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.