BILL ANALYSIS �
AB 1184
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Date of Hearing: May 18, 2011
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 1184 (Gatto) - As Amended: April 25, 2011
Policy Committee: PERS Vote:5-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill requires a local public agency that contracts with the
California Public Employees' Retirement System (CalPERS) to pay
for any increase in liability that accrues to a previous
employer as a result of excessive compensation paid to a
non-represented employee by the current public agency.
Specifically, this bill:
1)Provides that the obligations for retirement benefits that are
attributable to excess compensation earned by a
non-represented employee who was employed by one or more
public agencies is the sole obligation of the subsequent
contracting agency that paid the excess compensation.
2)Defines "excess compensation" as the final compensation of an
employee of a contracting agency who previously worked for
another contracting agency to the extent the final
compensation received from the current contracting agency is
in excess of 15% of the salary paid by the prior contracting
agency, as adjusted for actuarial increases in that salary.
3)Prohibits CalPERS from administering an Internal Revenue Code
(IRC) Section 415(b) replacement benefit plan for a person who
first becomes a member of CalPERS on or after January 1, 2013.
FISCAL EFFECT
CalPERS reports significant costs, in excess $500,000, for
evaluating each employee's record upon retirement, identifying
the employees who meet the general criteria and determining if
in fact, they have received excess compensation, as defined.
AB 1184
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COMMENTS
1.Purpose . According to the author, "This bill would save the
taxpayers of well-run cities from having to pay the pension
costs associated with exorbitant salaries in other cities.
Additionally this bill would prohibit California's public
employee retirement systems from participating in any program
offering pension benefits in excess of the federal cap
($195,000 for 2010)."
1)Background . CalPERS actuarially determines the employer rates
annually, which are based on various factors, including
employee and retiree demographics, experience (e.g., numbers
of deaths and retirements, amounts of salary increases, etc.),
and the level of investment returns on the retirement fund.
The rates are charged as a percentage of the employer's total
payroll for active employees and are paid over the course of
an employee's career. Under existing law, public employees
who change public employers, upon retirement and having met
specified criteria, have all their years of service calculated
at their highest compensation for the purpose of determining
their retirement benefits earned with each employer.
2)Federal law . IRC Section 415(b) places a dollar limit on the
annual benefit that can be received from a tax-qualified
pension plan such as CalPERS. Under Section 415(b), the
maximum annual retirement benefit payable at the Social
Security "normal retirement age" is $195,000 for calendar year
2010. This annual benefit limit may be adjusted by the
Internal Revenue Service (IRS) annually for cost-of-living
adjustments. Determination of whether a retirement benefit is
subject to this limit is made at retirement.
A provision within IRC section 415 allows some members to
avoid limitation and to receive their full "grandfathered"
benefits. These members are:
a) Persons who were members of CalPERS prior to January
1, 1990; and
b) Persons for whom the employer has provided no new or
enhanced benefits since October 14, 1987 (e.g. one year
instead of three-year final compensation).
However, if the employer has made a change in benefits since
AB 1184
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October 14, 1987, any increase in the allowance due to the
enhanced benefit is not included in the "grandfathered"
benefit, and is subject to the dollar limits.
4)The Replacement Benefit Plan (RBP). According to information
provided to the Committee by CalPERS, "The Replacement Benefit
Plan (RBP) is a plan that allows for 'replacement' of the
annual benefit allowance amount that exceeds the Section
415(b) limit with wages. Its purpose is to 'make whole' the
retirement allowances. The RBP is funded by the employer.
CalPERS invoices and collects the replacement benefit amount
from the affected employer and then disburses it to affected
retirees as wages in quarterly payments."
5)Opposition . The Association of California Water Agencies
contend AB 1184 is too broad and casts too wide a net. One
such consequence could be that older workers with decades of
experience would be punished and forced to stay at their
current place of employment lest they violate the 15% rule.
Additionally, an older worker who holds a trades position and
decides to return to school in order to receive a higher
degree in hopes of landing a better position could also be
punished for their experience. Essentially, AB 1184 could
have the unintended consequence of enacting a form of age
discrimination.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081