BILL ANALYSIS                                                                                                                                                                                                    Ó

                   Senate Appropriations Committee Fiscal Summary
                            Senator Kevin de León, Chair

          SB 277 (Beall) - State Peace Officers'/Firefighters Defined  
          Contribution Plan
          Amended: May 13, 2013           Policy Vote: PE&R 5-0
          Urgency: No                     Mandate: No
          Hearing Date: May 23, 2013      Consultant: Maureen Ortiz
          SUSPENSE FILE.
          Bill Summary:  SB 277 terminates the State Peace  
          Officers'/Firefighters Defined Contribution Plan (POFF DCP) and  
          requires the distribution of all funds.  Plan participants may  
          choose from a variety of distribution methods, and if no  
          election is made CalPERS will roll over the money to the  
          Supplemental Contributions Program. 

          Fiscal Impact: 

              One-time costs estimated at $700,000 to the POFF DCP Trust  

          Administrative costs result from activities involving outreach  
          to participants, making distributions upon the termination of  
          the plan, and management of account rollovers into the default  
          Supplemental Contribution Program.  Third party administrator  
          costs will result from the following activities:

          -  General implementation of the termination, including  
          participant data analysis, establishing the rollover source,  
          adding on-line functionality for distributions, managing default  
          distributions of less than $1,000, facilitating data and fund  
          transfer, and reviewing and updating the CalPERS' website,  
          publications and forms.

          -  Participant Communication including a general announcement,  
          reminder letters, SCP welcome kits, and missing participant  

          -  System and business analyses for the transfer of assets from  
          the POFF DCP to the SCP.


          SB 277 (Beall)
          Page 1

          The POFF DCP administrative account is funded through account  
          maintenance fees paid by participants.  The fee was reduced  
          March 1, 2013 from .55% to .45%.  Any administrative expenses  
          associated with terminating the plan and distributing the funds  
          to members will be paid out of an existing surplus in that  
          maintenance fees account.   To the extent that members choose to  
          withdraw their money instead of rolling it over to another  
          investment option, there could be several million dollars in  
          state tax revenue from an existing 2.5% penalty if the member is  
          subject to the early distribution penalty. 

          Background:   The State Peace Officers' and Firefighters' (POFF)  
          Supplemental Plan is an employer-provided benefit negotiated  
          with the State of California by the California Correctional  
          Peace Officers' Association (CCPOA).  The Plan is administered  
          by CalPERS and governed under section 401 (a) of the Internal  
          Revenue Code.  It became effective in 1998 for rank and file  
          employees pursuant to a memorandum of understanding (MOU)  
          between the State and Bargaining Unit 6 (Correctional Peace  
          Officers:  and became effective in 1999 for associated  
          supervisors and managers.  Effective April 1, 2011, the State no  
          longer contributed two percent (2%) of Unit 6 employees' base  
          salary to the POFF Supplemental Plan, pursuant to a subsequent  
          MOU in exchange for increased employer health care contributions  
          and a 1 percent increase to the top salary steps of BU 6  
          employees effective July 1, 2013. Effective May 2011, the State  
          longer contributed two percent (2%) of Unit 6 -- related  
          excluded employees' base salary to the POFF Supplemental Plan,  
          which includes supervisors, management and exempt positions.

          Currently, members must terminate or retire from state service  
          in order to have access to their funds in the 401(a).  At that  
          time, they have an option of deferring distribution until a  
          later date (but not later than upon turning age 70 ), electing  
          to receive installment payments, receive a lump sum, roll the  
          money into a tax qualified plan such as an IRA, or use funds to  
          purchase up to 5 years of additional service credit (this option  
          ended January 1, 2013 with the implementation of the Public  
          Employees' Pension Reform Act).  If the balance of the account  
          is less than $5,000 the member must receive a lump sum payment. 

          The contributions to the POFF DCP were made on a pre-tax basis,  
          whereby the Supplemental Contribution Plan is an after-tax plan  


          SB 277 (Beall)
          Page 2

          available to state employees and members of the Judges'  
          Retirement System I and II. Participants voluntarily invest  
          after-tax contributions into a SCP account where all earnings  
          grow tax-deferred until the participant begins to take  
          withdrawals in retirement or upon separation from service.  Upon  
          distribution, members only pay taxes on the earnings.  If  
          necessary approvals are obtained from the Internal Revenue  
          Service, the POFF rollover accounts would retain their pre-tax  
          status and be separately accounted for as such.  

          Proposed Law:  SB 277 terminates the POFF DCP effective January  
          1, 2014 or upon obtaining appropriate approvals from the  
          Internal Revenue Service, ceases all contributions to the plan,  
          and prohibits new participants.

          SB 277 allows a participant access to his or her funds in the  
          POFF DCP to the extent that an in-service distribution is  
          allowed under applicable federal and state law.

          SB 277 provides that distribution of all funds in the POFF DCP  
          constitutes a complete discharge and release of the CalPERS  
          board, system, and plan from liability for payments.   
          Additionally, the CalPERS board and system will not be  
          considered fiduciaries with respect to a transfer of funds from  
          the POFF DCP to the Supplemental Contributions Program. 

          Staff Comments:  The POFF DCP has 37,010 participants and  
          approximately $481.5 million in assets.  Comparatively, the SCP  
          plan has 567 participants and $19 million in assets.

          The contributions to the POFF DCP were considered before-tax  
          contributions.  However, the SCP is currently an after-tax plan.  
           SB 277 provides if any member does not specify how he or she  
          wants her funds to be distributed, the default will be the SCP -  
          but due to the differences in tax status between the two  
          programs, separate accounts will have to be maintained for the  
          funds that are rolled over from the POFF DCP to the SCP.  Plan  
          participants will pay sufficient fees to cover these  
          administrative expenses.


          SB 277 (Beall)
          Page 3