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; SB 13 (Beall) Page 1 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 SB 13 (Beall) Page 2 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 SB 13 (Beall) Page 3 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 SB 13 (Beall) Page 4 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 SB 13 (Beall) Page 5 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.