BILL ANALYSIS
AB 704
Page 1
Date of Hearing: May 6, 2009
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Kevin De Leon, Chair
AB 704 (Calderon) - As Amended: April 13, 2009
Policy Committee: P.E.R. &
S.S.Vote: 4-1
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill establishes the Deferred Retirement Option Program
(DROP) as a supplemental benefit program in the California
Public Employees Retirement System (CalPERS). The program would
be available for managerial employees in state bargaining units
5 (Highway Patrol), 6 (Corrections), 7 (Protective Services and
Public Safety), and 8 (Firefighters). The bill also:
1)Requires CalPERS to implement the program by July 1, 2010,
unless the Board determines, by resolution, that the
implementation cannot be completed in this timeframe. In such
a case, the Board must implement the program by January 1,
2011. The Board is also authorized to adopt any regulations
necessary to implement the program.
2)Requires CalPERS to complete an actuarial evaluation of the
program to determine cost neutrality by June 1, 2010 and every
two years for the life of the program.
3)Specifies that the DROP is only to be implemented if the
actuarial evaluation establishes that the program is
cost-neutral. The bill further specifies that the program
will be terminated if, at any future date, CalPERS determines
that it has ceased to be cost-neutral.
FISCAL EFFECT
1)CalPERS indicates that implementation of the program prior to
April 2011 would increase the project costs of its current IT
AB 704
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modernization project by as much as $7 million.
2)Costs for implementation following the conclusion of the
current modernization project would be in the range of
$500,000.
3)Uncertain net impact on state and local employers. These
entities would experience savings to the extent that they no
longer have to make retirement contributions on behalf of the
employee participating in the DROP program. However, this is
offset to some degree by higher wage costs the employer would
continue to pay to the long term employee versus a newly hired
replacement.
4)Probable cost to the CalPERS retirement fund. A recent
CalPERS actuarial cost analysis found that, if employees act
in their own best interest, it is highly unlikely that the
DROP program can be designed so that it is cost neutral to the
retirement fund. This partly reflects the fact that roughly
75% of peace officers already work beyond the maximum
retirement age. For many of these individuals, participation
in the DROP program would result in additional years of
retirement benefits from the fund (since under existing law
they would not be collecting benefits for the period in which
they are working). Over time, the DROP program would likely
result in increased state contributions to the CalPERS
retirement fund.
COMMENTS
1)Background . A DROP is a feature within a defined benefit plan
that permits a member's benefits to be split into two
components - one payable as a monthly annuity and the other
payable to the member as a lump sum. It is typically offered
to experienced employees that have reached the maximum
retirement age, as an incentive to keep them in the workforce.
Members entering the program select a retirement date between
12 and 60 months into the future, and agree to freeze accrual
of retirement benefits from the date they enter the program.
Upon retirement, these members would then receive both the
retirement benefit they were eligible for at the time of
AB 704
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election, and an additional lump sum consisting of their
retirement allowance for the period of time they were
participating in the DROP, and interest accrued at a rate of
5% per year, minus any administration costs retained by
CalPERS.
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).
2)Rationale . The DROP is intended to encourage experienced
managers in the public safety fields to work beyond the point
they attain their maximum retirement benefit, which is limited
by law to 90% of their annual salary. Supporters assert that
the bill will benefit both the state and employees by
encouraging qualified managers to remain in state service.
During the time the employee is in DROP status, the state of
California employer would benefit from continued services of
an experienced employee and would be saving money since it is
no longer contributing to the employee's retirement. At the
same time, the employee is accumulating benefits and taking
home more money since he/she is no longer contributing to
their retirement fund.
3)Public Policy Conflict? CalPERS notes in its analysis that the
reason current law provides safety employees richer retirement
benefit formulas but limits their maximum retirement benefits
to a specified percentage of final compensation is to ensure
that public safety employees do not continue employment beyond
the point they are able to meet the physical demands of their
jobs. Offering a DROP to encourage older, experienced safety
employees to remain in safety employment appears to conflict
with the policy of providing incentives to leave safety
employment at earlier ages.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081