BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 400| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 445-6614 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ UNFINISHED BUSINESS Bill No: SB 400 Author: Ortiz (D), et al Amended: 9/7/99 Vote: 21 SENATE PUBLIC EMP. & RET. COMMITTEE : 4-0, 3/22/99 AYES: Ortiz, Baca, Karnette, Lewis NOT VOTING: Haynes SENATE APPROPRIATIONS COMMITTEE : 11-0, 4/19/99 AYES: Johnston, Alpert, Bowen, Burton, Karnette, Kelley, Leslie, McPherson, Mountjoy, Perata, Vasconcellos NOT VOTING: Escutia, Johnson SENATE FLOOR : 35-0, 4/29/99 (Consent) AYES: Alpert, Bowen, Brulte, Burton, Chesbro, Costa, Dunn, Figueroa, Hayden, Haynes, Hughes, Johannessen, Johnson, Johnston, Kelley, Knight, Lewis, McPherson, Monteith, Morrow, Mountjoy, Murray, O'Connell, Ortiz, Peace, Perata, Polanco, Poochigian, Rainey, Schiff, Sher, Solis, Speier, Vasconcellos, Wright NOT VOTING: Alarcon, Baca, Escutia, Karnette, Leslie ASSEMBLY FLOOR : 70-7, 9/10/99 - See last page for vote SUBJECT : Public Employees' Retirement System: benefits SOURCE : California Public Employees' Retirement System California State Employees' Association California Department of Forestry Retirees California School Employees' Association CONTINUED SB 400 Page 2 DIGEST : This bill establishes a new level of survivor benefits for state and school employee participants in the 1959 Survivor Benefit Program, effective January 1, 2000 until January 1, 2010, increasing the benefit level to more closely achieve comparability with Social Security, and makes various improvements in the benefits provided to state and school members of the Public Employee's Retirement. Assembly Amendments add provisions one through nine (see Analysis section for details). ANALYSIS : Existing PERS law contains the '59 Survivor Benefit which was designed to provide pre-retirement death benefits to PERS members not covered by Social Security. Employees who participate in the '59 Survivor Benefit program pay $2 per month for coverage. It is understood that the program was originally enacted to mimic Social Security. Over the years four distinct benefit levels have been enacted in the '59 Survivor Benefit. Generally, state and school employees are covered by the existing Level 3, which provides survivors $350 per month for a single recipient, $700 per month for two recipients, or $840 per month for three or more recipients. The '59 Survivor Benefits are fixed dollar amounts (not related to salary at the time of death), with no COLA (post-death Consumer Price Index increases). Social Security death benefits are calculated based on the individual's earnings, and a CPI-indexed COLA. According to PERS, the lack of a COLA is a chronic design flaw in the '59 Survivor Benefit. Since the program is intended to replace Social Security, PERS views the proposed fifth level as an appropriate solution to the inadequacy of the current benefit. Significant surpluses have built up in both the state and school '59 Survivor Benefit accounts that cannot be used for other purposes. This bill: SB 400 Page 3 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: A. Whose bargaining unit has agreed to this provision in a memorandum of understanding. B. To state manager, supervisors and confidential employees where the Department of Personnel Administration had authorized their inclusion. C. To positions exempt from civil service. Current and 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. 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 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: A. Whose bargaining unit has agreed to this provision in a memorandum of understanding. B. To state manager, supervisors and confidential SB 400 Page 4 employees where the Department of Personnel Administration had authorized their inclusion. C. 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: A. Whose bargaining unit has agreed to this provision in a memorandum of understanding. B. To state manager, supervisors and confidential employees where the Department of Personnel Administration had authorized their inclusion. C. To positions exempt from civil service. Former State 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: A. Whose bargaining unit has agreed to this provision SB 400 Page 5 in a memorandum of understanding. B. To state manager, supervisors and confidential employees where the Department of Personnel Administration had authorized their inclusion. C. 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. 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.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 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 SB 400 Page 6 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: 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). E. Repeals the benefit on January 1, 2010, unless a later enacted statute deletes or extends that date; and, F. 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. SB 400 Page 7 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. 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. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No According to the Assembly Third Reading analysis: 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 SB 400 Page 8 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. 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. alPERS, 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 SB 400 Page 9 projected state employer rates and costs with no changes, with the proposed changes in benefits and methods, and the difference. SUPPORT : (Unable to verity at time of writing) California Association of Highway Patrolmen (co-source) California Department of Forestry Firefighters (co-source) Retired Public Employees Association (co-source) San Bernardino County Sheriff (co-source) California Association of Professional Scientists (co-source) Association of California State Attorneys and Administrative Law Judges (co-source) Professional Engineers in California Government (co-source) California Public Employees' Retirement System (co-sponsor) California State Employees' Association (co-sponsor) California Department of Forestry Retirees (co-sponsor) California School Employees Association (co-sponsor) California Professional Firefighters American Federation of State, County & Municipal Employees California Federation of Teachers California Union of Safety Employees California Correctional Peace Officers Association Union of American Physicians and Dentists ARGUMENTS IN SUPPORT : Supporters 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 SB 400 Page 10 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. ASSEMBLY FLOOR : AYES: Alquist, Aroner, Ashburn, Bates, Battin, Bock, Briggs, Calderon, Campbell, Cardenas, Cardoza, Cedillo, Corbett, Correa, Cox, Cunneen, Davis, Dickerson, Ducheny, Dutra, Firebaugh, Florez, Frusetta, Gallegos, Granlund, Havice, Hertzberg, Honda, House, Jackson, Keeley, Knox, Kuehl, Leach, Lempert, Leonard, Longville, Lowenthal, Machado, Maddox, Maldonado, Margett, Mazzoni, Migden, Nakano, Olberg, Oller, Robert Pacheco, Rod Pacheco, Papan, Pescetti, Reyes, Romero, Runner, Scott, Shelley, Soto, Steinberg, Strom-Martin, Thomson, Torlakson, Vincent, Washington, Wayne, Wesson, Wiggins, Wildman, Wright, Zettel, Villaraigosa NOES: Aanestad, Ackerman, Baldwin, Brewer, Kaloogian, McClintock, Thompson NOT VOTING: Baugh, Floyd, Strickland TSM:kb 9/10/99 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****