BILL ANALYSIS                                                                                                                                                                                                    Ó




                   Senate Appropriations Committee Fiscal Summary
                            Senator Kevin de León, Chair


          SB 13 (Beall) - Public Employees' Pension
          
          Amended: February 6, 2013       Policy Vote: P.E.&R. 4-0
          Urgency: Yes                    Mandate: No
          Hearing Date: April 8, 2013                             
          Consultant: Maureen Ortiz       
          
          This bill may meet the criteria for referral to the Suspense  
          File.
          
          
          Bill Summary: SB 13 makes numerous technical changes to the  
          Public Employee's Pension Reform Act of 2013 (PEPRA) to assist  
          affected employers and retirement systems in the timely  
          implementation of PEPRA.

          Fiscal Impact: 
              Unknown loss of savings from closing the Alternate  
              Retirement Program (ARP) on January 1, 2013, instead of July  
              1, 2013.  (General/Special)   
              Minor administrative costs to CalPERS and CalSTRS (Special)
              Minor increase in revenue from new legislative employees  
              paying half the normal cost of their defined benefit plan.

          The exact loss of savings from closing the ARP six months  
          earlier is unknown as it would depend on the number of employees  
          hired during that time period who later decide not to purchase  
          the two years of service credit, which would have resulted in a  
          savings to the state in the amount of the associated employer  
          contribution. 

          Background:  The Public Employee's Pension Reform Act of 2013,  
          enacted by AB 340 (Furutani, Chapter 296, Statutes of 2012),  
          implemented significant changes to the public pension systems  
          including the following:

             a)   allows legacy members (i.e., employees in retirement  
               plan membership prior to 1/1/2013) subject to reciprocity  
               to move between public employers and be subject to the new  
               employer's retirement benefit plan as it existed for new  
               hires on December 31, 2012;









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             b)   requires new public retirement system members to have  
               lower retirement formulas and higher retirement ages;

             c)   requires new members to have no less than a 3-year final  
               compensation period;

             d)   prohibits retroactive benefit increases for all public  
               employees;

             e)   requires new members to pay at least one-half of the  
               actuarial annual normal cost of their benefit plans as  
               member contributions and prohibits employers from making  
               those contributions on behalf of employees;

             f)   limits the amount of compensation that a public employee  
               may have counted towards a defined benefit based on the  
               Social Security wage index with subsequent adjustments  
               based on annual changes in the Consumer Price Index for All  
               Urban Consumers;

             g)   prohibits certain items of pay from being included in  
               "pensionable compensation";

             h)   prohibits inequitable retiree health vesting for new  
               excluded and appointed employees;

             i)   prohibits, for new employees, any employer benefit  
               contributions paid on salaries in excess of specified  
               federal limits, and prohibits an employer from seeking a  
               federal exception to the limit;

             j)   prohibits, for new employees, employer contributions to  
               benefit replacement plans in excess of federal compensation  
               limits, and prohibits an employer from offering a benefit  
               replacement plan to any group of employees to which the  
               plan was not offered prior to 1/1/2013;

             aa)  prohibits for all members, on and after 1/1/2013, the  
               purchase of non-qualified service credit (aka, "Airtime")  
               in a defined benefit plan;

             bb)  requires, for persons first elected or appointed on or  
               after 1/1/2013, that final compensation earned as an  








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               elected or appointed city council member or county  
               supervisor may not be used in the calculation of a  
               retirement benefit for other public employment, and  
               prohibits a retired appointee to a state board or  
               commission from receiving a full pension and a full salary  
               while serving on the board or commission;

             cc)  prohibits pension contribution holidays for public  
               employers;

             dd)  places additional restrictions on working after  
               retirement for a public employer;

             ee)  creates stringent benefit forfeiture provisions for  
               public employees and officials who are convicted of  
               felonies committed in relation to the performance of  
               official duties;

             ff)  closes the Legislator's Retirement System to new  
               members;

             gg)  closes the Alternative Retirement Program to new state  
               miscellaneous employees subject to PEPRA effective July 1,  
               2013;

             hh)  requires higher employee contributions for state legacy  
               employees, and allows local employers to impose higher  
               legacy employee contributions by 2018 if they fail to  
               bargain such increases in the interim; and

             ii)  makes various other changes to public retirement systems  
               and plans and to the duties and requirements of public  
               employers and employees.

          The Alternate Retirement Program was established effective  
          August 11, 2004 and created a retirement savings program, in  
          lieu of retirement service credit and contributions to CalPERS.   
          State miscellaneous and industrial employees who were hired on  
          or after August 11, 2004 are placed in the ARP for a 24 month  
          period, and, beginning in the 25th month they contribute to  
          CalPERS and begin earning service credit.  Beginning on their  
          47th month of employment and extending through the last day of  
          their 49th month, these members have three options to elect  








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          regarding their ARP funds.  They may:  1) choose to transfer  
          their ARP funds to CalPERS and receive service credit for their  
          state service (whereby the employer then makes the applicable  
          contributions); 2) require a lump sum distribution of the entire  
          balance; or, 3) roll over their ARP funds to a Savings Plus  
          401(k) account.  If a member does not choose any option, their  
          funds are rolled over to a Savings Plus 401(k) account.

          Historically, approximately 45% of employees who are subject to  
          ARP choose to use their accumulated funds to purchase the two  
          years of service credit.  Therefore, the state realizes a  
          savings of two years' worth of employer contributions for over  
          half of new hires.

          Proposed Law:  SB 13 makes various corrections and  
          clarifications to PEPRA in order to assist employers and  
          retirement systems in the implementation of the enacted pension  
          reform.  Specifically, SB 13 makes the following changes:

             a)   contains Legislative findings and declarations that the  
               bill clarifies changes to PEPRA that are consistent with  
               legislative intent as enacted in AB 340 and are therefore  
               intended to be applicable as of January 1, 2013;  

              b)   clarifies that the provision for legacy employees to  
               move between public employers also (in addition to moving  
               between reciprocal employers) applies in cases of  
               concurrent membership (such as moving between CalPERS  
               employers or CalPERS and CalSTRS), consistent with the  
               intent of AB 340 to grandfather public employees hired  
               prior to 1/1/2013 with regard to moving between public  
               employers;

             c)   clarifies that PEPRA does not prohibit an employer that  
               offers a defined benefit plan prior to 1/1/2013 from later  
               offering only a defined contribution plan or a defined  
               contribution plan in addition to a defined benefit plan;

             d)   provides express authority to retirement systems to  
               promulgate regulations or adopt resolutions to implement  
               the requirements of PEPRA;  

              e)   confirms that in determining normal cost, the actuary  








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               may use single rate contributions (as in CalPERS), or  
               age-based contribution rates (as in members of the 1937 Act  
               County Retirement System);

             f)   creates a uniform requirement for all public retirement  
               systems subject to PEPRA with regard to when and how to  
               make annual changes to the compensation limits and when  
               such changes shall be effective;  

              g)   clarifies that the normal cost rate used to determine  
               employee contributions includes all benefits under the plan  
               (such as death and survivor benefits and cost-of-living  
               adjustments);  

              h)   clarifies that new employees will initially be subject  
               to a higher employee contribution rate (i.e., higher than  
               the required 50%) if it is paid by similarly situated  
               employees subject to a collective bargaining agreement; and  
               clarifies that new legislative employees subject to PEPRA  
               are required to pay 50% of the normal cost; 

              i)   clarifies that an employer is not required to change the  
               retiree health vesting schedule of any employee subject to  
               a specific health vesting schedule prior to 1/1/2013, or  
               with whom the employer had a contractual agreement for a  
               particular health vesting schedule;  

              j)   clarifies that judges will be subject to felony  
               forfeiture provisions required under the Judges Retirement  
               Systems (JRS I&II)  and  PEPRA, resulting in the highest loss  
               of benefits possible;  
                 
              aa)  changes the date that new employees are not subject to  
               the Alternate Retirement Program from July 1, 2013 to  
               January 1, 2013;  

              bb)  clarifies that legacy members in the Los Angeles County  
               Retirement Association are allowed to move between  
               retirement plans D and E, but not the PEPRA plan and plans  
               D or E;  

              cc)  clarifies that new 1937 Act county retirement  
               association members subject to the PEPRA retirement  








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               formulas shall not be subject to the traditional offsets on  
               contributions and benefits that apply to legacy employees;  
               and  

              dd)  corrects typographical errors and streamlines  
               terminology throughout the Act.


          Staff Comments: AB 340 passed at the end of the 2012 session as  
          a conference committee report following over a year of meetings,  
          hearings, and various legislative efforts relative to  
          comprehensive pension reform.  Due to the complexity of PEPRA,  
          and the prohibition of amending a conference report once it is  
          in print, a number of provisions need clarification in order for  
          the reform package to be implemented as intended.  SB 13 will  
          provide employers and retirement system administrators with  
          better guidelines for fully implementing the requirements of AB  
          340 in a timely manner.