BILL ANALYSIS
SB 400
Page 1
Date of Hearing: August 18, 1999
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Carole Migden, Chairwoman
SB 400 (Ortiz) - As Amended: July 15, 1999
Policy Committee:
P.E.R.&S.S.Vote:7-0
Urgency: No State Mandated Local
Program:NoReimbursable:
SUMMARY :
This bill incorporates the Benefit Equity Package sponsored by
the California Public Employees' Retirement System (CalPERS),
which makes various improvements to the benefits provided state
and school members of the system. Most significantly, the bill:
1)Provides a new retirement formula for state miscellaneous,
university, state industrial and school members who retire on
or after January 1, 2000. The new formula would have a
minimum retirement age of 50 and provide a retirement benefit
factor of 2% at age 55 increasing to 2.7% at age 65 and above.
This formula will supercede the present 2% at age 60 formula
for state and school members for both past and future service.
2)Provides a new retirement formula for state patrol members who
retire on or after January 1, 2000. The new formula would
provide a retirement benefit factor of 3% at age 50. This
formula would supercede the present 2% at age 50 formula for
both past and future service.
3)Provides a new retirement formula for State Peace
Officer/Firefighter members who retire on or after January 1,
2000. The new formula would provide a retirement benefit
factor of 3% at and after age 55 and would allow members to
retire, on a discounted basis, as early as age 50. This would
supercede the present 2.5% at both past and future service.
4)Provides a new retirement formula for state safety members who
retire on or after January 1, 2000. The new formula would
provide a retirement benefit factor of 2% at age 55,
increasing to 2.35% at and above age 56. Members could retire
SB 400
Page 2
on a discounted basis as early as age 50. This formula would
supercede the present 2% at age 55 formula for both past and
future service.
5)Changes the method of calculating the average monthly
compensation used in computing retirement allowances for
school members who retire on or after January 1, 2000 from an
average of 36 consecutive months to 12 consecutive months.
6)Closes the CalPERS Second Tier Plan and the Modified First
Tier Plan to state employees hired on or after January 1,
2000.
7)Allows current state employees in the Second Tier Plan to
elect to be subject to the First Tier Plan with the new
retirement formula. Also allows Second Tier members who elect
to be subject to First Tier the option of upgrading former
Second Tier service to First Tier service by paying the
required contributions and interest.
8)Provides that current members of the Modified First Tier Plan
would automatically become members of First Tier unless they
make a written request to remain subject to Modified First
Tier.
9)Provides a 2% to 5% ad hoc retirement allowance increase,
effective January 1, 2000, for state and school retirees who
retired prior to December 31, 1999.
FISCAL EFFECT :
CalPERS intends to fund the enhanced benefits provided by this
bill through (1) assets the system has generated over the past
several years, due to the superior performance of the stock
market and (2) an accounting change that will value the system's
assets at 95% of market value, rather than 90%, as is current
practice. CalPERS indicates that the benefit package will
reduce the actuarial surplus for the state from $10.4 billion to
$4.985 billion, and for the schools from $7.2 billion to $4.46
billion.
Reducing the actuarial surplus of the system will, however,
increase the state employer contribution, which is subsidized by
interest earnings. The state employer contribution for 2000-01,
under current law, is scheduled to be 3.08% of payroll, or
SB 400
Page 3
roughly $300 million. Due to the superior return on system
assets in recent years, however, the state contribution is
expected to fall by 2010-11 to about 0.22% of payroll, or only
$31 million, in the absence of the benefit package proposed by
this bill.
If this benefit package is enacted, the state contribution will
fall initially in 2000-01, to 0.81% of payroll, or $78 million,
due to the initial impact of the accounting change, but will
increase significantly thereafter, to 6.79% of payroll in
2001-02, or $679 million. The employer rate will level off in
subsequent years, eventually falling below 5% in 2009-10, but
the employer contribution amount will remain in the $650 million
range.
The Table below displays the state employer costs of the bill
(as compared to current law) for years 2000-01 through
2010-11(all funds), assuming an annual rate of return on assets
equal to 8.25%:
Fiscal Year State Employer Rate
Increase State Costs ($ millions)
2000-01 -2.27% -$219.8
2001-02 4.18% $417.9
2002-03 4.52% $469.3
2003-04 4.64% $500.1
2004-05 4.71% $526.8
2005-06 4.74% $550.3
2006-07 4.75% $571.8
2007-08 4.73% $591.9
2008-09 4.72% $611.2
2009-10 4.69% $629.7
2010-11 4.65% $648.0
COMMENTS :
Purpose. CalPERS maintains that the basic retirement formula
for most state employees was last improved 30 years ago. The
excess earnings generated by returns on the system have been
devoted entirely to reducing the state employer contribution
rate, even though interest income is earned on both employer and
employee contributions. As a result, the state employer rate
has fallen dramatically over the past 20 years, and is scheduled
to fall further, while the employee rate has remained basically
SB 400
Page 4
the same. For these reasons, CalPERS believes that now is the
time to enact a substantial benefit improvement package.
Analysis Prepared by : Stephen Shea / APPR. / (916) 319-2081