BILL ANALYSIS Ó
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CONFERENCE COMPLETED
Bill No: AB 340
Author: Furutani (D)
Amended: Proposed Conference Report No. 1 - 8/20/12
Vote: 21
CONFERENCE COMMITTEE VOTE : 4-0, 8/20/12
AYES: Senators Negrete McLeod and Simitian,
Assemblymembers Allen and Furutani
NO VOTE RECORDED: Senator Walters, Assemblymember Silva
SUBJECT : Public employees retirement
SOURCE : Author
DIGEST : This bill makes major revisions to the public
retirement systems' laws (see Analysis section for details
of the bill as developed by the Senate Public Employment
and Retirement Committee staff).
Conference Committee Amendments delete the prior version of
the bill which expressed intent concerning the public
retirement systems, and replace it with the major revisions
to the retirement laws.
ANALYSIS : This bill would:
1. Establish the Public Employees' Pension Reform Act of
2013 (PEPRA) which will apply to all public employers
and public pension plans on and after January 1, 2013.
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A. Exclude from the PEPRA requirements the University
of California and stand-alone, independent retirement
plans offered by charter cities and counties that do
not participate in the California Public Employees'
Retirement System (CalPERS) or the 1937 Act County
Retirement System requirements. Accordingly, plans
approved by voters prior to the implementation of
this bill are not impacted.
2. 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.
3. 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.
4. Specify that the Legislature reserves the right to
modify the annual CPI adjustments to the compensation
cap prospectively.
5. Prohibit an employer from offering a defined benefit
(DB) plan, or combination of DB plans, on compensation
in excess of the compensation cap.
6. Allow an employer to offer a defined contribution (DC)
plan on earnings above the compensation cap up to the
federal limit on compensation that can be creditable to
DB plans. Any such DC plan must comply with federal
laws, and employees do not have a vested right to an
employer contribution to such a plan.
7. Define "new member" with regard to eligibility for 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
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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 that offer alternate DB 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 that offer a retirement benefit plan
established prior to January 1, 2013 that consists
solely of a DC plan to continue offering that plan to
new employees.
10.Excludes members of the Judges Retirement Systems I and
II (JRS I and JRS II) from the PEPRA retirement formula
and the compensation cap.
11.Specify that the retirement formula for the DB plan will
be 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.
12.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 with an
actuarially reduced formula, and with a maximum formula
of 2.4% at age 65.
13.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 (basic plan); 2.5% at
age 57 (safety option plan one); and 2.7% at age 57
(safety option plan 2).
14.Require contributions from employees to the DB plan to
equal to one-half of normal cost of the DB.
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15.Require that final compensation be defined for all new
employees as the highest average annual compensation
over a three-year period.
16.Define "pensionable compensation" and prohibit the
following types of compensation from being used to
calculate a retirement benefit: compensation paid to
enhance a retirement benefit; compensation previously
provided "in-kind" and converted to cash in the final
comp 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.
17.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.
18.Limit the maximum salary taken into account for any
retirement plan (DB and DC combined) 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.
19.Prohibit an employer from making contributions to any
public retirement plan (DB or DC) on any amounts of
compensation that exceed the 401(a)(17) limit.
20.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
section 415(b) of the IRC 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.
21.Authorize a public retirement system to continue
administering a 415(b) benefit replacement plan for
employees first hired prior to January 1, 2013.
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22.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.
23.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.
24.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.
25.Prohibit all employers from suspending employer and/or
employee contributions necessary to fund annual pension
normal costs.
26.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.
27.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 no case could a
person who receives a retirement incentive (e.g., a
"golden handshake") return to work as a retired
annuitant for a period of 180 days after retirement.
28.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.
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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.
29.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.
30.Specify that retirees of the California State Teachers'
Retirement System (CalSTRS) are subject to the
post-retirement employment limitations specified in that
system.
31.Require public officials and employees to forfeit
pension and related benefits if they are convicted of a
felony in carrying our official duties, in seeking an
elected office or appointment, or in connection with
obtaining salary or pension benefits.
32.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
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subsequent legislation.
33.Prohibit newly elected statewide officers and
legislative officers from participating in the
Legislators' Retirement System. They would continue to
be optional members in CalPERS.
34.Specify that the Alternate Retirement Plan will not
apply to new state employees subject to PEPRA.
35.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.
36.Provide additional flexibility to CalPERS contracting
agencies to achieve cost sharing goals with current
employees, as specified.
37.Require CalPERS contracting agencies and school
employers to achieve specific cost sharing goals by
January 1, 2018.
38.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.
39.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.
40.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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41.Prohibit certain cash payments from being counted as
compensation earnable for retirement purposes in '37 Act
counties
42.Provide '37 Act retirement boards with more independence
to perform audits and assess penalties relating to
pension spiking.
43.Require '37 Act county employers and districts to
achieve specific cost sharing goals by January 1, 2018.
44.Specify that if any provision of the bill is held
invalid, the rest may still be given effect.
45.Makes conforming changes to provisions of the Education
Code administered by CalSTRS.
Comments
The comprehensive pension reform proposal contained in the
Conference Committee Report is based on the Governor's
12-Point Pension Reform Plan.
The Conference Committee 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 Report
includes a hard cap on the amount of compensation that can
be used when calculating a retirement benefit and lower
retirement formulas. There are only other two provisions
of the Governor's Plan that were not included in the
Report: 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 proposal.
Regarding state retiree health care vesting, 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 the goal of comprehensive
reform, included are some pension reform changes found in
bills going through the Legislature this session that were
not included as part of the Governor's plan. Finally, the
Report includes a number of other changes that are part of
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comprehensive pension reform.
Existing Law
California currently has many public retirement systems and
individual retirement plans. The largest are 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, cities, and districts
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 some cases all employees of a public employer
are coordinated, and in other cases none of the 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., two
percent per year of service upon reaching age 60). In
addition, all systems provide cost-of-living adjustments in
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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 2/3 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, unfunded liability may occur and employers make
up the difference in the form of higher rates. The 2008
economic crisis resulted in significant unfunded
liabilities in the retirement systems, impacting most
employer rates. Similarly, when investment returns exceed
expectations, surpluses may accrue, and 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 basic cost of providing an employee's future benefit at
any given time is the "normal cost." The normal cost is
calculated separately from the unfunded liability or any
surplus, and system actuaries use all of these calculations
to annually set the employer contribution rate for that
year.
One exception to the forgoing exists with regard to the
CalSTRS retirement plan. CalSTRS contribution rates for
both employers and employees are set in statute. The
CalPERS board does not currently have the authority to
raise or reduce employer rates in response to increased
unfunded liability or the accrual of a surplus.
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FISCAL EFFECT : Appropriation: Yes Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 8/30/12)
League of California Cities
Urban Counties Caucus
OPPOSITION : (Verified 8/30/12)
California Association of Professional Scientists
CDF Firefighters
Laborers' International Union, Locals 777 and 792
Local Government Employees
Professional Engineers in California Government
Service Employees International Union
ARGUMENTS IN SUPPORT : The League of California Cities
states, "The board of directors of the League of California
Cities urges the Legislature to enact AB 340 (Furutani),
the California Employees' Pension Reform Act of 2013
(PEPRA). While not perfect, the League views this
legislation as a substantial step forward in implementing
pension reform largely in keeping with the League's own
comprehensive pension reform principles. This
recommendation is made in recognition that there are
numerous questions of implementation and interpretation
that will need to be resolved in the days and months ahead.
The League and cities will continue to be vigilant in
advocating for effective pension reform to ensure the
intent of this historic legislation is respected. Finally,
the League board congratulates the elected and appointed
city leaders of California for their pension reform actions
to date, and it respectfully urges them to continue their
leadership on this vital issue at the local level. ? The
city officials of California recognize that pension reform
is a journey and not just a destination. They have enacted
a number of cost-saving pension reforms already, and this
legislation would give them valuable new tools for
achieving additional savings with existing employees while
at the same time requiring more sustainable and affordable
pension plans for new employees. This is a win-win for the
cities and taxpayers of California ? This year reform of
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the state's pension laws is the first and most important
strategic goal of the League of California Cities.
Hundreds of cities have already made major strides in the
last few years to reduce current and future pension costs.
A League survey of city managers earlier this year revealed
that 47 percent of the responding cities had already
adopted a new pension tier for new employees and 64 percent
of the cities had already secured higher employee
cost-sharing for pensions from existing employees through
collective bargaining."
ARGUMENTS IN OPPOSITION : Opponents argue that AB 340
circumvents the collective bargaining process, and
unilaterally imposes severe cuts to public employee
pensions. AB 340 also imposes the biggest retirement
benefit rollback in California history, cutting benefits to
levels below those that existed before SB 400. The bulk of
these cuts will not be borne by high wage earners, who can
offset them by relying on other retirement savings. Rather
the brunt of these cuts will be borne by low wage workers
who have devoted their lives to public service-teaching our
kids, taking care of us when we are sick, and making our
streets safer. AB 340 will both decrease benefit formulas
and increase the age factors, resulting in new employees
earning substantially lower retirement benefits. The
formulas in AB 340 impose a 2% at age 62 formula for local
government non-safety employees and require these employees
to work until age 67 to receive the maximum retirement
factor of 2.5% There are myriad non-safety jobs that are
so physically demanding that working to age 67 would be a
physical and practical impossibility. Accordingly, these
workers will never be able to achieve their maximum benefit
allowance, and rather will have to rely on an additional
reduction to already diminished retirement benefits."
DLW:md 8/30/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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