BILL ANALYSIS
AB 704
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Date of Hearing: April 22, 2009
ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL
SECURITY
Ed Hernandez, Chair
AB 704 (Charles Calderon) - As Amended: April 13, 2009
SUBJECT : Public employees' retirement: Deferred Retirement
Option Program.
SUMMARY : Establishes the Deferred Retirement Option Program
(DROP) as a supplemental benefit program in the California
Public Employees' Retirement System (CalPERS) for exempted and
excluded employees in state bargaining units (BUs) 5 (Highway
Patrol), 6 (Corrections), 7 (Protective Services and Public
Safety), and 8 (Firefighters). Specifically, this bill :
1)Establishes the DROP as a voluntary program and makes it
available to all excluded and exempt employees in BUs 5, 6, 7,
and 8. These members become eligible to participate in the
program at any time that they meet the minimum service
requirement for a service retirement and attain age 50.
2)Requires CalPERS to implement the program by July 1, 2010,
unless the CalPERS Board of Administration determines, by
resolution, that the implementation cannot be completed in
this timeframe. In such a case, CalPERS must implement the
program by January 1, 2011.
3)Authorizes CalPERS to adopt any regulations necessary to
implement the program.
4)Requires the DROP to either result in cost savings or to be
cost neutral and requires CalPERS to prepare a cost analysis
of the program, as specified.
5)Requires the CalPERS actuary to conduct valuations of the
program every two years, as specified, and authorizes the
Department of Personnel Administration to terminate the
program if it is determined not to be cost neutral.
6)Specifies the terms of termination of the program are subject
to the meet and confer process.
7)Requires members electing to participate in the DROP to
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voluntarily:
a) Make the election prior to retirement on a form
prescribed and retained by CalPERS;
b) Designate the deferred retirement calculation date which
cannot be more than 60 months or less than 12 months after
the member's actual retirement date.
c) Participate in the annual leave program and be limited
to a maximum of 12 hours of annual leave credit per month.
8)Prohibits employees participating in the DROP from paying
contributions or receiving service credit in CalPERS and
provides that the state, as employer, is prohibited from
making contributions to CalPERS for DROP participants.
9)Specifies that the election to participate in the DROP is
irrevocable but allows participants to extend their
participation in the program as long as it does not exceed the
maximum 60 month threshold.
10)Prohibit members participating in the DROP from participating
in reduced worktime for partial service retirement.
11)Specifies how benefits will be calculated for members
participating in the DROP.
12)Specifies that a member may receive his or her DROP account
balance in a single lump sum payment or a lump-sum rollover,
as specified, and allows a specified beneficiary to receive
any remaining balance in the DROP account upon the death of
the member.
EXISTING LAW does not provide for a DROP in CalPERS. SB 274
(Soto), Chapter 897, Statutes of 2003, established the DROP as
an optional benefit program for safety members of counties
operating retirement systems under the County Employees'
Retirement Law of 1937 ('37 Act).
FISCAL EFFECT : Unknown.
COMMENTS : A DROP is a feature within a defined benefit plan
that splits the member's benefit into two pieces one piece
payable as a monthly annuity and the other piece payable to the
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member as a lump sum.
A DROP can be designed as prospective (Forward DROP) or
retroactive (Back DROP). Under a Forward DROP, a member
eligible for retirement elects to begin the DROP period. The
member continues to work for the employer and receive his or her
salary, and usually stops paying member contributions to the
retirement plan. The member's retirement benefit is calculated
based on the member's age, years of service, and compensation at
the time the member entered the DROP period, but no retirement
benefits are paid until the member terminates employment.
Instead, the monthly retirement benefit payments accumulate
during the DROP period, usually with interest, in the DROP
account. When the member terminates employment, the balance of
the DROP account is paid to the member as a lump sum and payment
of the monthly retirement benefit as calculated at the beginning
of the DROP period commences.
Under a Back DROP, a member eligible for retirement terminates
employment, but elects to have the retirement benefit calculated
as though he or she retired earlier. The period from that
earlier (retroactive) retirement date to the actual date of
termination of employment is considered the DROP period. The
member's retirement allowance is calculated based on the
member's age, years of service, and compensation at the
beginning of the DROP period. The retirement benefits that
would have been payable to the member during the DROP period are
paid to the member, usually with interest, as a lump sum and the
member's monthly retirement benefit commences.
Additionally, under existing law, safety retirement benefits in
CalPERS are capped at 90% of an individual's final compensation.
Beyond this point, no additional retirement benefits are
accrued, yet the member still has to continue contributing to
CalPERS. This creates a disincentive to continue working,
leading to the retirement of experienced employees.
PRIOR LEGISLATION:
1)AB 991 (Calderon) of 2008, would have established a DROP as a
supplemental benefit program in CalPERS for exempted and
excluded employees in BUs 5, 6, 7, and 8. This bill died in
the Assembly Appropriations Committee.
2)SB 1409 (Soto) of 2002, would have enacted a DROP for local
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safety members whose employers contract for the option. This
bill was vetoed by the Governor due to cost concerns.
3)AB 293 (Shelley) of 2001, would have enacted a DROP for
members in BUs 5, 6, and 8. This bill was vetoed by the
Governor because of concerns that the details specified in the
bill should be the subject of collective bargaining where, if
agreed to, they could be included in a Memorandum of
Understanding and ratified by the Legislature.
4)SB 193 (Soto) of 2001, would have enacted a DROP for local
safety members whose employers contracted with CalPERS for the
option. This bill was vetoed by the Governor due to cost
concerns but in his veto message the Governor stated, in part,
"I would be open to considering a truly cost neutral program
for local government."
5)AB 2030 (Correa) of 2000, would have established a DROP for
school members and local contracting agency members whose
employer contracts with CalPERS for the DROP. This bill died
in the Senate Appropriations Committee.
6)SB 1312 (Ortiz) of 2000, would have enacted a DROP for state
members subject to collective bargaining and for local members
whose employers contract with CalPERS for this option. This
bill was vetoed by the Governor. In his veto message, the
Governor stated, in part, "This bill would result in increased
retirement costs to the State and school employers, and for
contracting local agency employers opting for the DROP. This
bill is overly broad. These benefits, if at all, should
accrue only to Safety personnel."
REGISTERED SUPPORT / OPPOSITION :
Support
California Correctional Supervisors Organization
California Statewide Law Enforcement Association
Opposition
None on file
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957
AB 704
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