BILL ANALYSIS Ó SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: AB 1381 Jim Beall, Chair HEARING DATE: June 24, 2013 AB 1381 (Asm. PER&SS Comm) as amended 6/14/13 FISCAL: YES CALIFORNIA STATE TEACHERS' RETIREMENT SYSTEM: CONFORMITY WITH PUBLIC EMPLOYEES' PENSTION REFORM ACT OF 2013 HISTORY : Sponsor: California State Teachers' Retirement System (CalSTRS) Other legislation: SB 220 (Beall) 2013 Currently in Assembly PER&SS Committee AB 1380 (Assembly PER&SS Comm) 2013 Currently in Senate PE&R Committee AB 340 (Furutani), Chapter 296, Statutes of 2012 ASSEMBLY VOTES : PER & SS 7-0 4/10/13 Appropriations 17-0 4/17/13 Assembly Floor 74-0 5/02/13 SUMMARY : AB 1381 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. BACKGROUND AND ANALYSIS : 1)Existing law : a) establishes CalSTRS, which provides retirement, disability, and death benefits for the state's teachers and school administrators in grades k-12 and community colleges. Pamela Schneider Date: June 14, 2013 Page 1 b) establishes comprehensive public employee pension reform through enactment of PEPRA (and related statutory changes) that apply to all public employers (including school districts) and public pension plans (including CalSTRS) 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. c) requires, in the TRL, a 2% at age 60 formula for CalSTRS members prior to PEPRA and a 2% at age 60 formula for new members of the system following enactment of PEPRA. d) requires CalSTRS to administer both the Defined Benefit (DB) Program and the Cash Balance (CB) Benefit Program. e) does not specifically amend the TRL to incorporate the requirements and provisions of PEPRA as they apply to members of CalSTRS. 1)This bill : a) finds and declares that AB 1381 is declarative of existing law and deems the amendments operative as of January 1, 2013 (the operative date of PEPRA) unless otherwise stated. b) specifically amends the TRL to incorporate requirements of PEPRA into the TRL and bring it into conformity with PEPRA as those requirements relate to CalSTRS and members and employers in the system. c) defines PEPRA in the TRL using the legal citations. (EC Section 22109.8) d) defines public employer in the TRL for both the DB Program and the CB Benefit Program by referencing the definition of public employer in PEPRA. (EC Section 22160.5, 26135.5) e) Defines a "member" subject to PEPRA employed to Pamela Schneider Date: June 14, 2013 Page 2 perform creditable service subject to coverage under the DB Program, and a "participant" subject to PEPRA employed to perform creditable service subject to coverage under the CB Benefit Program. Both are defined as a person who first becomes employed on or after January 1, 2013. These definitions 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 DB or CB Benefit programs. (EC Sections 22146.2, 26132.5) f) Makes various changes to provisions governing age factors and normal retirement age as follows: i) includes age 62 in the definition of normal retirement and normal retirement age to accommodate 2% at 62 members and participants. (EC Section 22148, 26800) ii) 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. (EC 22664) iii) removes various references to age 60 and replaces them with "normal retirement age" to accommodate both CalSTRS' 2% at 60 and 2% at 62 members and participants. (EC Section 23855, 24206, 24600, 26810) iv) 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. (EC Section 24202, 24202.5, 24202.6, 24202.7, 24203) v) 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 Pamela Schneider Date: June 14, 2013 Page 3 after age 60 after which the benefit will be the total amount that would have been received at age 60. (EC Section 24205) vi) includes the 2% at 62 age factors in the service retirement benefit calculation after reinstatement or the termination of a disability retirement. (EC Section 24209, 24210) g) 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. (EC 26134.5, 22135) h) adds clarification that 2% at 62 members are excluded from receiving employer-paid member contributions unless a labor agreement would be impaired, as specified, and ends employer-paid member contributions for 2% at 60 members for labor agreements entered into, extended, or renewed on or after January 1, 2014. (EC 22909) i) makes various changes to provisions governing the limits on amount and types of compensation as follows: i) 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. (EC Section 22115) ii) makes technical and clarifying changes to the definition of creditable compensation for 2% at 60 members and excludes 2% at 62 members from that definition. (EC 22119.2) iii) 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, and sets parameters for determining annual adjustments to the limit. (EC 22119.3) iv) prohibits 2% at 62 members from having Pamela Schneider Date: June 14, 2013 Page 4 compensation paid for a specified number of times or to enhance a benefit credited to the Defined Benefit Supplement (DBS) Program. (EC 22905) v) makes technical and clarifying changes to the definition of salary for 2% at 60 participants under the CB Benefit Program. (EC 26139) vi) adds a definition of salary that reflects PEPRA and the prior definition for 2% at 62 participants under the Cash Balance Benefit Program, 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. (EC 26139.5, 26503.5) j) 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. (EC Section 24252) aa) inserts requirements and authorizations into the member and participant contribution sections of the TRL, including ending employer-paid member contributions for 2% at 60 members and restricting the 2% at 60 participant contribution rate from being less than the employer contribution rate for contracts entered into, extended, renewed or amended on or after January 1, 2014. (EC 22901, 22901.3, 22909, 26504) bb) restricts the purchase of nonqualified service (i.e., "airtime") in the TRL. (EC 22826) cc) makes various changes to provisions governing postretirement employment, as follows: i) allows CalSTRS to receive earnings information from EDD for any member of the DB Program performing retired member activities. (EC 22327) ii) 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 Pamela Schneider Date: June 14, 2013 Page 5 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. (EC Section 24214) iii) amends the second occurrence of Education Code section 24214 to match the first occurrence without providing the narrow annual earnings limit exemption. iv) 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. (EC Section 24214.5) v) defines retired participant activities in the TRL for the CB Benefit Program, mirroring the definition of retired member activities for the DB Program. (EC Section 26135.7) vi) expands the 180-day zero-dollar earnings limit to all CB Benefit Program 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. (EC Section 26812) vii) prohibits the accruing of DB service credit when performing retired participant activities. (EC Section 26812) viii) inserts the term retired participant activities where appropriate. (EC Section 26813 and various) 1)makes various technical corrections, including correcting certain references by replacing the term "board" with "system" when the functions referenced are administrative in nature. (EC Section 22327, 22901.3, 24214) FISCAL : As stated by the Assembly Appropriations Committee, "Minor and absorbable costs for CalSTRS." Pamela Schneider Date: June 14, 2013 Page 6 COMMENTS : 1)Argument in Support : 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 Committee with the following information regarding the need for the changes proposed in the bill: a) PEPRA is not defined in the TRL. b) Public employer is not defined in the TRL. c) A participant subject to PEPRA is not defined in the TRL for the CB Benefit Program. d) 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. e) 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. f) 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. g) For CalSTRS 2% at 62 members, PEPRA prohibited the payment of benefits in excess of the limitation imposed by the federal Internal Revenue Code. h) For CalSTRS 2% at 62 members, PEPRA required the Pamela Schneider Date: June 14, 2013 Page 7 member contribution rate to be 50 percent 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 one percent 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. i) For all members, PEPRA prohibited the purchase of nonqualified service, or airtime, after December 31, 2012. j) Currently, the law authorizes CalSTRS to receive earnings information from the Employment Development Department (EDD) for individuals receiving a 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. 1)SUPPORT : California State Teachers' Retirement System (CalSTRS), Sponsor Pamela Schneider Date: June 14, 2013 Page 8 2)OPPOSITION : None to date ##### Pamela Schneider Date: June 14, 2013 Page 9