BILL ANALYSIS                                                                                                                                                                                                    



                                                             


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|SENATE RULES COMMITTEE            |                   SB 400|
|Office of Senate Floor Analyses   |                         |
|1020 N Street, Suite 524          |                         |
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                    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





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  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:







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 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  







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      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  







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      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  







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   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.







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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  







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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  







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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  







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  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

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