BILL ANALYSIS Ó
SENATE COMMITTEE ON
PUBLIC EMPLOYMENT AND RETIREMENT
Dr. Richard Pan, Chair
2015 - 2016 Regular
Bill No: SB 292 Hearing Date: 4/27/15
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|Author: |Pan |
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|Version: |4/21/15 As amended |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Pamela Schneider |
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Subject: Public Employees'Pension Reform Act (PEPRA): employee
contributions
SOURCE: Peace Officers Research Association of California
California Professional Firefighters
DIGEST: This bill specifies that the requirement for
employees subject to PEPRA to pay 50% of the actuarial normal
cost of their pension benefits does not apply in specific cities
and one county in which voter-approved tax levies were enacted
prior to 1978 for the purpose of paying pension costs.
ANALYSIS:
Existing law:
1)Requires, under PEPRA, that new public employees hired after
January 1, 2013, shall pay at least 50% of the actuarial
normal cost of funding their pension benefits, as specified.
2)Limits, under the state Constitution (Proposition 13, 1978)
property tax rates to 1% of the purchase price of the property
with specified adjustments.
3)Exempts from Proposition 13's 1% property rate limit a
property tax rate approved by voters prior to July 1, 1978,
for the purpose of paying the pension costs of the city or
county. Twenty-five cities and one county were thus
grandfathered under Proposition 13.
SB 292 (Pan) Page 2 of ?
4)Prohibits the imposition of new extraordinary ad valorem
property tax rates for indebtedness at the local level other
than for general obligation bonds.
5)Freezes extraordinary tax rates for pensions approved by
voters before Proposition 13 at their 1982-83 percentages.
This bill:
Exempts a public employer and the employer's employees from the
requirement under PEPRA for employees to pay 50% of the
actuarial normal costs of their pensions in cases in which the
city or county passed a voter-approved tax levy prior to July 1,
1978, for the purpose of paying for the costs of the city's or
county's pension benefits.
Background
Proposition 13 and Extraordinary Tax Rates for Pensions
Proposition 13 limited property taxes to 1% of the purchase
price of the property. However, the 1% limit on property tax
rates did not apply to special assessments used to pay for
indebtedness approved by voters before July 1, 1978. In 1982,
the Supreme Court ruled in Carman v. Alvord that extraordinary
tax rates approved by voters before July 1, 1978 to fund
employee pension systems are valid exemptions under Proposition
13. These levies vary by city, range from 0.05% to 0.45%, and
are levied in addition to the 1% general property tax rate.
In 1983, the Legislature enacted a moratorium on property tax
rates for indebtedness other than bonds (AB 377, Roos). This
moratorium was made permanent in 1985(AB 13, Roos). AB 13 also
froze voter-approved extraordinary tax rates for pensions at
their 1982-83 percentage levels. The extraordinary rates are
frozen as a specific percentage of total tax revenues;
therefore, if total property values grow over time, the total
dollar amount of the extraordinary tax revenues increases in
tandem, even though the rate does not increase.
Cities and County with Extraordinary Tax Rates for Pensions
The cities and county with extraordinary tax rates for pensions
that are also subject to PEPRA are as follows:
SB 292 (Pan) Page 3 of ?
Albany, Alameda, Bell, Berkeley, Cloverdale, Coalinga, Compton,
El Monte, Huntington Beach, Huntington Park, Inglewood, Lynwood,
Maywood, Monrovia, Montebello, Monterey Park, Oakland, Oxnard,
Richmond, San Fernando, San Gabriel, Watsonville, and Santa
Clara County.
In some of the cities with extraordinary tax rates for pensions,
the pension costs covered are for the city's safety employees
only-primarily police and fire personnel. Both employer and
employee contributions have traditionally been paid by proceeds
from the extraordinary tax levies.
Two cities-Los Angeles and Fresno-do not contract with CalPERS
and instead maintain their own independent retirement systems.
These cities are independent charter cities that maintain
independent retirement systems and are exempt from PEPRA. Thus,
they may continue paying their retirement obligations using
revenue generated by their respective levies, unlike the
ambiguity that has surfaced for those cities that contract with
CalPERS, which are subject to PEPRA.
Employee Contributions Under PEPRA
PEPRA (AB 340, 2012) requires that new public employees in
California first hired after January 1, 2013 must pay 50% of the
actuarial normal costs of their pension plans as member
contributions to the retirement systems. For employees subject
to PEPRA, the employer is prohibited from paying the member
contributions. PEPRA employees hired prior to 2013 (referred to
as "classic" or "legacy" members of the retirement systems) pay
contribution rates at the statutory pre-PEPRA levels set for
those employees unless they have collectively bargained a
different contribution level with the employer.
PEPRA allowed a new employee to be grandfathered under the
classic or legacy employee contribution rate if the agency had a
collective bargaining agreement in place on January 1, 2013 that
set a specific contribution rate for employees. However, PEPRA
states that upon expiration of that bargaining agreement, PEPRA
employees must, at that time, begin paying the required member
contribution rate equal to 50% of the actuarial normal cost of
their respective plans.
Prior/Related Legislation
AB 340 (Furutani, Chapter 296, Statutes of 2012) enacts PEPRA,
SB 292 (Pan) Page 4 of ?
which became effective on January 1, 2013.
AB 13 (Roos, Chapter 112, Statutes of 1985) made the moratorium
on extraordinary tax rates for indebtedness other than bonds
enacted by AB 377 permanent and froze extraordinary tax rates
for pensions at their 1982-83 percentage levels.
AB 377 (Roos, Chapter 491, Statutes of 1983) created a temporary
moratorium on extraordinary tax rates for indebtedness other
than bonds.
FISCAL EFFECT: Appropriation: No Fiscal
Com.: No Local: No
SUPPORT:
Peace Officers Research Association of California (co-source)
California Professional Firefighters (co-source)
Laborer's International Union of North America, Locals 777 & 792
Oxnard Firefighters Association, Local 1684
OPPOSITION:
None received
ARGUMENTS IN SUPPORT:
According to the Peace Officers Research Association of
California:
SB 292 clarifies an issue that came to PORAC's attention
after the passage of California's pension reform
legislation, the California Public Employees' Pension
Reform Act (PEPRA), took effect on January 1, 2013. A
section in the PEPRA calls for all new employees, and by
2018 most current employees, to contribute 50% of their
"normal cost". Normal cost is the basic cost of providing
an employee's future retirement benefit, not including
unfunded liabilities or surpluses. The issue that has come
to our attention centers around approximately two dozen
cities and one county whose voters approved a tax to fund
their local retirement obligations. Some of these pension
SB 292 (Pan) Page 5 of ?
initiatives were approved by voters as early as the 1920's.
The pension levies pay for both the employer and employee
contributions out of their respective funds, thereby
allowing that city or county's general fund to be used in
other areas important to that jurisdiction.
If these local agencies are to subject to the PEPRA rule on
employee contributions, the impact will hit those agencies'
general fund and could potentially result in a serious loss
of employees due to the immediate increased cost. Also, it
will truly impact recruitment for those entities due to the
higher contribution rates that would be required from their
general fund.
The Governor's stated intent for the passage of PEPRA was
in large part to save employer cost for increasing pension
obligations. Unfortunately, the PEPRA section mandating
increased employee contributions will have the opposition
effect for these cities and county impacted by Senate Bill
292.
According to the California Professional Firefighters:
Since PEPRA, ambiguity now exists as to whether these
employers may use this voter-approved tax revenue to pay
all of their retirement obligations, including the employee
share. Consequently, these few jurisdictions are now
forced to backfill the cost of their retirement obligations
using other revenue sources. Additionally, the provisions
of PEPRA as currently interpreted, present a conflict with
the will of the voters in enacting these pension levies
many decades ago. Finally, this conflict presents a new,
unexpected strain on a local agency's general fund in
having to find other ways to meet its requirements, as
outlined in their various collective bargaining agreements.