BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 1248| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 1248 Author: Hueso (D) Amended: 5/10/12 in Senate Vote: 21 SENATE PUBLIC EMPLOY. & RETIRE. COMMITTEE : 3-2, 6/27/11 AYES: Negrete McLeod, Padilla, Vargas NOES: Walters, Gaines ASSEMBLY FLOOR : 52-24, 5/27/11 - See last page for vote SUBJECT : Local public employees retirement SOURCE : Author DIGEST : This bill requires a local public employer to provide coverage under the federal social security system to all employees who are not covered under a defined benefit plan, except as specified. It also expresses a legislative finding and declaration that federal social security coverage of local employees is an issue of statewide concern, and that therefore, all cities and counties, including charter cities and counties, would be subject to the provisions of the bill. Senate Floor Amendments of 5/10/12 (1) change the exception date for existing plans to July 1, 2012, (2) clarify that if an employer provides a new plan for part-time, seasonal, and temporary employees after July 1, 2012, that employer shall not be required to provide Social Security also if CONTINUED AB 1248 Page 2 the new plan's present value of projected benefits exceeds the present value of projected benefits under the prior plan, and (3) define "projected benefits" to mean the projection of benefits, including death and disability benefits, that have accrued and will likely be accrued in the future by employees based on actuarial assumptions. ANALYSIS : Existing state law: 1.Creates public retirement systems for public employees, which, in general, provide defined benefits that are calculated by multiplying a member's age factor, years of service, and highest average compensation, as specified by the retirement system. 2.Specifies that a defined benefit is paid as a retirement allowance for the member-retiree's lifetime and, as an option to the member, the lifetime of his or her survivor at a reduced actuarial amount. 3.Requires that an employee who works at a 50 percent or higher time base must be included in the employer's defined benefit retirement plan. Existing federal law: 1. Requires that employees be mandatorily included in the Federal Old Age and Survivor's Insurance (i.e., Social Security) unless they are members of a public retirement system. 2. Requires a public employer that does not provide Social Security to provide a retirement benefit meeting minimum standards, as specified by federal regulation. 3. Allows public employees to contract to provide Social Security coverage for their employees. This bill requires that a local public employer shall provide Social Security coverage to all employees who are not covered by a defined benefit plan, with the following exceptions: CONTINUED AB 1248 Page 3 1. A public employer who provides a plan for part-time, seasonal, and temporary employees that was in place prior to July 1, 2012 shall not be required to provide Social Security also. If an employer implements a new alternate benefit plan for part-time, seasonal, and temporary employees after July 1, 2012, the requirements of this bill shall not apply if the present value of projected benefits under the new alternate benefit plan exceeds the present value of projected benefits under the existing alternate benefit plan with respect to those employees. 2. An employer who provides a defined benefit plan that was in place prior to July 1, 2012 shall not be required to provide Social Security also. Background Who has Social Security ? ----------------------------------------------------------- | SS Coverage | No SS Coverage | |------------------------------+----------------------------| | State Miscellaneous & | | | Industrial | State Safety, Peace | | including Judicial & | Officer/ | | Legislative | Firefighter, Patrol | | Branches | | |------------------------------+----------------------------| | School Classified Employees | Teachers | |------------------------------+----------------------------| | Most Local Miscellaneous or | | | General Members | Some Local Miscellaneous | | | Members | |------------------------------+----------------------------| | Some Local Safety Members |Most Local Safety | | |Members | | | | ----------------------------------------------------------- As noted above, most local public employers have programs similar to the state employee program in which CONTINUED AB 1248 Page 4 miscellaneous or general employees are included in Social Security, and safety employees are not. However, some local employers have opted to cover all employees under Social Security (including Safety employees) and some local employers have opted to stay out of Social Security entirely for all employees (even General or Miscellaneous employees). Up until 1951, public employees were not included in Social Security. In 1951, states were given the option of including employees in Social Security. In 1991, federal laws changed once more, and all employees have since then been required to be covered by Social Security unless they are public employees and covered under a pension plan that meets the minimum federal requirements for coverage. The federal laws, however, do not require that the coverage be under a traditional defined benefit plan. Comments Part-time, Seasonal, and Temporary Employees . One group of employees does not fit neatly into this either/or scenario. Part-time, seasonal, and temporary employees often do not work enough hours to be included in the public employer's defined benefit plan. Some of those employers do not provide Social Security either. In such cases, the employer must provide an alternate retirement plan that meets federal requirements. For example, the State Teachers' Retirement System administers the Cash Benefit Program for part-time teachers, which is separate and different from the main defined benefit plan, and may be paid at retirement as a lifetime annuity or as a lump-sum. Similarly, the Department of Personnel Administration administers an alternate retirement plan for part-time, seasonal, and temporary state employees. Some alternate retirement plans are provided in addition to Social Security, and some are stand-alone programs offered in lieu of Social Security. FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local: No SUPPORT : (Verified 5/14/12) CONTINUED AB 1248 Page 5 American Federation of State, County and Municipal Employees, AFL-CIO California Alliance for Retired Americans California Labor Federation California Nurses Association California Professional Firefighters California School Employees Association California Teamsters Public Affairs Council Glendale City Employees Association Organization of SMUD Employees Peace Officers Research Association of California San Bernardino Public Employees Association San Diego and Imperial Counties Labor Council San Luis Obispo County Employees Association Santa Rosa City Employees Association United Nurses Associations of California/Union of Health Care Professionals OPPOSITION : (Verified 5/14/12) California State Association of Counties Los Angeles County Board of Supervisors Regional Council of Rural Counties ARGUMENTS IN SUPPORT : According to the author's office, "In 1981, San Diego determined to opt out of Social Security and provide its employees its own defined benefit pension plan. Today, San Diego would like to eliminate the defined benefit pension plan by vote of the people and replace it with a 401(k) plan?Volatility in the stock market raises concerns about the security of defined contribution retirement systems. This volatility becomes an even larger concern for workers who would not be covered under the federal Social Security system. Allowing local governments to offer a 401(k) only retirement system will leave workers without a financial safety net in their retirement years and will shift the burden to the state in the long-run. If retired workers require health services, Medi-Cal will have to step in. Our state's budget for Medi-Cal today is $41 billion, $13 billion of which comes directly from the state's general fund. If workers do not have enough money in their 401(k) when they retire, as is common with 401(k) plans, California will have to CONTINUED AB 1248 Page 6 supplement their income through our already burdened SSI/SSP program. These costs are currently $2.7 billion and already represent the highest figures in the nation. Allowing California workers to participate in the Social Security System will protect them in the future." Proponents state, "The Social Security Act of 1935 excluded state and local government employees from coverage because of concerns about the federal government's right to impose a tax on state governments and because many state and local employees were already covered by public pension plans. In 1990, Congress mandated Social Security for all state and local employees who are not members of a public retirement system and not covered by a Section 218 Agreement beginning July 2, 1991. State and local retirement systems that do not participate in Social Security must provide comparable benefits to the retirement, disability, and survivors' benefits provided by Social Security. For mandatory Social Security coverage purposes, a public retirement system is a pension plan maintained by a public employer that meets specified requirements of the Internal Revenue Code and specified Internal Revenue System regulations. These requirements must be met for a retirement system to be used as an alternative to mandatory Social Security coverage. Allowing local governments to offer a 401(k) only retirement system will leave workers without a financial safety net in their retirement years and shift the burden to the state in the long-run. Until the federal government provides adequate safeguards of investments, 401(k)s are going to be extremely risky. It's possible our employees will retire without any coverage at all. ARGUMENTS IN OPPOSITION : The California State Association of Counties (CSAC) states: Some part-time, seasonal, and temporary employees are not in Social Security and have optional retirement plans that are separate and different from the traditional defined benefit plans. CSAC request an amendment to exempt this sub-group of employees from the bill's requirement: For a limited group of part-time, temporary, and seasonal employees an alternative to social security or a defined CONTINUED AB 1248 Page 7 benefit is provided consistent with the federal Internal Revenue Code Section 3121(b)(7)(F). These employees are not eligible for participation in the county's defined benefit plan due to the limited hours they work and their county employer does not participate in social security. ASSEMBLY FLOOR : 52-24, 5/27/11 AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, Bill Berryhill, Block, Blumenfield, Bonilla, Bradford, Brownley, Buchanan, Butler, Charles Calderon, Campos, Carter, Cedillo, Chesbro, Davis, Dickinson, Eng, Feuer, Fong, Furutani, Galgiani, Gatto, Gordon, Hall, Hayashi, Roger Hernández, Hill, Huber, Hueso, Huffman, Lara, Bonnie Lowenthal, Ma, Mendoza, Mitchell, Pan, Perea, V. Manuel Pérez, Portantino, Skinner, Solorio, Swanson, Torres, Wieckowski, Williams, Yamada, John A. Pérez NOES: Conway, Cook, Donnelly, Beth Gaines, Garrick, Grove, Hagman, Halderman, Harkey, Jeffries, Jones, Knight, Logue, Mansoor, Miller, Morrell, Nestande, Nielsen, Norby, Olsen, Silva, Smyth, Valadao, Wagner NO VOTE RECORDED: Fletcher, Fuentes, Gorell, Monning DLW:mw 5/14/12 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED