BILL ANALYSIS �
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: AB 89
Gloria Negrete McLeod, Chair Hearing date: June 27, 2011
AB 89 (Hill) as amended 6/23/11 FISCAL: YES
PUBLIC RETIREMENT SYSTEMS: FEDERAL LIMITS ON COMPENSATION
AND BENEFITS AND LOWER SAFETY TIER FOR SAN MATEO COUNTY
HISTORY :
Sponsor: Author
Prior legislation: AB 194 (Torrico), 2010
Vetoed
ASSEMBLY VOTES :
PER & SS 6-0 5/04/11
Appropriations 17-0 5/18/11
Assembly Floor 75-0 5/26/11
SUMMARY :
Requires all public retirement systems to adhere to federal
compensation limits in determining retirement benefits for
members who first join the retirement systems on or after
January 1, 2012, and prohibits public employers from making
contributions to qualified public retirement plans on any
compensation exceeding the limited amount.
Allows the County of San Mateo to implement lower retirement
tiers for safety employees represented by the Probation and
Detention Association (PDA). This is an URGENCY BILL .
BACKGROUND AND ANALYSIS :
1) Existing state laws :
a) creates California's public retirement systems,
which, in general, provide retirement benefits based on
members' ages at retirement, years of service, and
average amount of compensation earned over a specified
Pamela Schneider
Date: 6/23/11 Page 1
period of time-usually a consecutive 12 or 36-month
period (referred to as "final compensation)."
b) establishes the 1937 Act County Retirement System,
which covers 20 independent county retirement
associations, including the San Mateo County Employees
Retirement Association (SMCERA).
2) Existing federal laws :
a) limit the amount of final compensation that may be
included in calculating a retirement benefit for all
individuals who become members of public retirement
systems after July 1, 1996 (current limit is $245,000).
b) allow employers to request exemptions from the
federal limits, which may be granted by the Internal
Revenue Service (IRS).
3) This bill :
a) in addition to any other benefit limitations prescribed
by law, would prohibit a retirement benefit calculation
based on final compensation higher than the federal
compensation limit defined in IRC 401(a)(17). The limit
for calendar year 2011 is $245,000.
b) prohibits a public employer from making employer
contributions to a public retirement system based on any
portion of compensation exceeding the federal limit.
c) specifies that these limitations are applicable to
individuals who first become retirement system members on
and after January 1, 2012.
d) allows San Mateo County to implement recently
negotiated lower pension tiers for safety members
represented by the PDA.
e) this is an URGENCY BILL .
FISCAL
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Date: 6/23/11 Page 2
The Assembly Appropriations Committee did not identify any
specific costs associated with this bill.
COMMENTS :
1) Arguments in Support
According to recent media reports, in 1999, the University
of California Retirement System (UCRS) sought an exemption
from the 401(a)(17) limits from the Internal Revenue
Service. The exemption was granted in 2007 thus allowing
UCRS to calculate pensions on the employees' total
salaries. The university, however, never implemented the
change.
Recently, 26 high-level UC executives sent a letter to the
Board of Regents demanding the UC calculate their
retirement benefits on their entire salaries. Currently,
UCRS recognizes only the first $245,000 of the income of
UCRS members subject to the IRC Section 401(a)(17) limits.
According to the UC, the retirement benefits the executives
are seeking would add $5.5 million a year to the pension
liability and an additional $51 million to make the changes
retroactive to 2007, as the executives are demanding.
According to the author,
"Preventing public agencies from making contributions
based on any portion of a salary above $245,000/year is
necessary to ensure that taxpayer money is used to fund
services, not to provide exorbitant retirement benefits
for already highly compensated executives."
In addition, according to information provided by the
author and the County of San Mateo, a recently negotiated
MOU with the PDA will require new hires to choose reduced
retirement formulas of either 2% at age 50, or 3% at age 55
(the formula for current employees is the 3% at age 50
formula). Employees who choose the 3% at age 55 formula
will also pay a larger share of the cost in employee
contributions.
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Date: 6/23/11 Page 3
2) SUPPORT :
California Federation of Teachers (CFT)
California Public Employees' Retirement System (CalPERS)
Count of San Mateo
3) OPPOSITION :
None to date
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Date: 6/23/11 Page 4