BILL ANALYSIS Ó SB 1352 Page 1 Date of Hearing: June 22, 2016 ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT, AND SOCIAL SECURITY Rob Bonta, Chair SB 1352 (Committee on Public Employment and Retirement) - As Amended May 27, 2016 SENATE VOTE: 39-0 SUBJECT: State teachers' retirement SUMMARY: Makes various technical, conforming, or non-controversial changes to the Education Code related to the California State Teachers' Retirement System (CalSTRS) to improve the administration of the State Teachers' Retirement Plan, which includes the Defined Benefit (DB) Program, the Defined Benefit Supplement (DBS) Program, and the Cash Balance (CB) Benefit Program. Specifically, this bill: 1)Repeals a duplicative code section that erroneously was never chaptered out and amends the remaining section to clarify that the accumulated DBS Program account balance is an amount of credits, as specified. 2)Clarifies that the base allowance used to calculate SB 1352 Page 2 supplemental payments for members converting to service retirement after the termination of their disability allowance is the lesser of the two allowances determined at conversion, as specified. 3)Corrects typographical errors in the section defining "credited interest". 4)Repeals the current definition of "break in service," including eliminating a superfluous provision for career substitute teachers. 5)Defines "school term" consistent with current law and applicable school calendars. 6)Specifies within the "final compensation" definitions that periods of service for determining final compensation include full pay periods in which members earn compensation, periods prior to the school term when members earn compensation during the first pay period, periods following the school term when members earn compensation during the last pay period and periods in the middle of the school term when members earn compensation during the immediately preceding and immediately following pay periods. 7)Clarifies that the prohibition on using full pay periods beyond the benefit effective date does not apply with regards to the final pay period of the school term. SB 1352 Page 3 8)Repeals the definition of "final compensation" that allows for 36 months of service to be used that are consecutive except for periods in which an employer certifies that there has been a reduction in school funds and moves that language to the definition of 36-month final compensation. 9)Specifies that final compensation for concurrent retirement can use "compensation for services rendered on a full-time basis" under the other retirement system rather than the CalSTRS-defined "compensation earnable." 10)Conforms the definition of "final compensation" to the definition of "concurrent retirement" by stating that it is only available when a member retires "for service" from each system, rather than retires for disability. 11)Clarifies that when additional months are needed to calculate final compensation, they come from the member's first school year, rather than first position. 12)Requires non-service-based benefits for all members to be calculated using the average annual creditable compensation earned by a member over 36 or 12 months, consistent with the current calculation for part-time members, eliminating the need to determine subjectively whether a member is working part time when calculating benefits intended to provide income replacement. SB 1352 Page 4 13)Specifies that membership election forms must be received by CalSTRS within 30 days of the member's signature. 14)Adds conforming statutory references to exclude additional contributions made as part of the full-funding plan for CalSTRS by AB 1469 (Bonta), Chapter 47, Statutes of 2014, from excess contributions that are credited to the DBS Program. 15)Clarifies that when the member is employed by the state instead of a school employer the conversion of sick leave to service credit will be .004 years of service credit for each day of unused sick leave, which is consistent with the time base used to calculate service credit reported by the state. 16)Makes changes to statutory provisions administering the DBS Program to conform to the federal Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA). 17)Specifies that beginning on July 1, 2018, contributions to DBS and CB accounts will be credited on a specific day following the period for which the contributions are earned thereby ensuring that DBS and CB Benefit program benefits accrue in a definitely determinable and predictable manner. 18)Clarifies that the effective date of a disability related benefit be later than the last day of creditable compensation earned rather than the last day of the member's creditable service. This distinction conforms to the statutory intent of SB 1352 Page 5 requiring a member to exhaust the member's leave before initiating a disability benefit. 19)Clarifies that a member who applies for a service retirement from the DB Program pending a disability determination and who opts to take a lump sum distribution from the member's DBS account is not eligible for a disability benefit or disability annuity from the DBS. 20)Clarifies that, when determining whether the member has enough service credits to qualify for specified enhancement factors (e.g., one year final compensation, a career factor, and a longevity bonus), the credit for unused sick-leave to determine the member's eligibility also applies when the member "re-retires" after having previously received a disability allowance, a disability retirement benefit, or a disability-related service retirement. 21)Clarifies that in the event of the dissolution of marriage, option cancellations are required to be made on a properly executed form provided by CalSTRS. 22)Clarifies that, in addition to payments made by warrant and canceled by the State Controller, payments rejected via electronic funds transfer shall also not accrue interest when they revert to the fund. 23)Makes a technical change fixing an erroneous code reference and clarifies various provisions to recognize that the board SB 1352 Page 6 does not formerly "adopt" actuarial valuations but bases its decisions on the actuarial valuations provided by the actuary. 24)Clarifies that all CB participants employed to perform creditable service subject to coverage by the CB Benefit Program who are receiving an annuity may terminate the annuity to make contributions to the plan regardless of their age or the length of time they have received the annuity, as specified. EXISTING LAW: 1)Contains duplicative Education Code sections with identical section numbers for the definition of "accumulated Defined Benefit Supplemental account balance". The duplicate code sections occurred when two simultaneous bills were chaptered in 2000 and the first was erroneously not "chaptered out" by the second. 2)Provides benefit recipients whose monthly benefit has not kept pace with inflation a quarterly supplemental payment. Prior to January 1, 2014, Education Code section 24410 outlined the base date used for the purpose of determining postretirement allowance increases for members who convert to service retirement (SR) after the termination of their disability allowance (DA) without returning to employment, pursuant to Education Code section 24212 or 24213. Although these sections specifically require a comparison calculation for the benefit to ensure that the member will receive no more than the SB 1352 Page 7 terminated disability allowance, the law was silent regarding the base allowance amount used to determine supplemental purchasing power payments. In an effort to clarify the law, AB 1379 (PER&SS Committee), Chapter 558, Statutes of 2013, included language specifying that under all circumstances, the base allowance shall be the original DA allowance. However, during planning implementation, this change was found to have serious unintended consequences by providing increase supplemental payments that offset any decreases resulting when the retirement calculation is determined using a lower service credit-based SR calculation. The intent was and always has been to use the service credit-based SR calculation for the base allowance for those members whose SR amount is the lesser of the two calculations. 3)Contains in the current definition of "credited interest" surplus commas that change the meaning of the provision to be nonsensical. 4)Provides, generally, that final compensation is calculated using 36 or 12 months that are consecutive except that periods of service separated by "breaks in service" may be aggregated. Because teachers are often employed from September through June, the definition of "break in service" specifically excludes "months not recognized as part of the school term" if a member begins teaching at the beginning of the school term. As a result, if the first day of the school term is in September and a member does not earn creditable compensation in July or August, July and August will be included in the calculation of final compensation. Although CalSTRS has interpreted this requirement to provide that months not recognized as part of the school term could additionally include months during winter intersession or June for school terms ending in May, there is no separate definition of school term in current law, and the specific mechanics of the SB 1352 Page 8 calculation are similarly lacking. In addition, the Teachers' Retirement Board may determine a different final compensation for certain types of non-service-based benefits. For example, under CalSTRS disability benefits, a typical benefit is based on a percentage of a member's final compensation that is fixed in statute, regardless of service credit. To determine, final compensation for part-time service, the compensation earnable "shall be adjusted by the ratio that part-time service bears to full-time service." This calculation is intended to provide a benefit that adequately replaces the income a member was receiving prior to a disability or death. 5)Provides for several different ways employees can elect DB Program membership. However, none of the laws concerning election specify that the election form must be submitted to CalSTRS within any specific time frame. Other sections of law require that forms be received by the system within 30 days of the specified qualifying event, including the election of disability and death benefit coverage, conditions for service retirement allowance and pre-retirement option election changes. 6)States how service shall be credited to the DB; limits a member's creditable service to one credit per school year; and provides that contributions in excess of the amount required for one credit, except certain excluded excess contributions, shall be credited the DBS. 7)Grants service credit in the DB Program for a member's unused sick leave when the member retires for service. The Education Code prescribes the calculation of service credit for employees of California public schools. However, it does not address the calculation for DB members who are employed by a SB 1352 Page 9 state agency. 8)Requires, under USERRA, that qualified pension plans treat returning military service members as if they had not incurred a break in service. CalSTRS initially implemented USERRA's requirements with regards to benefits provided under the DB Program and the CB Benefit Program. However, no changes were made to codify USERRA's requirements as they relate to the DBS Program when it was established in 2001. 9)Specifies generally that contributions to the CB Benefit Program and the DBS Program be credited to a member's account upon receipt by the system. Both programs have been determined by the Internal Revenue Service to be "definitely determinable" because contributions are credited based on a specified percentage of earnings, and interest is credited at a pre-determined minimum interest rate. As a result, two members earning the exact same amount could accumulate different benefits (via interest credits) because although one employer could remit contributions in a timely manner, another employer could remit the required contributions late. 10)Provides that a disability allowance, a disability retirement benefit, or a service retirement benefit related to a disability becomes effective under specified conditions, including that the effective date of the benefit be later than the last day of the member's creditable service. 11)Authorizes a member who is awaiting the determination of an application for a disability allowance or disability retirement benefit to apply for a service retirement from the SB 1352 Page 10 DB, if eligible. Upon approval or denial of the pending disability application, the member's retirement allowance is adjusted appropriately. The member is not permitted to opt for a lump sum payment of the DB service retirement during the pendency of the disability application determination. However, a member may take a lump sum from the member's DBS account. 12)Provides to eligible members who receive a service retirement certain enhancement factors to use in calculating the member's retirement allowance, including the following: one year final compensation; a career factor; and a longevity bonus. In determining whether the member has enough service credits to qualify for the enhancement factors, existing law credits the member with two-tenths of service credit for each year of unused sick-leave. 13)Provides, generally, that retired and disabled members may cancel or change option benefit and beneficiary elections up to 30 days after the effective date of the member's initial benefit payment, and the law requires such changes to be made on a form provided by the system. However, the section of law governing cancellation of an option in the event of dissolution of marriage does not prescribe such a form which allows for inconsistent application of the law because CalSTRS must honor the member's request, regardless of the written format. 14)Requires CalSTRS to add interest if a payment has not been made because, after a good faith effort, the member or beneficiary cannot be located. Additionally, another provision of the Education Code clearly states that when a payment has been issued, but remains unclaimed, no interest SB 1352 Page 11 shall accrue. However, that section only applies when a warrant is cancelled by the State Controller's Office after the warrant is unclaimed for one year. As a result, the law is silent regarding the interest that may or may not accrue when a payment is returned to CalSTRS or the State Controller's Office within 12 months or when an electronic funds transfer is rejected. 15)Requires the board to acquire the services of an actuary to provide information, as specified, including an actuarial evaluation of the DB at least every six years and of the CB and DBS plans annually. 16)Provides that members of the CB plan (e.g., part-time employees who didn't qualify for the DB plan) who have separated from employment, attained normal retirement age, and have received an annuity from the CB plan for at least a year may terminate their annuity and begin making contributions and receiving employer contributions to the CB plan upon returning to employment performing creditable service and notifying CalSTRS, as specified. FISCAL EFFECT: According to the Senate Appropriations Committee, pursuant to Senate Rule 28.8, negligible state costs. COMMENTS: According to the sponsor, CalSTRS, this bill will help ensure continued effective and efficient plan administration for CalSTRS' internal and external customers. SB 1352 Page 12 REGISTERED SUPPORT / OPPOSITION: Support California State Teachers' Retirement System (Sponsor) Opposition None on file Analysis Prepared by:Karon Green / P.E.,R., & S.S. / (916) 319-3957