BILL ANALYSIS
SB 400
Page 1
SENATE THIRD READING
SB 400 (Ortiz)
As Amended July 15, 1999
Majority vote
SENATE VOTE :35-0
PUBLIC EMPLOYEES 7-0 APPROPRIATIONS 15-6
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|Ayes:|Correa, Briggs, Dutra, |Ayes:|Migden, Cedillo, Davis, |
| |Firebaugh, Honda, Knox, | |Hertzberg, Kuehl, |
| |Pescetti | |Maldonado, Papan, Romero, |
| | | |Keeley, Steinberg, |
| | | |Thomson, Wesson, Wiggins, |
| | | |Wright, Aroner |
| | | | |
|-----+--------------------------+-----+--------------------------|
| | |Nays:|Brewer, Ackerman, |
| | | |Ashburn, Campbell, |
| | | |Runner, Zettel |
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SUMMARY : Makes various improvements in the benefits provided to
state and school members of the Public Employees' Retirement
System (CalPERS). Specifically, this 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 would 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 1/50th at
age 60 formula and the modified 1/50th 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 and would
not be available as a contract option for local contracting
agencies. 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
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retire, on a discounted basis, as early as age 50. This
formula would not be available as a contract option for local
contracting agencies and would supercede the present 2.5% at
age 55 formula for 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
on a discounted basis as early as age 50. This formula would
not be available as a contract option for local contracting
agencies and 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. The CalPERS Board would
have authority to establish regulations to implement this
section without being subject to review by the Office of
Administrative Law.
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. This increase would be in
addition to the annual cost-of-living-allowance and
supplemental payments from the Purchasing Power Protection
Act. Retirees who retired from 1996 to present would receive
a 2% increase, 1995 retirees would receive a 3% increase, 1994
retirees would receive a 4% increase, 1993 retirees would
receive a 4.5% increase and retirees who retired in 1992 or
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before would receive a 5% increase.
10)Establishes a new "5th Level" of survivor benefits for state
and school employees participating in the 1959 Survivor
Benefit Program, as follows:
a) Creates a new "5th Level" 1959 Survivor Benefit and
requires all state and school members not participating in
Social Security to be covered by this program;
b) Specifies that under this new level, survivors of
deceased members would receive $750 per month for a single
recipient, $1,500 per month for two recipients and $1,800
per month for three or more recipients;
c) Decreases the age at which a surviving spouse becomes
eligible for certain benefits from 62 to 60;
d) Requires the members, and the employer if necessary, to
each pay $2 per month for the increased benefit (should the
needed total contribution ever exceed $4 per month, the
employee and the employer would evenly share the cost);
and,
e) Repeals the benefit on January 1, 2010, unless a later
enacted statute deletes or extends that date.
11)Provides that on January 1, 2000, the Sergeants-at-Arms of
the Senate and Assembly who have been designated as peace
officers, would be reclassified as state peace
officer/firefighter members of CalPERS rather than
miscellaneous members.
EXISTING LAW contains the 1959 Survivor Benefit that was
designed to provide pre-retirement death benefits to CalPERS
members not covered by Social Security, specifically the federal
Old Age and Survivor Insurance (OASI) program. Employees who
participate in the 1959 Survivor Benefit program pay $2 per
month for coverage. Over the years four distinct benefit levels
have been developed within the 1959 Survivor Benefit program.
1959 Survivor Benefits are fixed dollar amounts without
pre-death indexing or post death Consumer Price Index increases.
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
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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
2000-2001, under current law, is scheduled to be 3.08% of
payroll, or roughly $300 million. Due to the superior return on
system assets in recent years, however, the state contribution
is expected to fall by 2010-2011 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 2000-2001, 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
2001-2002, or $679 million. The employer rate will level off in
subsequent years, eventually falling below 5% in 2009-2010, but
the employer contribution amount will remain in the $650 million
range. CalPERS, however, believes they will be able to mitigate
this cost increase through continued excess returns of the
CalPERS fund. They anticipate that the state's contribution to
CalPERS will remain below the 1998-99 fiscal year for at least
the next decade.
COMMENTS : This bill is sponsored by CalPERS to resolve
inequities between various classes of membership within CalPERS.
According to CalPERS, employer retirement costs have been
declining over the last 10 years as the result of significant
investment returns and changes in actuarial assumptions. The
members and retirees of CalPERS have not benefited from these
returns.
Supporters further argue that:
1)The new retirement formulas provided by this bill mark the
first significant improvement in retirement benefits for most
state and school members' in approximately 30 years.
2)The increase in liability for these new benefits can be funded
by the excess retirement assets that have been generated
through investment income and changes in actuarial assumptions
resulting in no immediate increase in costs to the employer.
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3)Tier Two is widely known as an inferior, inadequate retirement
plan that contributes to the state's inability to attract
talented employees in a tight labor market. By closing Tier
Two to new employees, this bill would improve recruitment
efforts and increasing benefits after age 63 should increase
retention of state and school workers.
4)Many local government law enforcement and public safety
employees have more generous pensions that recognize the
unique hazardous duties and the more limited tenure of these
strenuous stressful positions. The benefit increases provided
by this bill will help attract and retain high caliber state
safety employees.
5)The new level of 1959 Survivor Benefit would reestablish
comparability to Social Security survivor benefits.
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957
FN: 0002942