BILL ANALYSIS Ó SB 349 Page 1 Date of Hearing: June 22, 2011 ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL SECURITY Warren T. Furutani, Chair SB 349 (Negrete McLeod) - As Amended: May 26, 2011 SENATE VOTE : 35-0 SUBJECT : State Teachers' Retirement Plan. SUMMARY : Makes technical, clarifying and non-controversial changes to various sections of the Education Code administered by the California State Teachers' Retirement System (CalSTRS) to improve, and continue effective administration of the System. Specifically, this bill : 1)Amends the Education Code to comply with the requirements of the federal Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008. 2)Provides additional options to CalSTRS members by allowing them to submit CalSTRS forms and documents to designated CalSTRS representatives during counseling office hours or in the course of receiving counseling services, regardless of whether the counseling takes place in a counseling office. 3)Broadens the language in the Education Code to include "other" payments and collection of overpayments that would be subject to the $10 threshold. 4)Clarifies the funding of the Medicare Premium Payment Program (MPP Program) to ensure that the MPP Program may only be extended to the extent that surplus employer contributions of the Defined Benefit (DB) Program are available. 5)Allows a member to terminate a retirement or disability benefit and be eligible for a refund of the remaining contributions and interest when properly executed on a CalSTRS form. 6)Removes the $500 late reporting penalty for the DB and Cash Balance Benefit (CB) programs, leaving the regular interest penalty, and make the penalties consistent for both the DB and CB programs, among other related changes, as specified. SB 349 Page 2 7)Clarifies that the beneficiary and option beneficiary designations are invalidated when a member completes a refund of his or her accumulated retirement contributions. 8)Clarifies that an amount equal to the refund that is returned to CalSTRS, would be treated the same as if the actual refund warrant had been returned. 9)Clarifies that the basis for eligibility of Family Allowance and Survivor benefits lies with the member, and not with the member's beneficiaries. 10)Clarifies that a member may not apply for a disability benefit if the basis for the disability is an impairment that began prior to the member's membership in CalSTRS. 11)Clarifies CalSTRS' authority to order a review of medical documentation in lieu of a physical examination. 12)Clarifies provisions allowing members to specify when their retirement benefits start, following termination of employment. 13)Makes technical, non-controversial changes to provide consistency and ease of administration of the Early Retirement Limited Term Reduction Program (ERLTRP). 14)Specifies that retired DB members are not allowed to make contributions to the CB Program, to provide consistency among the two programs. 15)Specifies that the zero-dollar earnings limit applies to a member's age at the most recent retirement. 16)Makes conforming changes to reconcile the differences between the DB and the CB post-retirement employment limitations; provide consistency in the post-retirement limitations that are imposed on educators who retire under CalSTRS, and also removes citations to provisions related to two obsolete programs. 17)Aligns provisions, as specified, to allow an option election to be made as part of the retirement application process, or by the end of the month in which the retirement takes effect. SB 349 Page 3 18)Allows payment of a portion of disability retirement to the member's dependent child, as specified. 19)Makes other minor, technical changes to the Teachers' Retirement Law. EXISTING FEDERAL LAW : Establishes the HEART Act which requires, among other provisions, that public pension systems treat participants who die on or after January 1, 2007 while performing qualified military service, as being reemployed and then dying while employed for purposes of survivor and death benefits. EXISTING STATE LAW : 1)Allows CalSTRS to designate one or more of its contracted field counseling offices as an official recipient of member benefit applications and other documents from members, spouses and beneficiaries, and allows CalSTRS members to submit documents to CalSTRS through benefits counselors. 2)Allows the Teachers' Retirement Board to establish a $10 minimum threshold for the processing of benefit payments or the collection of overpayments to a member. 3)Allows, under the MPP Program, CalSTRS to pay the Medicare Part A premiums for eligible retired members of the DB Program, effective July 1, 2001. The Teachers' Retirement Board is authorized to extend this eligibility date. To qualify for CalSTRS payment of the premium, the member must be at least 65 years of age, enrolled in Medicare Parts A and B at the age of 65 or on July 1, 2001, whichever is later, and not eligible for Medicare Part A without payment of a premium. CalSTRS also pays the Medicare Parts A and B late enrollment surcharges for DB members who retired prior to January 1, 2001, provided they enrolled in Medicare by July 1, 2001. To fund this program, CalSTRS established a special trust fund known as the Teachers' Health Benefits Fund (THBF), into which an amount from employer contributions that otherwise would be credited to the DB Program would instead pay the premium of Medicare Part A. 4)Establishes the DB Program and the CB Program administered by SB 349 Page 4 CalSTRS as separate benefit programs for full-time public school administrators and instructors, and part-time or seasonal instructors who are not eligible for the DB Program, respectively. 5)Requires CalSTRS to assess penalties and interest on late remittances of contributions for both the DB Program and the CB Program in accordance with regulations established by the CalSTRS Board. 6)Allows a member to designate a beneficiary to receive the member's benefits upon death of the member; allows a member to make a preretirement election, change or cancellation of an option, as specified, that designates a beneficiary to receive a lifetime monthly benefit upon the death of the member, and provides that upon death of a member, beneficiaries or survivors may receive specified benefits depending on the coverage that the member was under, and eligibility of the member. 7)Allows a member to transfer all or a specified portion of his or her contributions eligible for a direct trustee-to-trustee transfer to another qualified plan under Section 402 of the Internal Revenue Code of 1986; to cancel the transfer, and to refund the system with the withdrawn funds. 8)Provides that upon proper application, a vested member can receive disability benefits while the member is either employed, on compensated leave of absence, physically or mentally incapacitated, or on leave of absence without compensation, as specified, and for CalSTRS members who became members after October 16, 1992, allows a portion of the benefit to be paid to a dependent child until the age of 21. 9)Requires a member to provide medical documentation to substantiate an impairment qualifying the member for a disability allowance, and allows CalSTRS to order a medical examination of a member to determine whether the member is incapacitated for performance of service. 10)Provides that a member may retire, as specified, change, or modify the effective date of retirement from CalSTRS if the application for retirement is appropriately filed with CalSTRS. SB 349 Page 5 11)Allows a member to who retires between the ages of 55 and 60 under the Early Retirement Limited Term Reduction Program (ERLTRP), to elect to receive half of the amount of his or her monthly retirement benefit for a limited time and then revert to the full retirement allowance for normal retirement age. 12)Provides specified postretirement earnings limitations on members who return to CalSTRS-covered employment after retirement, including a limited time for members who retire under normal retirement age; prohibits a retired member in the DB Program from making contributions to the program, and provides for different limitations on retired DB members and CB Program participants who return to work in CalSTRS-covered service. FISCAL EFFECT : According to the Senate Appropriations Committee, pursuant to Senate Rule 28.8, negligible state costs. COMMENTS : According to CalSTRS: 1)Federal HEART Act Compliance: Currently, under the DB Program, unless a member dies within four months of CalSTRS-covered service, or their survivors can show that the member was continuously disabled since the last day of service, their survivors are not eligible for the one-time death benefit or for an ongoing survivor benefit or family allowance. In the event a member dies prior to retirement, CalSTRS provides a distribution of the member's remaining contributions and interest in their DB, CB, or Defined Benefit Supplement (DBS) account upon notification of death. These distributions are made in all cases as long as there are funds in the respective account. This bill would bring CalSTRS into conformity with federal law to pay survivor and death benefits for military members who die while performing military service, if they would otherwise have been eligible for benefits had they remained in CalSTRS-covered employment. 2)Receipt of Documents: Currently, the Board may designate one or more of the contracted field counseling offices as an official recipient of member benefit applications and other documents from members, spouses SB 349 Page 6 and beneficiaries, and allows CalSTRS members to submit documents to CalSTRS through benefits counselors, even if the counselors were not at a counseling office at the time the documents were submitted. A counseling session with a member may take place at a location other than a counseling office, such as at the member's school. 3)$10 Threshold: If the amount of the processing a benefit payment or collection of overpayment is below the $10 minimum, CalSTRS is not required to issue the payment or collect the overpayment. This allows CalSTRS to avoid the expense of issuing a benefit payment or collecting an overpayment when the amount of the payment is relatively small. By including unspecified "other" payments and collections, the number of payments or collections for relatively small amounts would be reduced by not limiting the application of that threshold amount to benefit payments or overpayment collections. 4)Medicare Premium Payment Program: Currently, CalSTRS pays the Medicare Part A premiums for 6,700 retired DB Program members, and the Medicare Part B surcharges to 1,050 DB Program members. However, the MPP Program has a diminishing eligible population and finite duration, and CalSTRS expect a predicted decline beginning in 2016, with a peak enrollment that year of 7,700 members. This bill clarifies the funding of the MPP Program to reflect the original intent. When the existing language was enacted, which funded the MPP Program, the amount to be spent for the MPP Program, including any extensions authorized by the Teachers' Retirement Board, could not exceed the amount of surplus assets identified in the DB valuation and set aside in the subsequent DB Program valuations. Since that time, it became apparent that more funds were set aside than needed to fully fund the MPP Program, even if everyone, regardless of when they retired, could be eligible for the benefit. As a result, the Teachers' Retirement Board changed its approach to set aside only the amount needed to fund the program for the SB 349 Page 7 group that retires by the date at which the Teachers' Retirement Board sets as the eligibility deadline (currently 7/12/12), and any extensions of the eligibility would be paid from resources identified at the time of the extension that exceeded the amount needed to fully fund the DB Program over the board's funding period. This measure is consistent with the current approach, and maintains the original intent that the MPP Program only be extended to the extent that employer contributions that are surplus to a full funding plan are available. 5)Refund of Contributions After Retirement: Previously, CalSTRS allowed a retired member to elect to stop his or her retirement benefit and collect a refund of remaining contributions, until being advised that this was an incorrect interpretation of the law. Currently, a retired member must terminate his or her retirement and return to work for at least one day, and then separate from employment, to collect a refund of his or her remaining contributions. This bill allows a member to terminate a retirement or disability benefit and be eligible for a refund of the remaining employee contributions and interest, without the technicality of returning to active employment for a day. 6)Penalties and Interest: Current law requires CalSTRS to assess interest on late remittances of contributions for both the DB and CB Programs, and penalties on late contribution reports in accordance with regulations to be established by the CalSTRS Board. Regular interest would be charged on any delinquent contributions. Penalties would be assessed based on the total employer and employee contributions at the regular interest rate from the time the report was due to when the report is received by CalSTRS, with a minimum fee of $500. Among other things, this bill allows for the drafting of regulatory language for the CB Program late contribution penalty that would parallel the DB draft penalties and interest regulations that are now going through CalSTRS' rulemaking process. SB 349 Page 8 7)Beneficiary Designation Invalidation: Historically, if a member chose to receive a refund of his or her contributions and subsequently returned to membership without completing a new beneficiary designation form, the beneficiary designation in effect prior to the refund would continue to be in effect after returning to membership. Under recent updates to its information technology system, CalSTRS maintains on record, the beneficiary designations after the member's more recent membership date and deems a prior designation as invalid. However, the law does not clearly state whether a member's designation is invalidated when he or she terminates service and receives a refund of his or her contributions. This bill clarifies the law so that CalSTRS may use up-to-date beneficiary designations that are made after the member's most recent membership date. 8)Return of Refund: Under current law, a former CalSTRS member who has requested a rollover to another qualified retirement plan and returns the refund warrant to CalSTRS within 30 days of when the refund was originally mailed by CalSTRS, may be reinstated as a member of the DB program. However, in cases where a warrant is sent directly to a financial institution and is deposited, the member may not be able to return the original warrant to CalSTRS. Under that circumstance, CalSTRS cannot accept the member back into the DB Program. This bill clarifies that an amount equal to the refund that is returned to CalSTRS will be treated the same as if the actual refund warrant had been returned. 9)Family Allowance and Survivor Benefits: Upon the death of a member, beneficiaries or survivors may receive specified benefits. The benefits received depend on the coverage that the member was under, which is based on whether the member started his or her membership on or after October 16, 1992 (Coverage A or Coverage B). Eligibility for those benefits depends on the eligibility of the member. This bill clarifies that the basis for eligibility of Family SB 349 Page 9 Allowance and Survivor benefits lies with the member, and not with the member's beneficiaries. 10)Disability Allowance Application: CalSTRS members are eligible for disability benefits after they are vested and meet other requirements. Current law specifies time periods in which a member can apply for a disability benefit. This bill makes a technical change in the code, and clarifies an existing provision that states that a member may not apply for a disability benefit if the basis for the disability is an impairment that began prior to the member's membership in CalSTRS. 11)Independent Medical Examinations: Currently, CalSTRS can request a medical examination performed by a licensed physician to determine whether a member is incapacitated for performance of service to substantiate an application for a disability benefit. In most cases where a medical examination is requested, CalSTRS also requests a review of medical documentation to determine whether a member is incapacitated for performance of service. There are some instances where CalSTRS would only request a review of medical documentation and would not require the member to participate in an examination. The majority of the costs associated with the medical examination are paid directly by CalSTRS, while additional costs related to travel and meals are paid by the member who is subsequently reimbursed by CalSTRS. 12)Service Retirement Benefit Effective Date: Currently, a member may submit an application for service retirement during a period that begins six months prior to the chosen retirement date and extends to the last day of the month in which the retirement is to take effect. Each year, a number of members fail to submit their retirement application within that period to receive a service retirement benefit after their employment terminates. This bill allows a member to backdate his or her service SB 349 Page 10 retirement benefit effective date to as early as the day following the date the member terminated his or her employment regardless of whether the service retirement application is received after the employment termination date, and specifies that the value of annuities payable under the DBS program is to be calculated based on the member's retirement date, in conformity with the change to the service retirement benefit effective date, which may be earlier than when the annuity is paid, among other technical changes. 13)Early Retirement Limited Term Reduction Program (ERLTRP): Due to the different calculations used to determine a member's monthly benefit, CalSTRS encounters problems administering the program when a member either reinstates to active service and subsequently retires with a multiple-retirement calculation; retires for service after terminating a disability retirement or disability allowance; or retires for service after reinstating to active service from a disability allowance. 14)DB Retiree Contributions: Current law is inconsistent between the DB and CB programs when specifying that retired members do not make contributions for CalSTRS-covered employment. A retired member in the DB program may not make contributions to the DB program. However, current law does not specifically state whether or not a retired DB member cannot participate in the CB program. This bill specifies that retired DB members are not allowed to make contributions to the CB program, to provide consistency among the two programs. 15)Post Retirement Earnings Limit (Under Age 60): Members who retire under the normal retirement age of 60, and subsequently work in any CalSTRS-related service fall under a zero-dollar earnings limit for the first six calendar months after they retire. During those six calendar months, the zero-dollar earnings limit reduces the member's retirement benefit by the amount of compensation earned during that period. Members may retire for service, reinstate to active membership and subsequently retire again. This post-retirement earnings limit, as well as other earnings limits, applies to a member's most recent retirement. SB 349 Page 11 16)Post Retirement Earnings Limit: Federal regulations governing tax-qualified pension programs prohibit paying a pension to a person who is under the normal retirement age of that pension system (i.e., age 60) unless the employment that brought about the pension has been terminated. CalSTRS addresses this prohibition by limiting the yearly amount of money that can be earned by DB members and CB participants after retirement from CalSTRS-covered service. The DB and CB programs have different limitations on retired members and participants who return to work in CalSTRS-covered service. Under certain circumstances, postretirement earnings may be exempt from the limit, as specified. This bill reconciles differences in the DB and CB post-retirement employment limitations and provides consistency in the post-retirement limitations that are imposed on educators who retire under CalSTRS. 17)Option Elections: A CalSTRS member may elect an option that designates a beneficiary to receive a lifetime monthly benefit upon the death of the member. If a preretirement election of an option is changed or cancelled, or the option beneficiary dies before the member retires, the member's retirement benefit may be permanently reduced. This bill aligns the provisions to allow the election to be made as part of the retirement application process, or by the end of the month in which the retirement takes effect. 18)Child's Portion of Disability Retirement or Survivor Benefit: The disability retirement allowance for CalSTRS members who became members on or after October 16, 1992, includes a portion of the benefit that is paid to a dependent child until the age of 21. Under the provisions of law at the time, CalSTRS paid the dependent child portion of the benefit even if the member died while receiving the disability retirement allowance. The law governing payment of a disability retirement benefit to a dependent child was incorrectly amended in 1997, and since then, has not allowed payment of a SB 349 Page 12 child benefit after the disabled member dies. This change was unintentional and no basis for the change can be found. This bill will correct that error. REGISTERED SUPPORT / OPPOSITION : Support California State Teachers' Retirement System (Sponsor) California Federation of Teachers Opposition None on file Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916) 319-3957