BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
AB 89 (Hill)
Hearing Date: 8/15/2011 Amended: 6/23/2011
Consultant: Maureen Ortiz Policy Vote: PE&R 5-0
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BILL SUMMARY: AB 89, an urgency measure, 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. The bill also
allows the County of San Mateo to implement lower retirement
tiers for safety employees represented by the Probation and
Detention Association.
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Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
Retirement benefits ------------unknown future
savings-------------- Specials*
San Mateo pension formula ---potentially millions in
future savings---- Local
*Public Employees Retirement System and State Teachers
Retirement System
* Judges Retirement System and Legislators' Retirement System
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STAFF COMMENTS:
Section 401(a)(17) of the Internal Revenue Code limits the
amount of annual compensation that can be used to calculate a
benefit under qualified retirement plans. This federal
compensation limit for the 2011 calendar year is $245,000, only
applies to persons who first became members or participants in a
qualified retirement system on or after July 1, 1996. The
compensation limit does not limit the salary an employer can pay
an employee, but rather limits the amount of compensation that
can be used to calculate a public retirement benefit.
AB 89 (Hill)
Page 1
In spite of that limit, employers can request exemptions from
the federal limits from the Internal Revenue Service. For
instance, in 2007 the University of California (UC) Regents
sought, and was granted, an exemption from the limits. Although
this exemption would allow the UC to calculate pension benefits
based on the individual's entire salary, the university has not
implemented this change to date. 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.
According to the UC, those calculations would result in an
additional pension liability of $5.5 million. If the change
were made retroactive to 2007 when the exemption was granted,
there would be an additional $51 million in costs.
The cap on compensation limits for retirement calculation
purposes will apply to members of the Public Employees
Retirement System, State Teachers' Retirement System, Judges
Retirement System II, Legislators' Retirement System, and the
'37 Act Counties. AB 89 additionally prohibits public employers
from making contributions to qualified public retirement plans
on any compensation exceeding the limited amount.
The County of San Mateo has recently negotiated a new six year
Memorandum of Understanding with the Probation and Detention
Association that 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 3% at age 50). AB 89 provides
the statutory authority for the county to implement this new
retirement formulas. Employees will be able to choose between
the two new formulas. It is expected that the County of San
Mateo will save nearly $23 million in pension costs over the
next ten years.