BILL ANALYSIS Ó
SB 27
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Date of Hearing: August 17, 2011
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
SB 27 (Simitian) - As Amended: August 15, 2011
Policy Committee: PERSS Vote:5-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill provides that any salary enhancement for the principal
purpose of increasing a member's retirement benefit will not be
included in the calculation of a member's final compensation for
determining that benefit, requires the boards of each state
public retirement system to establish regulations that include
an ongoing audit process, and prohibits a retiree from returning
to work as a retired annuitant or contract employee for a period
of 180 days after retirement. Specifically, this bill:
1)Defines which forms of compensation may be included in an
employee's final compensation for the purpose of determining a
retirement allowance, and requires that no compensation
determined to have been paid expressly to enhance a member's
retirement allowance may be included.
2)Allows California Public Employees' Retirement System
(CalPERS) and the California State Teachers' Retirement System
(CalSTRS) to assess fees on employers who fail to accurately
provide required information, including the option of
auditing, or correcting inaccurate reporting, and prohibits an
employer from passing those costs on to employees.
3)Clarifies which forms of compensation for CalSTRS members may
be used to determine final compensation for a defined
retirement benefit and which forms of compensation must be
contributed to the Defined Benefit Supplement Program.
4)Requires that any CalPERS member who retires on or after
January 1, 2013, may not return to public employment as a
part-time worker, a private contractor, or employee of a third
party contractor for 180 days following the date of
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retirement. In addition, either the employer or employee will
be liable for related administrative costs of enforcement,
depending on whether the violation was due to employee or
employer error.
5)Requires that any CalSTRS member who retired on or after
January 1, 2013, may not earn any compensation as a retired
part-time worker, a private contractor or employee of a third
party contractor for 180 days following the date of
retirement.
6)Requires that the 180 day limit on working after retirement be
applicable to individuals retiring on or after January 1,
2013, and that the other provisions of the bill related to
final compensation shall be effective for current and future
members of the retirement system on or after July 1, 2012.
FISCAL EFFECT
Although the overall intent of SB 27 is to prevent compensation
increases for the sole purpose of enhancing retirement benefits
which will ultimately result in a savings to the two state
public pension systems, there will be upfront costs associated
with reprogramming computer systems to calculate the new
definitions of creditable compensation. CalSTRS estimates the
savings to be $10,000,000 annually with additional savings of a
smaller magnitude to CalPERS, probably on the order of several
million dollars.
The initial costs for CalSTRS include approximately $5 million
to adjust the agency's information technology systems. In
addition, ongoing administrative expenses will be approximately
$700,000 annually for CalSTRS. CalPERS indicates there will be
some increases in workload associated with processing employer
requests to review special compensation or other negotiated MOU
language, and programming costs which will be absorbed in the
regularly scheduled coding updates. Additionally, any other
changes required of CalPERS can be accommodated in the new
integrated information technology system that is scheduled to be
activated next year.
Increased costs to state agencies because of the prohibition on
a retiree returning to work as a retired annuitant or contract
employee for a period of 180 days after retirement. This change
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is likely to delay retirements with resulting higher costs to
agencies, likely to be at least several million annually or
more.
COMMENTS
1)Purpose. The author states SB 27 is designed to correct
abuses that impose an undue burden on both the taxpayers and
employees in the system, as well as erode public support for
reasonable public employee pensions. According to the author,
"Recent news reports have highlighted the actions by a small
percentage of public employees who have intentionally, but
legally manipulated their final compensation for purposes of
gaining a larger pension benefit. This bill institutes
uniform laws for the state's two largest retirement systems,
CalPERS, and CalSTRS, that will help to curtail an individual
from taking extraordinary steps to enhance their retirement
benefits (i.e., spiking).
The author also notes that the bill requires that employees
have a bona fide separation in service of six months before
taking another position in public service to prevent double
dipping. The author argues this provision will eliminate
revolving door practices.
2)Background . Existing law authorizes over 40 public retirement
systems in California, including CalPERS, CalSTRS, 20 counties
operating under the County Employees' Retirement Law of 1937
('37 Act), and independent public retirement systems, mostly
for cities and special districts. These systems provide
defined benefit retirement allowances based on years of
service, age at retirement, and final compensation (highest
paid 12 or 36 months of employment). Over the past several
years, there have been numerous reported instances of pension
spiking whereby an employee is provided a dramatic one year
boost in pre-retirement compensation, or cashes in large
vacation and leave balances and is allowed to use the one-time
proceeds in the final year compensation calculation. Some
forms of these practices are restricted by specific pension
funds. For example, in 1994, the Legislature passed SB 53,
(Chapter 1297/1994), which among other things excludes
cash-outs of vacation or leave balances in earnable
compensation used for purposes of the retirement calculations
of state CalPERS members. However, there is no statewide law
governing these practices.
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CalPERS and CalSTRS provide defined benefit retirement
allowances based on employees' years of service, age at
retirement and final compensation (highest paid 12 or 36
months of employment. One of the major differences between
the two is that CalSTRS has both a traditional defined benefit
program and a supplemental program called the Defined Benefit
Supplement Program, into which contributions are made on forms
of compensation that may not be included in final compensation
used to calculate a defined benefit allowance. These
contributions accumulate and are paid to members at retirement
in a manner similar to a tax-deferred savings account.
3)Legal Issues. This bill can been to be a unilateral reduction
of contractual retirement benefits provided by a retirement
system and could be impermissible under law. Such vested
pension rights are regarded as an implied contract that is
protected under the contract clauses of the state and federal
constitutions. Court decisions have come firmly down on the
side of protecting vested pension rights. The courts have been
clear that an employee does not obtain, prior to retirement,
any absolute right to fixed or specific benefits, only to a
reasonable or substantial pension, making it clear that
pensions can be changed, however any changes are strictly
limited.
4)Franchise Tax Board (FTB) concerns . The FTB writes that if it
is required to wait 180 days from the date an employee retires
before employing that individual as a retired annuitant,
revenue producing activities, technology projects, and
maintenance of legacy systems would be adversely impacted.
The FTB only employs retired annuitants in positions that
require short term services in critical need areas where no
other viable option exists to fill the position immediately.
Few, if any, options exist for the FTB to mitigate the adverse
impacts of this provision of the bill.
5)Previous legislation. This bill is similar to SB 1425
(Simitian) which was vetoed in 2010. SB 1425 was
double-jointed with AB 1987 (Ma), and the governor vetoed AB
1987 indicating that the bill did not provide real pension
reform.
6)Opposition. Arguments in opposition are focused on the
180-day prohibition on returning to work as a retiree. Police
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and sheriffs note that after a six-month break in service, an
officer must re-undergo background checks that are costly and
time-consuming.
The Humboldt County Superintendent of Schools expresses
concerns relative to the requirement for retirees to wait 180
days before returning to employment with the public employer
and recommends allowing emergency reemployment in rural school
districts: "The waiting period can place a specially
qualified person in a rural setting into the untenable
position of retiring and leaving the students without their
services, or forsaking retirement."
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081