governed by state statute from the PEPRA requirements.

          3)Establish a cap on the amount of compensation that can be used 
            to calculate a retirement benefit on for all new members, as 
            specified, of a public retirement system equal to the Social 
            Security wage index limit ($110,100) for employees who 
            participate in Social Security, or 120% of that limit 
            ($132,120) if they do not participate in Social Security.

          4)Require the retirement systems to adjust the compensation cap 
            annually, as specified, based on changes in the Consumer Price 
            Index (CPI) for all Urban Consumers.  

          5)Specify that the Legislature reserves the right to modify the 


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            annual CPI adjustments to the compensation cap prospectively.

          6)Prohibit an employer from offering a defined benefit (DB) 
            plan, or combination of DB plans, on compensation in excess of 
            the compensation cap.

          7)Define "new member" with regard to eligibility for the PEPRA 

             a)   An individual who has never been a member of any public 
               retirement system prior to January 1, 2013.

             b)   An individual who moved between retirement systems with 
               more than a six month break in service, as specified.
             c)   An individual who moved between public employers within 
               a retirement system after more than a six month break in 
               service, as specified. 

          8)Allow employers who offer alternate plans established prior to 
            January 1, 2013 that have lower benefit formulas and that 
            result in a lower normal cost to continue offering those plans 
            to new employees.

          9)Allow employers who offer a retirement benefit plan 
            established prior to January 1, 2013 that consists solely of a 
            Defined Contribution (DC) plan to continue offering that plan 
            to new employees.

          10)Exclude members of the Judges Retirement Systems I and II 
            (JRS I and JRS II) from the PEPRA retirement formula and the 
            compensation cap. 

          11)Allow employers who offer a retirement benefit plan that was 
            approved by the voters prior to January 1, 2013, that have 
            lower benefit formulas and that result in a lower normal cost 
            to continue offering those plans to new employees.

          12)Allow employers to provide contributions to a DC plan for 
            compensation in excess of the cap provided that the plan and 
            the contribution comply with federal law.  Employees who 
            receive an employer contribution to a DC plan will not have a 
            vested right to the employer contribution.

          13)Specify that the retirement formula for the DB plan will be 


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            2% at age 62 for all new non-safety employees, excluding 
            teachers.  The formula is adjusted to encourage members to 
            retire at later ages.  The earliest an employee would be 
            eligible to retire is age 52 with a 1% factor and the maximum 
            retirement factor of 2.5% is provided at age 67.

          14)Specify that the retirement formula for new members of the 
            California State Teachers' Retirement System (CalSTRS) will be 
            2% at age 62.  The earliest an employee would be eligible to 
            retire is age 55 and with a maximum formula of 2.4% at age 65. 

          15)Specify three retirement formulas for the DB plan that will 
            apply to new safety employees, as specified.  The three 
            formulas are:  2% at age 57; 2.5% at age 57; and, 2.7% at age 

          16)Require contributions from employees to the DB plan equal to 
            one-half of normal cost of the DB.

          17)Require that final compensation be defined for all new 
            employees as the highest average annual compensation over a 
            three-year period.

          18)Prohibit the following types of compensation from being used 
            to calculate a retirement benefit on:  compensation paid to 
            enhance a retirement benefit; compensation previously provided 
            "in-kind" and converted to cash in the final compensation 
            period; one-time or ad hoc payments; terminal pay; pay for 
            unused leave or time off; pay for work outside of normal 
            hours; uniform, housing or vehicle allowances; pay for 
            overtime, except planned overtime, extended duty workweek, or 
            pay defined in the federal labor codes; employer contributions 
            to DC plans; and, bonuses.

          19)Prohibit a public employer from providing a better health 
            benefit vesting schedule for excluded and exempt employees 
            than for represented employees in the same retirement classes.

          20)Limit the maximum salary taken into account for any 
            retirement plan to the federal limit established under 
            401(a)(17) of the Internal Revenue Code (IRC) and prohibit an 
            employer from seeking a federal exemption from the limit.

          21)Prohibit an employer from making contributions to any public 


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            retirement plan on any amounts of compensation that exceed the 
            401(a)(17) limit.

          22)Prohibit a public employer from offering a benefit 
            replacement plan for any member or survivor who is subject to 
            the federal limit on benefits established by IRC Section 
            415(b) for an employee first hired on and after January 1, 
            2013, or to any group of employees that was not offered a 
            benefits replacement plan prior to that date.

          23)Authorize a public retirement system to continue 
            administering a 415(b) benefit replacement plan for employees 
            first hired prior to January 1, 2013.

          24)Prohibit a retroactive enhancement to a benefit formula, 
            either due to a change to an existing formula, or due to a 
            change to the retirement classification for a specific job.

          25)Prohibit the purchase of non-qualified time ("airtime") on 
            and after January 1, 2013.  Any application to purchase 
            airtime received by a retirement system prior to January 1, 
            2013 is grandfathered.

          26)Specify that local elected members first elected on or after 
            January 1, 2013 may not receive a retirement benefit for the 
            elected service based on compensation earned in any other 
            public employment.  The retirement benefit for the elected 
            service shall only be based on compensation earned for that 

          27)Prohibit all employers from suspending employer and/or 
            employee contributions necessary to fund annual pension normal 

          28)Prohibit post-retirement employment from exceeding 960 hours 
            in a consecutive 12 month period.  If a retiree receives 
            unemployment benefits, he or she is prohibited from working 
            for 12 months as a retiree for a public employer.

          29)Prohibit a person who retires on or after January 1, 2013, 
            from returning to work as a retired annuitant for a period of 
            180 days after retirement unless the action is approved in an 
            open meeting, as specified by the governing body of the 
            employer, or by California Department of Human Resources 
            (CalHR) authority if state retiree, as specified.  However, in 


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            no case could a person who receives a retirement incentive 
            return to work as a retired annuitant for a period of 180 days 
            after retirement.

          30)Establish the following exceptions to 180 day rule:

             a)   The retiree is participating in the Faculty Early 
               Retirement Program pursuant to a collective bargaining 
               agreement with the California State University.

             b)   The retiree is a public safety officer or firefighter.

             c)   The retiree is a trustee, administrator, or fiscal 
               advisor appointed to address academic or financial 
               weaknesses in a school or community college district, 
               pursuant to specified requirements.

             d)   The retiree is a subordinate judicial officer whose 
               position, upon retirement, is converted to a judgeship and 
               he or she returns to work in the converted position.

             e)   The retiree is a person taking office as a judge, as 

          31)Prohibit a public retiree who is first appointed on or after 
            January 1, 2013, from serving full-time on a salaried state 
            board or commission without suspending their retirement 
            allowance or choosing to serve as a non-salaried member of the 
            board or commission, as specified.  Retiree health care 
            benefits for these individuals would be protected so that the 
            person is eligible to receive any prior employer provided 
            retiree healthcare coverage upon re-retirement after leaving 
            the board or commission.  Appointees to the Parole Board are 
            exempt from this prohibition.

          32)Specify that retirees of CalSTRS are subject to the 
            post-retirement employment limitations specified in that 

          33)Require public officials and employees to forfeit pension and 
            related benefits if they are convicted of a felony in carrying 
            out official duties, in seeking an elected office or 
            appointment, or in connection with obtaining salary or pension 


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          34)Allow public safety members who qualify for Industrial 
            Disability Retirement (IDR) and are under age 50 to receive an 
            actuarially reduced retirement benefit. This pilot project 
            will sunset in 2018 unless extended by subsequent legislation.

          35)Prohibit newly elected statewide officers and legislative 
            officers from participating in the Legislators' Retirement 
            System.  They would continue to be optional members in the 
            California Public Employees' Retirement System (CalPERS).

          36)Specify that the Alternate Retirement Plan will not apply to 
            new state employees subject to PEPRA.

          37)Allow more flexibility for bargaining increased cost sharing 
            between employers and existing employees in CalPERS and 
            retirement systems established pursuant to the County 
            Employees' Retirement Law of 1937 ('37 Act).  Using impasse 
            procedures to impose cost sharing arrangements achieved 
            through this new flexibility would be prohibited if the 
            proposed contribution exceeds statutorily required 
            contributions for current employees or half of the normal cost 
            of benefits for employees first hired on or after January 1, 

          38)Provide additional flexibility to CalPERS contracting 
            agencies to achieve cost sharing goals with current employees, 
            as specified.

          39)Require CalPERS contracting agencies and school employers to 
            achieve specific cost sharing goals by January 1, 2018.

          40)Require additional contributions for various state bargaining 
            units, and excluded and exempt employees of the state, 
            executive, legislative and judicial branches that have not yet 
            achieved equal cost sharing of normal cost.

          41)Require CalPERS to develop a system for monitoring excessive 
            increases to salaries that create significant liabilities for 
            former employers due to reciprocity, and for requiring the 
            employers that caused the significant liability to be 
            responsible for it.

          42)Increase the retirement formula for new state miscellaneous 
            members who opt to participate in the Second Tier from 1.25% 
            at age 65 to 1.25% at age 67.


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          43)Prohibit certain cash payments from being counted as 
            compensation earnable for retirement purposes in '37 Act 

          44)Provide '37 Act retirement boards with more independence to 
            perform audits and assess penalties relating to pension 

          45)Require '37 Act county employers and districts to achieve 
            specific cost sharing goals by January 1, 2018.

          46)Specify that if any provision of the bill is held invalid, 
            the rest may still be given effect.

          47)Make conforming changes to provisions of the Education Code 
            administered by CalSTRS.

           EXISTING LAW  :  California currently has dozens of public 
          retirement systems and individual retirement plans. The largest 
          are the California Public Employees' Retirement System 
          (CalPERS), serving over 1.6 million members and retirees, and 
          the California State Teachers' Retirement System (CalSTRS), 
          serving over 850,000 members and retirees.  CalPERS also 
          administers the Judges' Retirement Systems I and II and the 
          Legislators' Retirement System.  In addition, there are many 
          independent public retirement systems, including the 20 county 
          systems that operate under the 1937 Act County Employees' 
          Retirement Law, the University of California Retirement Plan, 
          plans for the City and County of San Francisco, and cities of 
          San Diego, Fresno, Sacramento, Oakland, San Jose, and others.

          Some of these retirement systems and individual retirement plans 
          are established under a statutory framework, while others 
          operate under their own regulations and charters.  Benefit 
          formulas vary widely with differing retirement formulas for 
          non-safety and safety employees and benefit levels and plan 
          designs varying among retirement systems and employers.  
          Finally, Social Security (SS) coverage varies.  Non-safety state 
          employees are coordinated with SS, while state safety employees 
          are not.  Teachers are not coordinated with SS, but school 
          classified employees are coordinated.  Employees of counties and 
          cities have varying coverage. It is most common that safety 
          employees do not have SS, while non-safety employees do have SS; 
          however, that is not the case for every public employer.  In 


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          some cases all employees of a public employer are coordinated, 
          and in other cases no employees are coordinated.

          The unifying factor for all public retirement systems and plans 
          (with one or two known exceptions) is that they provide a 
          defined benefit for retirees that is derived by multiplying the 
          individual's years of service, highest average compensation over 
          a 12 or 36 month period, and the individual's retirement benefit 
          age factor (e.g., 2% at age 60).  In addition, all systems 
          provide cost-of-living adjustments in varying levels to retiree 
          benefits, death and disability benefits, and survivor benefits.  
          Finally, all defined benefit plans must comply with applicable 
          federal laws in order to maintain their status as tax-qualified 

          Benefits for retirement system members are funded over the 
          employee's working career from three sources.  First, employees 
          make contributions as a percentage of payroll.  Employee 
          contribution rates are established in statute, or in rules and 
          charters for the smaller plans.  In some cases, employers and 
          employees agree, through collective bargaining, to adjust 
          employee contribution rates.  The second source of funding is 
          derived from investment returns on the retirement funds.  For 
          example, CalPERS estimates that historically, investment returns 
          have paid for approximately two-thirds of the cost of providing 
          benefits.  The third source of funding is employer 
          contributions, which are also determined and paid as a 
          percentage of employee income.  When investment returns do not 
          perform as expected, employers make up the difference in the 
          form of higher rates. Similarly, when investment returns exceed 
          expectations, employer rates are reduced accordingly.  These 
          rate reductions and increases are actuarially "smoothed" over a 
          period of years in order to ease employer rate volatility and 
          ensure continued funding of the retirement systems.

           The Senate amendments  deleted the Assembly version of this bill, 
          and instead stated that it is the intent of the Legislature to 
          convene a conference committee to craft responsible and 
          comprehensive pension reform legislation that reflects both the 
          needs of public employees and the fiscal situations of state and 
          local governments.

           AS PASSED BY THE ASSEMBLY  , this bill prohibited certain cash 
          payments from being counted as compensation earnable for 
          retirement purposes in counties operating retirement systems 


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          pursuant to the County Employees' Retirement Law of 1937 ('37 
          Act) and prohibited a retiree in those counties from immediately 
          returning to employment with the public employer on a part-time 
          or contract basis.

           FISCAL EFFECT  :  Unknown.  CalPERS and CalSTRS are in the process 
          of preparing a fiscal analysis of the report.  Savings are 
          projected to be in the tens of billions over 30 years.

           COMMENTS  :  The comprehensive pension reform proposal that is 
          contained in the Conference Committee Report is based on the 
          Governor's 12-Point Pension Reform Plan.  

          The Conference Committee Report (Report) includes 10 of the 12 
          points included in the Governor's plan.  As an alternative to 
          the hybrid plan proposed by the Governor, the Conference 
          Committee has included a hard cap on the amount of compensation 
          that can be used when calculating a retirement benefit.  There 
          are only other two provisions of the 12-Point Plan that were not 
          included at all and those were the changes to the CalPERS Board 
          of Administration and the proposal to increase state retiree 
          health care vesting.  The Governor chose to drop the CalPERS 
          Board issue and, on the health care vesting issue, state 
          employee bargaining units have shown a willingness to bargain 
          over this issue and so the Conference Committee believed it 
          should remain subject to collective bargaining.

          Additionally, in order to achieve our goal of comprehensive 
          reform, we have included numerous pension reform changes that 
          were included in bills going through the Legislature this 
          session but were not included as part of the Governor's plan.  
          Finally, the Report includes a number of other changes that are 
          part of the comprehensive pension reform.

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

                                                                FN: 0005777


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