BILL ANALYSIS
SB 1425
Page 1
SENATE THIRD READING
SB 1425 (Simitian and Correa)
As Amended August 19, 2010
Majority vote
SENATE VOTE : 35-0
PUBLIC EMPLOYEES 6-0 APPROPRIATIONS 12-0
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|Ayes:|Torrico, Harkey, |Ayes:|Fuentes, Bradford, |
| |Furutani, Hernandez, Ma, | |Huffman, Coto, Davis, De |
| |Nestande | |Leon, Gatto, Hall, |
| | | |Skinner, Solorio, |
| | | |Torlakson, Torrico |
| | | | |
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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
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retiring on and after January 1, 2012.
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
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 the California Public Employees' Retirement System
(CalPERS) and the California State Teachers' Retirement System
(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, 2012, 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
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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.
13)Requires that any CalSTRS member who retires on or after
January 1, 2012, 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 CalPERS; 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
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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
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 Assembly Appropriations
Committee:
1)Exclusion of certain items currently allowed as compensation
for purposes of retirement calculations under TRL will lower
pension costs by between $15 million and $25 million each year
in pension costs. These items include certain intermittent
payments and services 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 costs associated with this bill would
be absorbable. It would incur minor costs to review special
compensation or other negotiated provisions before MOUs take
effect, offset by decreases in workload associated with making
such determinations at the time of individual members'
retirement. Minor and probably absorbable costs for
programming changes associated with coding any newly approved
special compensation item.
4)The Franchise Tax Board (FTB) indicates that the six-month
prohibition against returning to work as a contract employee
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 million
2009-10, $1.5 million in 2010-11 and about $2 million per year
thereafter.
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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.
6)Significant costs to local pension funds to administer the
provisions of this bill, not reimbursable.
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
(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."
FTB indicates that the required 180-day break will have adverse
impacts on its revenue producing activities, technology
projects, and maintenance of its Information Technology systems.
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.
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AB 1987 (Ma) is a companion measure to this bill and is intended
to strengthen anti-spiking provisions in the '37 Act.
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957
FN: 0006304