BILL ANALYSIS Ó AB 1381 Page 1 ASSEMBLY THIRD READING AB 1381 (Public Employees, Retirement and Social Security Committee) As Introduced February 26, 2013 Majority vote PUBLIC EMPLOYEES 7-0 APPROPRIATIONS 17-0 ----------------------------------------------------------------- |Ayes:|Bonta, Allen, Harkey, |Ayes:|Gatto, Harkey, Bigelow, | | |Jones-Sawyer, Mullin, | |Bocanegra, Bradford, Ian | | |Rendon, Wieckowski | |Calderon, Campos, | | | | |Donnelly, Eggman, Gomez, | | | | |Hall, Holden, Linder, | | | | |Pan, Quirk, Wagner, | | | | |Ammiano | |-----+--------------------------+-----+--------------------------| | | | | | ----------------------------------------------------------------- SUMMARY : Makes various technical corrections and conforming changes that align the Teachers' Retirement Law (TRL) with the provisions of the Public Employees' Pension Reform Act of 2013 (PEPRA), as enacted in AB 340 (Furutani), Chapter 296, Statutes of 2012. Specifically, this bill : 1)Defines PEPRA in the TRL using the legal citations. 2)Defines public employer in the TRL for both the Defined Benefit (DB) Program and the Cash Balance (CB) Benefit Program by referencing the definition of public employer in PEPRA. 3)Defines participant subject to PEPRA as a person who first becomes employed to perform creditable service subject to coverage under the CB Benefit Program on or after January 1, 2013. This definition does not include a person who was a member of a concurrent retirement system on or before December 31, 2012, if the person performed service in the other retirement system within the six months prior to commencing creditable service under the CB Benefit Program. 4)Makes various changes to provisions governing age factors and normal retirement age as follows: a) Includes age 62 in the definition of normal retirement AB 1381 Page 2 and normal retirement age to accommodate 2% at 62 members and participants. b) Excludes nonmember spouses of 2% at 62 members from the previous age factors and applies the age factors prescribed by PEPRA to those nonmember spouses who are awarded a separate account. c) Removes various references to age 60 and replaces them with "normal retirement age" to accommodate both California State Teachers' Retirement System (CalSTRS) 2% at 60 and 2% at 62 members and participants. d) Excludes 2% at 62 members from the previous age factors and lower minimum retirement age and makes technical corrections to the age factors and minimum and normal retirement ages prescribed by PEPRA. e) Excludes 2% at 62 members from the Reduced Benefit Election, which allows vested members who are between age 55 and 60 to receive one-half of the monthly benefit calculated as if they were age 60 and to continue that benefit for the same number of months after age 60 after which the benefit will be the total amount that would have been received at age 60. f) Includes the 2% at 62 age factors in the service retirement benefit calculation after reinstatement or the termination of a disability retirement. 5)Excludes 2% at 62 members from one-year final compensation based on having 25 or more years of service credit or a collective bargaining agreement. 6)Makes various changes to provisions governing the limits on amount and types of compensation as follows: a) Excludes 2% at 62 members from certain provisions of the definition of compensation earnable, which is used to determine final compensation, that apply to community college members employed prior to July 1, 1996. b) Makes technical and clarifying changes to the definition of creditable compensation for 2% at 60 members and AB 1381 Page 3 excludes 2% at 62 members from that definition. c) Adds detail regarding the reduced compensation limit and various types of compensation to the definition of creditable compensation for 2% at 62 members, reflecting provisions of PEPRA and the prior definition. d) Prohibits 2% at 62 members from having compensation paid for a specified number of times or to enhance a benefit credited to the Defined Benefit Supplement (DBS) Program. e) Makes technical and clarifying changes to the definition of salary for 2% at 60 participants. f) Adds a definition of salary that reflects PEPRA and the prior definition for 2% at 62 participants, including a reduced compensation limit, and extends that definition of salary to other compensation paid for trustee service if performed by a 2% at 62 participant. 7)Prohibits 2% at 62 members from receiving any benefits from CalSTRS in excess of the federal limit by excluding them from the Replacement Benefits Program. 8)Inserts these requirements and authorizations into the member and participant contribution sections of the TRL. 9)Restricts the purchase of nonqualified service in the TRL. 10)Makes various changes to provisions governing postretirement employment, as follows: a) Allows CalSTRS to receive earnings information from Employment Development Department (EDD) for any member of the DB Program. b) Corrects, in the first occurrence of Education Code Section 24214, a reference and closes a loophole used to compensate retired members in excess of the annual postretirement earnings limit by making payments to an annuity, a tax-deferred retirement plan, an insurance program or a plan that meets specified requirements in the federal Internal Revenue Code. AB 1381 Page 4 c) Amends the second occurrence of Education Code Section 24214 to match the first occurrence without providing the narrow annual earnings limit exemption. d) Adds a definition of financial inducement to retire to the narrow exemption from the 180-day zero-dollar earnings limit under the DB Program and corrects drafting errors. e) Defines retired participant activities in the TRL for the CB Benefit Program, mirroring the definition of retired member activities for the DB Program. f) Expands the 180-day zero-dollar earnings limit to all CB annuitants who retire on or after January 1, 2014, regardless of age, and adds a narrow exemption parallel to the exemption under the DB Program. g) Prohibits the accruing of DB service credit when performing retired participant activities. h) Inserts the term retired participant activities where appropriate. EXISTING LAW establishes comprehensive public employee pension reform through enactment of PEPRA (and related statutory changes) that apply to all public employers and public pension plans on and after January 1, 2013, excluding the University of California and charter cities and counties that do not participate in a retirement system governed by state statute. FISCAL EFFECT : According to CalSTRS, there are no program costs associated with this bill and administrative costs are minor and absorbable. COMMENTS : According to the sponsor of the bill, CalSTRS, "AB 1381 will ensure continued implementation of PEPRA as intended by placing the act's requirements in the TRL. This bill clarifies which provisions of the TRL apply to members subject to PEPRA, also known as CalSTRS 2% at 62 members. Members who were hired to perform CalSTRS creditable activities on or before December 31, 2012, are not subject to PEPRA and are known as CalSTRS 2% at 60 members." CalSTRS has provided the Assembly Public Employees, Retirement AB 1381 Page 5 and Social Security Committee with the following information regarding the need for the changes proposed in the bill: 1)PEPRA is not defined in the TRL. 2)Public employer is not defined in the TRL. 3)A participant subject to PEPRA is not defined in the TRL for the CB Benefit Program. 4)For CalSTRS 2% at 62 members, PEPRA reduced the age factor for any specific age and increased both the minimum retirement age and the normal retirement age. 5)For CalSTRS 2% at 62 members, PEPRA required final compensation to be calculated based on the highest average annual salary rate over three consecutive school years, regardless of years of service. 6)For CalSTRS 2% at 62 members, PEPRA reduced the limit on compensation and limited the types of compensation that count toward the retirement benefit paid by CalSTRS. 7)For CalSTRS 2% at 62 members, PEPRA prohibited the payment of benefits in excess of the limitation imposed by the federal Internal Revenue Code. 8)For CalSTRS 2% at 62 members, PEPRA required the member contribution rate to be 50% of the normal cost of their benefit structure rounded to the nearest one-quarter percent. This contribution rate will be adjusted if the actuarial valuation for the DB Program indicates that the normal cost of the 2% at 62 benefit structure has changed by more than 1% since the last adjustment. The employer is not permitted to pay the 2% at 62 member contribution. A member or participant that currently bargains for the member contribution rate may bargain for a contribution rate that is higher than one-half of the normal cost of the benefit structure. 9)For all members, PEPRA prohibited the purchase of nonqualified service, or airtime, after December 31, 2012. 10)Currently, the law authorizes CalSTRS to receive earnings information from the EDD for individuals receiving a AB 1381 Page 6 disability benefit under the DB Program. For all members, PEPRA extended a very limited exemption from the annual postretirement earnings limit through 2013-14 and prohibited the granting of the exemption if the member received an incentive to retire in the previous six months. In addition, PEPRA required that a DB member's retirement benefit be reduced dollar for dollar, regardless of age, for the first 180 calendar days after retirement if the member performs activities in the public schools that are creditable to CalSTRS. A very narrow exemption may apply if a member has reached normal retirement age, the appointment is necessary to fill a critically needed position, the governing body of the employer approves the appointment by resolution at a public meeting, the member did not receive any financial inducement to retire and the member's termination of service was not the cause of the need to acquire the services of the member. Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916) 319-3957 FN: 0000241