BILL ANALYSIS Ó
AB 340
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PROPOSED CONFERENCE REPORT NO. 1 - August 28, 2012
AB 340 (Furutani)
As Amended September 7, 2011
Majority vote
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|ASSEMBLY: | |(September 9, |SENATE: | |(September 8, |
| | |2011) | | |2011) |
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(vote not relevant)
(vote not relevant)
ASSEMBLY CONFERENCE VOTE : 2-0 SENATE CONFERENCE VOTE :2-0
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|Ayes:|Allen, Furutani |Ayes:|Negrete McLeod, |
| | | |Simitian |
| | | | |
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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
as:
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
57.
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
service.
27)Prohibit all employers from suspending employer and/or
employee contributions necessary to fund annual pension normal
costs.
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
specified.
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
system.
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
benefits.
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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,
2013.
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
counties.
44)Provide '37 Act retirement boards with more independence to
perform audits and assess penalties relating to pension
spiking.
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
plans.
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)
319-3957
FN: 0005777
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