BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 400|
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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that the program was originally enacted to mimic Social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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