BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Kevin de León, Chair AB 1144 (Hall) - Post Retirement Health Benefits Amended: June 19, 2013 Policy Vote: PE&R 4-0 Urgency: No Mandate: No Hearing Date: June 24, 2013 Consultant: Maureen Ortiz This bill does not meet the criteria for referral to the Suspense File. Bill Summary: AB 1144 authorizes the City of Carson to use an alternative vesting schedule for providing post-retirement health benefits under the Public Employees' Medical and Hospital Care Act. The new vesting schedule will be available only to new employees hired on or after January 1, 2014. Fiscal Impact: Minor, absorbable administrative costs to CalPERS (Special Fund) Unknown, potentially significant savings to City of Carson (Local Fund) Background: The Public Employees' Medical and Hospital Care Act (PEMHCA) is administered by CalPERS and provides health coverage for employees and annuitants of the state and the California State University. PEMHCA is also available to schools and local agencies that opt to contract for the coverage. Existing law does not allow contracting employers to provide PEMHCA coverage to active employees without also covering retired annuitants. However, there are several options available as to the employer contribution rates for employees and annuitants. In addition, over the years separate statutes have been enacted that provide variations of those options for the City of San Diego, school employers, Alameda County Transportation Improvement Authority, and Mariposa County. All of these variations were subject to collective bargaining. AB 1144 (Hall) Page 1 AB 1144 will provide an exception to the vesting and contribution provisions of PEMHCA. The City of Carson indicates the benefit changes it has negotiated are intended as both a cost-saving measure and also a recruitment tool for experienced employees. Its situation is an example of a broader issue for many contracting agencies that have found the existing PEMHCA vesting options to be static and not flexible to negotiation. Since the adoption of Government Accounting Standards Board Rule 45, which requires public employers to report in their annual financial statements any non-pension liabilities associated with post-employment health and welfare benefits for current and future retirees, many contracting agencies have also been exploring and implementing methods to control and pre-fund such liabilities. CalPERS staff recently completed a Health Benefits Purchasing Review to evaluate current health benefit design and purchasing strategies, and to identify areas of improvement in the Health Benefits Program. These efforts led to the Board of Administration's (Board) approval of 21 strategies and initiatives, including staff exploration of statutory and regulatory actions which may create more flexible vesting schedules. Among the potential solutions is to provide public agencies the same flexibility in crafting health benefit vesting schedules currently afforded school districts, by allowing them to collectively bargain for any vesting schedule that they negotiate. AB 1144 represents a viable approach to achieving that flexibility. Proposed Law: AB 1144 authorizes the City of Carson to use an alternative vesting schedule for providing post-retirement health benefits under (PEMHCA). The employer contribution must be agreed to through a collective bargaining contract. For employees not represented by a bargaining unit, the employer contribution will be determined pursuant to a resolution adopted by the city council of the City of Carson. Under the proposed schedule, an employee will have to work 5 years to get post-retirement benefits with a 50% employer contribution toward the premium. The schedule would increase by 10% annually so that an employee who had worked for the city for AB 1144 (Hall) Page 2 10 years would receive 100% of the employer contribution. Additionally, AB 1144 does the following: a) With respect to employees who are not represented by a bargaining unit, requires the City of Carson to certify to CalPERS that there is not an applicable MOU. b) Defines credited service as credited service performed with the City of Carson. c) Requires the city to provide to CalPERS any information determined by CalPERS as necessary to implement the provisions of AB 1144. d) Specifies that the proposed vesting schedule applies only to the City of Carson and only with regard to an employee who is first hired on or after January 1, 2014. Related Legislation: AB 1346 (Pan), currently pending before this committee, creates an alternative vesting schedule and employer contribution rate for annuitants of the Sacramento Metropolitan Fire District. Staff Comments The City of Carson does not currently have a vesting schedule (i.e., annuitants currently get 100% of the employer contribution toward post-retirement PEMHCA if they have 5 years of CalPERS credited service). The City of Carson and its employees' representative have collectively bargained to implement a vesting schedule that would require annuitants to have at least 10 years of credited service with the city to get 100% of the employer contribution. However, this vesting schedule is not currently authorized by law and therefore requires legislative action to authorize an exemption from the pre-set vesting schedule currently in statute. The City of Carson participates in PEMHCA under the equal employer contribution method. As a result, most of its active employees and retirees receive $1,385 from the City to help defray their monthly health benefit costs. However, there are two groups not receiving the equal contribution for health benefits, which are the unclassified and non-represented employees, who receive the minimum employer contribution for AB 1144 (Hall) Page 3 health benefits as specified in the PEMHCA. The City of Carson's new MOU goes into effect June 30, 2013, and was collectively bargained between the City and the American Federation of State, County and Municipal Employees (AFSCME). For postretirement health coverage, the MOU stipulates this to be predicated upon years of credited service, as shown in the following table: Credited Years of Service Percentage of Employer Contribution 0-4.99 Years 0 Percent 5 Years ?? 50 Percent 6 Years ?? 60 Percent 7 Years ?? 70 Percent 8 Years ?? 80 Percent 9 Years ?? 90 Percent 10 Years ?? 100 Percent As stipulated in the MOU, five of the 10 years of credited service must be with the City of Carson. In order for the provisions of this agreement to go into effect, the City must receive legislative approval of this exception to the PEMHCA.