BILL ANALYSIS
SB 1425
Page 1
Date of Hearing: August 4, 2010
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
SB 1425 (Simitian) - As Amended: May 4, 2010
Policy Committee: P.E.R. &
S.S.Vote:6-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill, a companion measure to AB 1987 (Ma), establishes
higher standards for all public retirement systems in
California, and makes specific statutory changes to bring the
provisions of Teachers' Retirement Law (TRL) and the Public
Employees' Retirement Law (PRL) into compliance with the new
higher standards.
FISCAL EFFECT
1)Exclusion of certain items currently allowed as compensation
for purposes of retirement calculations under TRL will
eventually lower pension costs by between $15 million and $25
million each year. These items include certain intermittent
payments and service credits in excess of one year.
2)CalSTRS anticipates first-year costs of approximately $3.4
million in information technology costs necessitated by
changes in the definition of 'creditable compensation.'
3)CalPERS indicates that its administrative costs associated
with this bill would be absorbable. It would incur minor costs
to review special compensation or other negotiated provisions
before MOU's take effect, offset by decreases in workload
associated with making such determinations at the time of
individual members' retirement. Also minor and probably
absorbable costs for programming changes associated with
coding any newly approved special compensation item.
4)The Franchise Tax Board indicates that the six-month
prohibition against returning to work as a contract employee
SB 1425
Page 2
or annuitant will have an adverse impact on its audits and
related revenue-generating programs - particularly in cases
where the employee retires in the middle of complex audits. It
estimates the revenue impacts would be $600,000 in 2009-10,
$1.5 million in 2010-11 and about $2 million per year
thereafter.
5)The Department of Personnel Administration indicates that a
six-month prohibition against returning to work as a contract
employee or annuitant may have an adverse impact on the
expertise and productivity of state departments. However, it
is not possible to quantify the dollar impact of these
effects.
SUMMARY (Continued)
Key provisions of the bill:
1)Requires each retirement system to establish accountability
provisions for participating employers that include an ongoing
audit process and penalty provisions for noncompliance.
2)Excludes cash conversions of accrued employee benefits from
being included in retirement calculations.
3)Prohibits final settlement or termination pay from being
included in retirement calculations.
4)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 applies to anyone retiring
on and after January 1, 2011.
5)Limits the increases in compensation that can be used in
retirement calculations by members during their final three
years preceding retirement to the average increases in
compensation received by similarly situated employees in the
same or closely comparable group. Promotions or routine merit
increases would not be affected by this provision.
6)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.
SB 1425
Page 3
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 the various
forms of compensation that 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.
COMMENTS
1)Background . Existing law authorizes over 40 public retirement
systems in California, including CalPERS, CalSTRS, 20 counties
operating 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).
Over the past several years, there have been numerous reported
instances of "pension spiking" whereby an employee is provided
a dramatic one year boost in pre-retirement compensation, or
cashes in large vacation and leave balances and is allowed to
use the one-time proceeds in the "final year" compensation
calculation. Some forms of these practices are restricted by
specific pension funds. For example, in 1994, the Legislature
passed SB 53, (Chapter 1297/1994), which among other things
excludes cash outs of vacation or leave balances in "earnable
SB 1425
Page 4
compensation" used for purposes of the retirement calculations
of state CalPERS members. However, there is no statewide law
governing these practices.
2)Rationale . According to the author, the purpose of the bill is
to correct abuses that impose an undue burden on taxpayers and
erode public support for reasonable public employee pensions.
The author cites recent news reports that 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." The author also indicates the provision placing a
six-month prohibition against returning to work as a
contractor or annuitant is intended to prevent 'revolving
door' practices.
3)Opposition . Various employers and associations at the state
and local level object to the provision 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. The
Judicial Council of California states that this prohibition
would "disrupt court calendars and increase the existing
backlog in criminal and civil cases." The Franchise Tax Board
indicates that the required 180-day break will have adverse
impacts on its revenue producing activities, technology
projects, and maintenance of its IT systems. Numerous local
associations, 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, indicate that the 180-day break provision will
have disruptive impacts on their members' operations.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081