BILL ANALYSIS
SB 1425
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Date of Hearing: June 23, 2010
ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL
SECURITY
Alberto Torrico, Chair
SB 1425 (Simitian) - As Amended: May 4, 2010
SENATE VOTE : 34-0
SUBJECT : Public retirement: final compensation: computation:
retirees.
SUMMARY : Establishes minimum standards and requirements for
all public retirement systems in California with respect to
final compensation, ongoing audits with penalties for
noncompliance, and prohibitions against a retiree from
immediately returning to employment with the public employer on
a part-time or contract basis. Specifically, this bill :
1)Makes various findings and declarations regarding the
manipulation of retirement benefits, including pension
spiking, and the duties of the retirement systems to employ
sound and equitable principles of oversight and the treatment
of compensation.
2)Requires each retirement system to establish accountability
provisions for participating employers that include an ongoing
audit process and penalty provisions for noncompliance.
3)Authorizes a retirement system to not include in retirement
calculations any compensation they determine was paid for the
principal purpose of enhancing a member's retirement benefit.
4)Limits cash conversions of accrued employee benefits, as
specified, and prohibits final settlement pay from being
included in retirement calculations.
5)Prohibits a retiree from returning to work as a retired
annuitant or as a contract employee for a period of 180 days
after retirement. This requirement will apply to anyone
retiring on and after January 1, 2011.
6)Limits the compensation used in retirement calculations for
members who are not in a group or class to the average
increase in compensation received during the final
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compensation period and the proceeding two years by employees
in the same or related group as the member.
7)Makes the specific statutory changes needed to bring the
provisions of the Teachers' Retirement Law (TRL) and the
Public Employees' Retirement Law (PERL) into compliance with
the new requirements imposed on all public retirement systems
by the bill.
8)Clarifies and defines in the TRL and the PERL which forms of
compensation may be included in an employee's final
compensation for the purpose of determining a retirement
allowance, and requires that no compensation determined to
have been paid expressly to enhance a member's retirement
allowance may be included.
9)Requires that increases to compensation paid during the final
compensation period must be consistent with publicly published
pay scales and the increases paid to other employees in the
same or similar working groups or classes, and prohibits
classes of one individual only.
10)Allows CalPERS and CalSTRS to assess fees on employers who
fail to accurately provide required information, including the
costs of auditing, adjusting, or correcting inaccurate
reporting, and prohibits an employer from passing those costs
on to employees.
11)Further clarifies in the TRL which forms of compensation for
CalSTRS members that may be used to determine final
compensation for a defined retirement benefit and which forms
of compensation must be contributed to the Defined Benefit
Supplement Program.
12)Requires that any CalPERS member who retires on or after
January 1, 2011, may not return to public employment as a
part-time worker, a private contractor, or employee of a third
party contractor for 180 days following the date of
retirement. Any employee who works in violation of this
provision will be required to cease employment and wait
another 180 days before returning to work. In addition,
either the employer or employee will be liable for related
administrative costs of enforcement, depending on whether the
violation was due to employee or employer error.
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13)Requires that any CalSTRS member who retires on or after
January 1, 2011, may not earn any compensation as a retired
part-time worker, a private contractor, or employee of a third
party contractor for 180 days following the date of
retirement. If the retiree does earn compensation in
violation of this requirement, his or her retirement allowance
will be reduced by the amount of compensation earned in the
prohibited period.
14)Specifies that all other provisions of the bill become
operative for all active and future members of the retirement
systems beginning July 1, 2011.
15)Specifies that this bill will not become operative unless AB
1987 (Ma) of this year is also enacted.
EXISTING LAW :
1)Authorizes over 40 public retirement systems for the state's
public employees, including the California Public Employees'
Retirement System (CalPERS); the California State Teachers'
Retirement System (CalSTRS); the 20 counties operating
retirement systems under the County Employees' Retirement Law
of 1937 ('37 Act); and independent public retirement systems,
mostly for cities and special districts. These systems
provide defined benefit retirement allowances based on
employees' years of service, age at retirement, and final
compensation (highest paid 12 or 36 months of employment).
2)Allows public employers, through laws, rules, local
ordinances, and collective bargaining agreements, to pay
differentials, bonuses, overtime, separation pay, holiday pay,
and other forms of compensation in addition to base pay and
require that participating employers accurately and timely
report to the retirement boards the amount of compensation
paid to employees, including special forms of pay, changes in
employment status, leaves, and other factors that impact
compensation.
3)Allows a retired public employee or teacher to return to
public employment with an employer covered by the retirement
system he or she retired from on a part-time basis, as
specified. An employee who exceeds the limited time base or
earnings, as specified, may be subject to reinstatement into
the retirement system and reduction or cessation of his or her
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retirement allowance or earnings.
4)Establishes in CalSTRS both a traditional defined benefit
program and a supplemental program called the Defined Benefit
Supplement Program, into which contributions are made on forms
of compensation that may not be included in final compensation
used to calculate a defined benefit allowance. These
contributions accumulate and are paid to members at retirement
in a manner similar to a tax-deferred savings account.
FISCAL EFFECT : According to the Senate Appropriations
Committee, "Although the overall intent of SB 1425 is to prevent
compensation increases for the sole purpose of enhancing
retirement benefits which will ultimately result in a savings to
the various public pension systems, there will be upfront costs
associated with reprogramming computer systems to calculate the
new definitions of creditable compensation. CalSTRS anticipates
first year costs of approximately $3.4 million in Information
Technology costs necessitated by changes in the definition of
'creditable compensation' which will result in fewer types of
pay being credited to the Defined Benefit Program. These
changes, however, are expected to save between $15 million and
$25 million each year in pension costs. Under the current TRL,
most compensation is creditable and, therefore, included in
final compensation. Under the provisions of SB 1425, certain
types of compensation will not be included in final compensation
such as 1) compensation for service credit in excess of one
year, and 2) payments made for a limited number of times.
"CalPERS indicates there will be some unknown increases in
workload associated with processing employer requests to review
special compensation or other negotiated MOU language, and
programming costs which will be absorbed in the regularly
scheduled coding updates. Additionally, any other changes
required of CalPERS can be accommodated in the new integrated
information technology system that is scheduled to be activated
next year.
COMMENTS : According to the author, "Recent news reports have
highlighted the actions by a small percentage of public
employees who have intentionally, but legally, manipulated their
final compensation for purposes of gaining a larger pension
benefit. This bill institutes uniform laws for all public
retirement systems that will help to curtail an individual from
taking extraordinary steps to enhance their retirement benefits
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(i.e., 'spiking').
"In addition, the bill requires that employees have a bona fide
separation in service of six months before taking another
position in public service to prevent 'double dipping.' The
provision will eliminate 'revolving door' practices in which
some public employees retire on a Friday and return to the same
job on Monday as a retired worker.
"Senate Bill 1425 is designed to correct abuses that impose an
undue burden on both the taxpayers and employees in the system,
as well as erode public support for reasonable public employee
pensions."
The Judicial Council has expressed concerns that the180 day
return to work prohibition will create a significant burden on
court operations by prohibiting retired judicial officers from
service for a period of at least six months after their
retirement date. According to the Judicial Council, when a
judicial vacancy occurs due to the retirement of a judge or the
conversion of a subordinate judicial officer position, the court
has no ability to control the length of time it takes to fill
that position since the authority rests solely with the
Governor. To bridge the gap of time between the vacancy and the
new appointment, many courts rely on the retired judge or
subordinate judicial officer.
Numerous organizations, including the California State
Association of Counties, the League of California Cities, the
California School Boards Association, the California Association
of School Business Officials, and the Small School Districts
Association, have also raised objections to requiring a 180 day
break in service between the date a person retires and the date
he or she may return to work as a paid retiree.
AB 1987 (Ma) is a companion measure to this bill and is intended
to strengthen anti-spiking provisions in the '37 Act.
REGISTERED SUPPORT / OPPOSITION :
Support
Bill Lockyer, California State Treasurer
California Federation of Teachers
California Public Employees' Retirement System
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California School Boards Association (if amended)
California State Teachers Retirement System (if amended)
City of Fountain Valley (if amended)
Glendale City Employees Association
League of California Cities (if amended)
Los Angeles County Employees Retirement Association
Organization of SMUD Employees
Retired Public Employees Association
San Bernardino Public Employees Association
San Luis Obispo County Employees Association
Santa Rosa City Employees Association
Service Employees International Union Local 1000
Opposition
California Association of School Business Officials (unless
amended)
California Special Districts Association (unless amended)
California State Association of Counties (unless amended)
Small School Districts' Association (unless amended)
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957