BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 292| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- VETO Bill No: SB 292 Author: Pan (D) Amended: 6/25/15 Vote: 21 SENATE PUBLIC EMP. & RET. COMMITTEE: 3-2, 4/27/15 AYES: Pan, Beall, Hall NOES: Morrell, Fuller SENATE FLOOR: 25-10, 5/4/15 AYES: Allen, Beall, Block, Cannella, De León, Galgiani, Hall, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Pan, Roth, Wieckowski, Wolk NOES: Anderson, Bates, Fuller, Gaines, Moorlach, Morrell, Nielsen, Runner, Stone, Vidak NO VOTE RECORDED: Berryhill, Hancock, Nguyen, Pavley SENATE FLOOR: 27-12, 9/11/15 AYES: Allen, Beall, Block, Cannella, De León, Glazer, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Pan, Pavley, Roth, Wieckowski, Wolk NOES: Anderson, Bates, Berryhill, Fuller, Gaines, Moorlach, Morrell, Nguyen, Nielsen, Runner, Stone, Vidak NO VOTE RECORDED: Galgiani ASSEMBLY FLOOR: 48-25, 9/11/15 - See last page for vote SUBJECT: Public employee retirement: contributions SOURCE: California Professional Firefighters Peace Officers Research Association of California SB 292 Page 2 DIGEST: This bill specifies that the requirement prohibiting employers from paying employee contributions for employees subject to the California Public Employees' Pension Reform Act of 2013 (PEPRA), who are required 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. In those cities and one county, the employer is not prohibited from paying the employee contribution. The exemption provided by this bill applies to the requirement that an employer may not pay the employee contribution. Thus, when an employer pays its pension program costs with revenues derived from a special tax rate approved by voters in support of pension programs, the employer is not prohibited from making the employee contribution. The bill also clarifies that the employee is still subject to an employee contribution rate of 50% of the normal cost. Finally, the bill clarifies that the exemption only applies with regard to contributions on behalf of pension benefits covered by the pension levies. So in cases in which the levies only cover certain personnel, such as safety and fire personnel, the exemption is with regard to those employees' benefits only. 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)Sets other required employee contribution rates for non-PEPRA (sometimes called classic or legacy members), and allows, in the case of those members, the employer and employees to collectively bargain over whether or not the employer pays some or all of the member contributions. 3)Prohibits a public employer from paying any portion of an employee's contribution when the employee is subject to PEPRA and the 50% of normal cost contribution requirement. 4)Specifies, in PEPRA, that charter cities with independent SB 292 Page 3 retirement systems that are not subject to state laws are exempt from PEPRA. 5)Limits, under the state Constitution (Proposition 13, 1978) property tax rates to 1% of the purchase price of the property with specified adjustments. 6)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. 7)Prohibits the imposition of new extraordinary ad valorem property tax rates for indebtedness at the local level other than for general obligation bonds. 8)Freezes extraordinary tax rates for pensions approved by voters before Proposition 13 at their 1982-83 percentages. This bill exempts a public employer from the requirement under PEPRA that prohibits the employer from making the mandated PEPRA-employee contributions of at least 50% of the actuarial normal costs of their pensions. This exemption only applies 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, and it only applies to the specific pension expenses covered by the special tax levies. Therefore, if the special tax levy is for fire and safety personnel only, the exemption would only apply with regard to those employees' contributions. In cases in which the employer is not prohibited from making the employee contribution, the employee's contribution rate would still be the statutory amount (e.g., 50% of the normal cost for employees subject to PEPRA), and the employer and employee could collectively bargain over whether or not the employer would pick up the employee contributions in full or in part. Background Proposition 13 and Extraordinary Tax Rates for Pensions SB 292 Page 4 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: 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. Other employers have extraordinary tax rates for all pension costs. Both employer and employee contributions have been allowed to be paid by proceeds from the extraordinary tax levies, subject to local collective bargaining. Two cities-Los Angeles and Fresno-do not contract with CalPERS and instead maintain their own independent retirement systems. SB 292 Page 5 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 Legislation AB 340 (Furutani, Chapter 296, Statutes of 2012) enacted PEPRA, 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 SB 292 Page 6 than bonds. FISCAL EFFECT: Appropriation: No Fiscal Com.:NoLocal: No SUPPORT: (Verified10/21/15) California Professional Firefighters (co-source) Peace Officers Research Association of California (co-source) Laborers' International Union of North America, Locals 777 & 792 Oxnard Firefighters Association, International Association of Fire Firefighters Local 1684 Service Employees International Union OPPOSITION: (Verified10/21/15) City of Oxnard 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 initiatives were approved by voters as early as the 1920's. The pension levies pay for both the employer and employee SB 292 Page 7 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 ARGUMENTS IN OPPOSITION:The City of Oxnard notes that the revenue received from its pension tax levy does not fully cover its pension costs, and expresses concerns that this bill could result in costs for employee contributions falling back onto the city. GOVERNOR'S VETO MESSAGE: SB 292 Page 8 I am returning Senate Bill 292 without my signature. This bill exempts certain employees from making pension contributions if they work in a city or county that receives parcel tax revenue designated for pension costs. I believe the cost-sharing requirements in the Public Employees' Pension Reform Act of 2013 are unrelated to whether a city or county has an existing parcel tax for pensions. The employee share-of-cost is a crucial standard that must be retained. I am unwilling to chip away at this reform. ASSEMBLY FLOOR: 48-25, 9/11/15 AYES: Alejo, Bloom, Bonilla, Bonta, Brown, Burke, Calderon, Campos, Chau, Chiu, Chu, Cooley, Cooper, Dababneh, Dodd, Eggman, Frazier, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Roger Hernández, Holden, Jones-Sawyer, Lopez, Low, McCarty, Medina, Mullin, Nazarian, O'Donnell, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Mark Stone, Thurmond, Ting, Weber, Wood, Atkins NOES: Achadjian, Travis Allen, Baker, Brough, Chávez, Dahle, Beth Gaines, Gallagher, Grove, Hadley, Harper, Jones, Kim, Lackey, Levine, Maienschein, Mathis, Mayes, Obernolte, Olsen, Patterson, Steinorth, Wagner, Waldron, Wilk NO VOTE RECORDED: Bigelow, Chang, Daly, Irwin, Linder, Melendez, Williams Prepared by:Pamela Schneider / P.E. & R. / (916) 651-1519 11/4/15 14:01:22 **** END **** SB 292 Page 9