BILL ANALYSIS SB 65 PROPOSED CONFERENCE REPORT NO. 65 August 25, 1994 SB 65 (McCorquodale) - As Amended: July 15, 1993 SENATE VOTE 38-0 ( May 28, 1993 ) ASSEMBLY VOTE 76-0 ( August 19, 1993 ) Original Committee Reference: P.E.R. & S.S. DIGEST Urgency statute. 2/3 vote required. Existing law, under the Judges Retirement Law, provides that the šLegislature finds and declares that on and after January 1, 2002, the šJudges Retirement System (JRS) shall be fully funded and actuarially sound. As passed by the Senate, this bill repealed the 2002 deadline. The Assembly amendments state legislative intent that the state's šactuarially determined employer contribution rate for second-tier benefits šin the 1993-94 fiscal year not exceed 18%. The conference committee amendments: 1) Provide a new lower tier of benefits for judges who are first elected or appointed to judicial office on or after November 9, 1994. This new tier of benefits would be known as the Judges Retirement System II (JRS II) 2) Repeal the statutory requirement that the actuarial unfunded liability š of existing tier of benefits, known as the Judges Retirement System (JRS) be eliminated by the year 2002. 3) Provide a member contribution of 8%, and an employer contribution of š18.8%. The employer contribution would be reviewed on an annual basis to determine whether or not the contribution is maintaining the actuarial soundness of the fund. The Governor's budget submission would reflect any changes needed in the employer contribution rate, while the Legislature would have the ultimate authority to change the employee rate (when necessary). The new retirement plan for future judges will be fully funded through these contributions from the judge, the State, and investment earnings of the proposed JRS II Fund. 4) Provide a combination of two basic types of retirement allowances: a) "defined benefit" plans - which provide a lifetime monthly retirement allowance for the retiree and his/her spousal survivor based on a certain percentage of the highest salary earned by the employee before retirement. This percentage is - continued - SB 65 Page 1 SB 65 determined by three basic factors: years of service in the covered position, age at retirement, and final salary. The employer's obligation to pay is absolute, regardless of šwhether the employer's and employees' contributions, into a šfund are adequate. b) "defined contribution" plan - which provide a cash payment (either single lump-sum, or a set number of equal annual payments, or the purchase of an annuity at retirement) based on the accumulated contributions of the employee and the employer. There is no lifetime benefit provided to retiree or his/her survivor under a "defined contribution" plan, and the employer's liability for the retired employee ends immediately upon the final disbursement of the accumulated contributions and interest. This type of plan is common in the private sector. 5) Provide "defined benefit" of 3.75% of the highest 12-month average š salary per year of service, up to 75% for judges reaching age 65 with at least 20 years of service. Minimum vesting for a "defined benefit" would require 20 years of service at age 65, or age 70, as little as five years of service. 6) Provide that judges who would leave the bench before age 65, or with š less than 20 years of service will receive only the "defined contribution" account balance paid out in a lump sum when the judge leaves office. Provide that when a "defined contribution" option is made, the retiring judge receives only a payment representing 10% of the employer's 18.8% The remaining 8.8% of the employer contribution reverts to the JRS II Fund. A judge could elect to receive the "defined contribution" amount in schedule of payments over time elected by the judge. 7) Provide that the benefit of a judge who does not retire prior to the š commencement of the term of office after the term during which he or she attains 70 years of years of age shall not exceed 50% of the judges'; final compensation, AND the employer no longer makes contributions to the "defined contribution" plan. This provision shall be made applicable only to the extent that it is not in violation of federal law. 8) Provide that retired judges would have an annual COLA of up to 3% per š year based on changes of the United States city average of the "Consumer Price Index for all Urban Consumers" (CPI). 9) Provide that the disability retirement plan would be at the rate of 65% š of the judge's average salary as a judge during the 12 months immediately preceding his or her retirement from judicial office. However: a) Judges must have at least 5 years of service to qualify for - continued - SB 65 Page 2 SB 65 JRS II disability retirement. They are immediately eligible for disability upon assuming the bench if "..the disability is a result of injury or disease arising out of and in the course of judicial service" (proposed Government Code Section 75560), b) the disability benefits of judges who assume the bench at age 48 or older are limited to the amount their service retirement would have yielded had they served to age 65, unless "...the šdisability is a result of injury arising predominately out of šand in the course of judicial service." (proposed Government šCode Section 75560.4 (b) 10) Provide that a surviving spouse of a judge who dies before becoming eligible to retire shall receive the greater of either: a) the return of the judge's accumulated contributions plus interest, or b) three times the judge's annual salary at the time of his or her death (using the present salary of a Superior Court Judge of $104,262, this would equal $312,785). This amount must be paid in equal payments over 36 months. If there is no surviving spouse, the greater of those amounts shall be paid što the surviving spouse, the greater of those amounts shall be paid to the šsurviving children of the judge; or if none, to the judge's designated šbeneficiary, or if none, to the judge's estate. FISCAL EFFECT The new retirement plan for future judges will be funded through šcontributions from the judge (8%), the state (18.8%), investment earnings of the Judges' šRetirement System II Fund, and a portion of civil filing fees. The šrecommended plan is significantly less costly to the state than the current šJRS. The state's employer contribution is far less than the 32 percent špaid in the current JRS. The "Judges' Retirement II" retirement plan šappears to be an actuarially sound system, provided it is funded by šemployer contributions as recommended in the bill. The Public Employees Retirement System (PERS) cannot make any šrecommendations on the actuarial soundness of this new retirement system šbased on the fact that an independent actuarial contract is not currently šin place at PERS to peform this function. According to PERS, administrative costs cannot be determined at this time. šStaff have identified that since the JRS II retirement plan requires the šestablishment of a new fund, an additional staff position is necessary to šadminister its' function. The current data processing functions would have to be changed to šincorporate the new retirement system. In addition, membership booklets š - continued - SB 65 Page 3 SB 65 and brochures would have to be developed for this new category of JRS šmembers. COMMENTS The Community Property provisions of the proposed JRS II are generally šsimilar to those of the existing JRS. Modifications have been made only to šadjust for the "defined contribution" options proposed to be made available šin JRS II. The "reciprocal" salary provisions of the existing JRS (where the final šsalary of a judge can be used to calculate the benefit which is due as a šresult of PERS-covered employment which occurred before the judge assumed šthe bench) are not included in JRS II. Existing JRS law: Provides a service retirement of 75% of the salary of the judge currently šsitting on the bench from which the retired judge left at retirement. The šexisting JRS provides the 75% benefit as early as age 60 with 20 years of šservice, or 65% with less than 20 years of service. A judge may leave the šbench before reaching one of the statutory combinations of age and years of šservice and earn a retirement allowance prorated on the basis of his or her šyears of service as a judge, payable when the judge reaches retirement age. If a judge works past the term of office when he or she reaches age 70, the šretirement allowance is reduced to 50% of salary with no survivor benefit šcoverage unless a further reduction in the subsequent retirement allowance šis elected. Background: Actuarially unsound from its inception, it was not until the early 1960s šthat the JRS required supplemental appropriation from the General Fund. šThe State is obligated to to make up funding shortfalls because contractual šduties and vested rights are created when judges enter the retirement šsystem. Many previous efforts have been initiated to place the JRS on a sound šfinancial basis. As early as 1966, the Legislative Analyst made šsuggestions that would have made the JRS actuarially sound. The šrecommendations were not implemented. Today, the JRS has unfunded pension obligations estimated at $1.6 billion. šThe current fiscal year's budget includes a supplemental appropriation of š$46 million from the General Fund, used solely to finance the majority of šthe roughly $74 million in pension and survivor benefits due during fiscal šyear. Two years earlier, the supplement was $28 million; the first such š"stopgap" appropriation was $300,000 in 1967. In 1992, the Legislature passed SB 1563 (McCorquodale), a bill providing šfor a less expensive, second-tier retirement system for new judges. šFollowing discussions with California Judges Association (CJA) and the šJudicial Council, Governor Wilson vetoed SB 1563 in 1992. - continued - SB 65 Page 4 SB 65 The Judicial Council Select Committee on Judicial Retirement was appointed šby Chief Justice Malcolm Lucas in late December 1992 and convened in šJanuary 1993 to conduct a through re-evaluation of the Judicial Retirement šSystem. This bill represents policy recommendation of the select committee. FN 012675 - continued - SB 65 Page 5