BILL ANALYSIS Ó AB 1381 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 1381 (Public Employees, Retirement and Social Security Committee) As Amended September 4, 2013 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |74-0 |(May 2, 2013) |SENATE: |39-0 |(September 9, | | | | | | |2013) | ----------------------------------------------------------------- Original Committee Reference: P.E.,R.& S.S. ----------------------------------------------------------------- | | | | | ----------------------------------------------------------------- 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)Finds and declares that this bill is declarative of existing law and deems the amendments, with specified exclusions, operative as of January 1, 2013, (the operative date of PEPRA) unless otherwise stated. 2)Defines PEPRA in the TRL using the legal citations. 3)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. 4)Defines a "member" subject to PEPRA employed to 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 do 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. 5)Makes various changes to provisions governing age factors and AB 1381 Page 2 normal retirement age as follows: a) Includes age 62 in the definition of normal retirement 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. 6)Excludes 2% at 62 members from one-year final compensation based on having 25 or more years of service credit or based on a collective bargaining agreement. Ends this benefit for 2% at 60 members for contracts entered into, extended, renewed or amended on or after January 1, 2014. 7)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 AB 1381 Page 3 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 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. g) Adds the PEPRA compensation limit for public employees who pay into Social Security to the creditable compensation and salary definitions for 2% at 62 members and participants in case there are future changes in law. 8)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. 9)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. 10)Requires the Teachers' Retirement Board (TRB) to adopt the normal cost rate that is used to determine the 2% at 62 member contribution rate and excludes that contribution rate from the collective bargaining process since CalSTRS member contribution rates are set in statute and have never been AB 1381 Page 4 subject to collective bargaining. 11)Restricts the purchase of nonqualified service in the TRL. 12)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) Clarifies that it is the annualized rate of pay for retired member activities that cannot be less than the minimum, nor exceed the maximum, paid to other employees performing comparable duties. c) Clarifies which compensation is not subject to the postretirement limitations. d) Corrects a reference and closes a loophole used to compensate retired members and participants in excess of the annual postretirement earnings limit and zero-dollar earnings limit, as applicable, by making payments to a deferred compensation plan, an annuity, a tax-deferred retirement plan, an insurance program or a plan that meets specified requirements in the federal Internal Revenue Code. Ensures that these provisions do not impair existing contracts for postretirement employment. e) Amends the second occurrence of Education Code Section 24214 to match the first occurrence without providing the narrow annual earnings limit exemption. f) 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. g) Defines retired participant activities in the TRL for the CB Benefit Program, mirroring the definition of retired member activities for the DB Program. h) 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. AB 1381 Page 5 i) Prohibits the accruing of DB service credit when performing retired participant activities. j) Inserts the term retired participant activities where appropriate. 13)Makes various technical corrections, including correcting certain references by replacing the term "board" with "system" when the functions referenced are administrative in nature. The Senate amendments make additional clarifying and conforming changes to the bill. 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 the Senate Appropriations Committee, pursuant to Senate Rule 28.8, negligible state costs. 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 and Social Security Committee with the following information regarding the need for the changes proposed in the bill: 1)PEPRA went in to effect on January 1, 2013. However, most related sections of the TRL were not amended by that act, and AB 1381 would not be effective until January 1, 2014, so it is necessary to state that the changes are declaratory of existing law. 2)PEPRA is not defined in the TRL. AB 1381 Page 6 3)Public employer is not defined in the TRL. 4)A member subject to PEPRA is not defined in the TRL for the DB Program and a participant subject to PEPRA is not defined in the TRL for the CB Program. 5)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. 6)Current statute provides for one-year final compensation based on having 25 or more years of service credit or a collective bargaining agreement. 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. 7)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. 8)For CalSTRS 2% at 62 members, PEPRA prohibited the payment of benefits in excess of the limitation imposed by the federal Internal Revenue Code. 9)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. Under PEPRA, the employer is not permitted to pay the 2% at 62 member or participant contribution, and certain public employers are moved toward equal sharing of normal costs between employers and employees. 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. 10)For all members, PEPRA prohibited the purchase of nonqualified service, or airtime, after December 31, 2012. 11)Currently, the law authorizes CalSTRS to receive earnings information from the EDD for individuals receiving a AB 1381 Page 7 disability benefit under the DB Program. Under current law, there are various restrictions that apply to retired member activities. 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. 12)CalSTRS performs the administrative duties applicable to the benefits and services provided under the TRL, and the TRB sets policies, consistent with that law, applicable to CalSTRS. Several places in the TRL, however, use the terms "board" and "system" interchangeably. Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916) 319-3957 FN: 0002454