BILL ANALYSIS
SB 400
Page 1
SENATE THIRD READING
SB 400 (Ortiz)
As Amended September 7, 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 2.5% at age 63
and above. This formula will supercede the present 1/50th at
age 60 formula state and school members for both past and
future service and the modified 1/50th at age 60 formula for
state members. The formula would be applicable to state
members employed by the state on or after January 1, 2000:
b) Whose bargaining unit has agreed to this provision in a
memorandum of understanding;
c) To state manager, supervisors and confidential employees
where the Department of Personnel Administration had
authorized their inclusion; and,
d) To positions exempt from civil service. Current and
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former employees who are PERS members and have retirement
credit with the legislative and judicial branch, the
university, the California State University and the schools
will be subject to the new formula regardless of their
current employer.
5)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
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. The formula would
be applicable to state patrol members employed by the state on
or after January 1, 2000:
f) Whose bargaining unit has agreed to this provision in a
memorandum of understanding;
g) To state manager, supervisors and confidential employees
where the Department of Personnel Administration had
authorized their inclusion; and,
h) To positions exempt from civil service. Former patrol
members not employed by the state on or after January 1,
2000 would remain under the present 2% @ 50 formula.
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
formula would 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. The formula
would be applicable to State Peace Officer/Firefighter members
employed by the state on or after January 1, 2000:
d) Whose bargaining unit has agreed to this provision in a
memorandum of understanding;
e) To state manager, supervisors and confidential employees
where the Department of Personnel Administration had
authorized their inclusion; and,
f) To positions exempt from civil service. Former State
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Peace Officer/Firefighter members not employed by the state
on or after January 1, 2000 would remain under the present
2.5% @ 55 formula.
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 2.5% at age 55.
Members could retire 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 and not be available
as a contract option for local contracting agencies. The
formula would be applicable to state safety members employed
by the state on or after January 1, 2000:
e) Whose bargaining unit has agreed to this provision in a
memorandum of understanding;
f) To state manager, supervisors and confidential employees
where the Department of Personnel Administration had
authorized their inclusion; and,
g) To positions exempt from civil service. Former state
safety members not employed by the state on or after
January 1, 2000 would remain under the present 2% @ 55
formula.
8)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.
9)Gives state miscellaneous and industrial members hired on or
after January 1, 2000, the option of participating in the
Second Tier Plan, rather than the 2% at 55 formula, by filing
an election within 180 days of employment.
7)Closes the CalPERS Modified First Tier Plan to state employees
hired on or after January 1, 2000, if the bargaining units
that are subject to this formula agree, by memorandum of
understanding, to be subject to the First Tier Plan with the
new 2% at 55 formula. Former Modified First Tier members not
employed by the state on or after January 1, 2000, would be
subject to the present 2% at 50 formula.
8)Allows current state employees in the Second Tier Plan to
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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.
9)Provides a 1% to 6% ad hoc retirement allowance increase,
effective January 1, 2000, for state and school retirees who
retired prior to 1998. 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 in 1997 would receive a 1% increase, 1995-96 retirees
would receive a 2% increase, 1990-94 retirees would receive a
3% increase, 1985-89 retirees would receive a 4% increase and
retirees who retired in 1975-84 would receive a 5% increase,
and retirees retiring in 1974 and prior would receive a 6%
increase.
10)Establishes a new "5th Level" of survivor benefits for state
and school employees participating in the 1959 Survivor
Benefit Program, as follows:
aa) 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;
bb) 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;
cc) Decreases the age at which a surviving spouse becomes
eligible for certain benefits from 62 to 60;
dd) 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);
ee) Repeals the benefit on January 1, 2010, unless a later
enacted statute deletes or extends that date; and,
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ff) Repeals the five level benefit established by SB 138
(O'Connell), Chapter 3, Statutes of 1999 which would have
only been available by memorandum of understanding and
which would have retained the eligibility of a surviving
spouse at age 62.
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.
12)The provisions of this bill applicable to state employees
(other than university, California State University,
legislative and judicial branch members) would not be
applicable to employees who are members of bargaining units
that have not agreed to these provisions in a memorandum of
understanding.
13)The provisions of this bill will not become applicable until
the Board of Administration of the California Public
Employees' Retirement System adopts a resolution to recognize
95% of the market value of assets for the June 30, 1998
valuation, and agrees to amortize the June 30, 1998, excess
assets over a twenty year period beginning July 1, 1999.
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
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 $7.092 billion, and for the schools
from $7.2 billion to $4.46 billion.
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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 3.58% of
payroll, or roughly $346 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 0.93% of payroll, or
only $129.2 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 1.07% of payroll, or $103
million, due to the initial impact of the accounting change, but
will increase significantly thereafter, to 4.65% of payroll in
2001-2002, or $465.6 million. The employer rate will level off
in subsequent years, eventually falling below 3% in 2008-2009,
but the employer contribution amount will remain in the $379
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. Overall, the benefit equity package is
the equivalent to about a 2% to 2% increase in normal costs.
If no changes in benefits are enacted, and current assumptions
hold, the employer rate will continue to decline, to below 2% of
payroll by the 2002-03 fiscal year. State contributions will
decline from the $1.2 billion paid in 1997-98 to $112 million in
2005-06, a decline of about 90% in less than a decade.
With the enactment of this bill, the state will not realize all
of these currently projected savings. The CalPERS Board of
Administration, however, has agreed to increase from 90 to 95%
the assets considered in its valuation of the plans, and shorten
the amortization of the excess assets to 20 years, to help
mitigate the impact of the benefit enhancements on State
employer contributions. The following table shows the projected
state employer rates and costs with no changes, with the
proposed changes in benefits and methods, and the difference.
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
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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.
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 making the
First Tier the default plan for new employees, this bill would
improve recruitment efforts and 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: 0003328