BILL ANALYSIS �
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: AB 1184
Gloria Negrete McLeod, Chair Hearing date: June 27, 2011
AB 1184 (Gatto) as amended 4/25/11 FISCAL: YES
CALPERS: EMPLOYER CONTRIBUTION RATE INCREASES RESULTING FROM
RECIROCITY
HISTORY :
Sponsor: Author
Prior legislation: Unknown
ASSEMBLY VOTES :
PER & SS 5-0 5/04/11
Appropriations 12-5 5/27/11
Assembly Floor 54-23 6/01/11
SUMMARY :
Makes changes to CalPERS actuarial rate setting programs to
shift liability onto hiring employers for excessive
compensation paid to employees who move from one CalPERS
employer to another.
Prohibits CalPERS from administering benefit replacement
plans for retirees whose benefits exceed federal pension
limits (for persons who become members of the system on and
after January 1, 2013).
BACKGROUND AND ANALYSIS :
1) Existing law :
a) establishes the California Public Employees' Retirement
System (CalPERS), which provides benefits for state
employees and approximately 1,500 school districts and
1,500 contracting local agencies.
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b) requires CalPERS to set employer rates on an annual
basis, based on a number of actuarial factors, and
specifies that the employer rate is an annual percentage
of the employer's total amount of compensation earnable
paid to all employees.
c) requires employers and employees to pay contributions
on an ongoing basis throughout the entirety of an
employee's career with the intended outcome that the
employee's retirement benefit will be fully funded for
the remainder of his or her lifetime at the time of
retirement.
d) allows CalPERS to pool small employers (i.e., less than
100 employees) into funding pools in order to reduce the
risk of dramatic rate increases due to negative
experience.
e) requires CalPERS to provide a defined benefit to
retirees, which is calculated by multiplying three
factors: and employee's age factor, years of service,
and highest compensation amount.
f) establishes reciprocity between CalPERS employers,
which provides, among other rights, the right of a member
to have his or her highest compensation applied to all of
his or her years of service under all employers in the
system.
g) requires that a retirement benefit for a CalPERS
member who had multiple employers will be funded in a
proportionate manner from the individual employer
accounts (e.g., if an employee worked for three employers
for 10 years each and retired, the three employer
accounts would each fund a third of the employee's
retirement benefit from the contributions made during the
employee's career).
h) implements a federal law that limits a tax-qualified
pension benefit to a set amount, which was $195,000 in
2010 and 2011, for any individual who first became a
member of the system on and after January 1, 1990 and who
is at least 62 years of age (limits are lower for
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individuals between the ages of 60 and 61 and higher for
ages over 65).
i) allows an employer to pay, and CalPERS to administer, a
Replacement Benefit Plan (RBP) that is paid on a non-tax
qualified basis to employees who earn retirement benefits
above the federal limit for that portion of the benefit
that exceeds the limit (e.g., if an employee earns a
retirement benefit of $200,000, $5,000 of the benefit
would be paid by the employer under the RBP, and $195,000
of the benefit would be paid from the retirement fund as
funded by the employer and employee contributions).
j) allows local governmental entities (i.e., cities and
counties) to adopt civil service and merit systems for
public employees, which, among other requirements,
require that hiring and promotions be based on a fair and
impartial criteria designed to identify the best
candidates with the highest levels of knowledge, skills,
and abilities.
k) requires, in both statute and the constitution, that
the State operate a merit-based civil service system,
requiring fair and equitable hiring and promotional
practices designed to identify candidates with the
highest levels of knowledge, skills, and abilities.
2) This bill :
a) defines "excessive compensation" as when an employer
pays an employee a salary that is 15% or more higher than
the salary paid by a former employer, as adjusted for
actuarial increases in that salary.
b) requires CalPERS to identify members who are
non-represented and to track all individual
non-represented employees' compensation across their
careers and to keep track of all changes to employees'
compensation of 15% or more.
c) requires CalPERS to adjust individual employer rates to
account for compensation increases above 15% with the
intent that the individual employers who gave the
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increases would be liable for the costs of prefunding
those retirement benefits that will accrue due to the
increases.
d) requires CalPERS to apply actuarial factors to these
calculations and tracking.
e) requires CalPERS to set up additional individual
accounts for employers into which certain employer and
employee contributions will be placed to fund liabilities
attributable to the pay increases above 15% or more.
f) prohibits CalPERS from administering the RBP for
persons who become members of the system on and after
January 1, 2013.
3) Does the bill create unintended consequences ?
a) Changes to CalPERS Actuarial System and Employer Rate
Setting Program:
This bill will change the manner in which CalPERS sets
employer rates and performs actuarial functions. CalPERS
cannot perform the requirements of the bill with its
current systems, and changes will be costly. Moreover,
even if CalPERS were to implement the changes at great
expense, the bill will make significant changes to the
manner in which CalPERS sets employer rates.
The bill does not clearly state which agencies will
assume liability for which portion(s) of a member's
career. An employee may have multiple employers, stop
working for a time to go into the private sector or
attend college, and then return to public service at a
higher wage due to increased experience or education; the
employee may be represented, non-represented, and then
represented; some individuals never retire, either dying
while in service or taking a refund of contributions upon
separation. Employees do not always fulfill actuarial
norms-some promoting rapidly in relatively short periods
of time, some leaving public service all together.
Sometimes an employing agency is merged with another
agency or ceases to exist altogether. In some cases,
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employers report compensation that is later determined
not to be pensionable, as happened in the City of Bell
case.
CalPERS does not currently have the ability to track all
of the possible movement and changes to employee's
compensation at the level required by this bill, while at
the same time shifting liability from employer to
employer as the person moves across his or her career and
different jobs over the years. Currently CalPERS does
not examine an individual's compensation until the person
retires, and then CalPERS examines the highest
compensation earnable period only in order to determine
the pension.
These requirements will change the current actuarial and
employer reporting programs, requiring employers to also
change their reporting at unknown cost. Major program
changes done by CalPERS-such as when CalPERS instituted
pooling for small employers-was done after an extended
period of focus groups, public meetings, consideration of
stakeholder concerns and issues, and in consistency with
federal laws governing tax-qualified retirement plans.
b) Is this level of change warranted?
CalPERS has studied the question and determined that
salary increases, within the range of what is considered
to be normal, do not tend to shift employer rates, which
are paid to CalPERS as a percentage of the employer's
total payroll, in a significant manner. This is because
employees move around, and most public employers are
paying wages within a comparable range for specific job
classes. One employer loses an employee to a higher
paying job and then turns around and fills the created
job opening with a new hire who will earn more than at
his or her former job. Thus, because of reciprocity, and
as long as pay ranges are not excessive as relative to
the affected job classes, employer rates are equalized.
In addition, federal caps in place since 1990 limit
pensions (current limit is $195,000). In 2010, out of
30,000 retirees, only 60 exceeded this cap due to long
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careers and high wages. As stated above, pension amounts
under the cap are not responsible for significant
increases in employer liability with regard to employees
who move between employers. A significant shift in
employer rate is only likely to occur in a City of
Bell-type situation for an individual who came into
public service prior to 1990-an ever shrinking number of
individuals.
The level of change required by this bill applies across
the system to all employees who are non-represented at
any time in their careers, going beyond what is necessary
to ensure that employer liability in a City of Bell-type
of situation is assessed to the employer causing the
increased liability.
c) Possible Impacts on Reciprocity, the Civil Service, and
the Merit System
A basic principle of a defined benefit plan is that a
member receives a pension based on his or her highest
period of compensation applied to all years of service.
Reciprocity was created, in part, so that a public employee
who moved among public employers would not lose valuable
benefits due to changing employers.
Under reciprocity, the highest compensation earned under
any employer applies to all years of service-just as if the
employee had worked an entire career with one employer.
While this bill does not directly impact reciprocity as it
applies to employees, it does impact how a benefit subject
to reciprocity is funded. The costs of reciprocity are
currently spread across all employers in an equalizing
manner; however, this bill shifts the cost of reciprocity
onto succeeding employers as an employee moves through his
or her career.
Civil service principals were created to ensure fairness in
the hiring and promotional processes for public employees.
Employees are to be examined, hired, and promoted on the
basis of their knowledge, skills, and abilities. The
process is intended to ensure that the best candidates are
chosen for promotions and jobs. Employees with longer
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careers and more experience may cost more in terms of
pension liabilities, thus forcing employers to choose
between cost and experience. Employees who are the best
qualified but lose out on jobs due to their age and
experience may have legitimate cause to claim age
discrimination in hiring and violations of the civil
service and merit requirements.
d) Tax Qualification Issues
CalPERS is a tax-qualified plan under federal Internal
Revenue Code requirements.
Currently, employers' plans fund benefits based on an
employee's service, compensation, and formula under each
employer. Liability is, among other things, the cost of a
member's service under an employer. CalPERS cannot easily
shift liability to one employer for a member's service
under another employer. This could violate IRC rules and
jeopardize the tax qualified status of the plan.
Any method of increasing liability for an employer for an
individual's service under another employer will have to be
done in such a way as to protect CalPERS' status as a
tax-qualified plan and in conformity with IRC rules, and
will require careful consideration and guidance from
pension tax experts in CalPERS' legal division.
e) Amendments Recommended
The bill is well-intentioned, but given the understanding
that employer liability is only significantly impacted when
excessive compensation at the level of a Bell-type
situation is paid, this bill requires extreme and costly
changes to CalPERS' entire business model in order to
prevent increased liability in rare circumstances. CalPERS
could create a program to monitor and adjust employer
liability in those rare circumstances in which abuse occurs
without being required to implement the significant program
changes required by this bill. Moreover, CalPERS must
ensure that any plan changes comply with federal IRC
requirements.
The committee recommends that the AB 1184 be amended to
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require CalPERS to define excessive compensation leading to
increased employer liability and to create a program for
ensuring that liability for such increases is borne by the
employer that creates the liability and not reciprocal
employers that are not responsible for the excessive
compensation .
CalPERS shall implement these changes as of the effective
date of the bill .
FISCAL
CalPERS has made initial estimates for implementing the
changes to their administrative and actuarial systems that
this bill would require. Those changes could be in the range
of between $5 million and $10 million initially (up to $5
million for changes to the actuarial system and as much or
more for changes to administrative systems) and up to $1
million annually for additional staff resources.
Additionally, CalPERS would be forced to require contracting
employers of the system to change their reporting systems to
comply with the new requirements, requiring IT changes at the
local level.
Finally, changes required to the manner of setting rates
would increase, by approximately 2 months, CalPERS current
rate setting calendar. It is unknown what impact, if any,
this would have on employer budget processes.
COMMENTS :
1) Arguments in Support
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
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offering pension benefits in excess of the federal cap
($195,000 for 2010)."
This bill has many supporters, who overwhelmingly support the
idea that one employer's excessive compensation should not
result in higher liabilities to other employers who are good
players. City of Simi Valley states:
"Public agencies must take responsibility for their
financial decisions, and be discouraged from offering
unnaturally inflated salaries that will lead to pensions
that they will have little responsibility for. The
situation in the city of Bell left public agencies
across the country not only distrusted by the
constituents they serve, but well aware of their fiscal
vulnerability for pension obligations they had no part
in creating. It is time to restore public trust and
assure that cities control their financial futures."
2) Arguments in Opposition
As stated by CalPERS:
"While the intent of the bill has merit, the provision
dealing with "excessive compensation" would be difficult
and costly for CalPERS to administer by requiring
significant changes to our Actuarial Valuation System
software and our MyCaIPERS system. The bill would also
require a change to how employers currently report some
membership and payroll data to CalPERS and at unknown cost
to the employer.
In addition, the definition of "excessive compensation"
does not apply equally to all public employers and
employees within CalPERS, it doesn't apply to any public
employers outside of CalPERS, and compares a member's
salary to final compensation (which includes both salary
and special compensation). These differences create
ambiguity and administrative complexity that could result
in unintended consequences.
Furthermore, shifting liabilities between employers
participating in a federally tax qualified pension plan
without violating federal law is an extremely complex and
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challenging task that, if executed incorrectly, can
threaten the tax qualification status of the Public
Employees Retirement Fund."
The California State Association of Counties and other groups
in opposition cite concerns about the "workability of this
bill." They also express concerns that employers will be
forced to consider pension liability because of an
applicant's age and experience as another issue in the hiring
process, potentially leaving employers vulnerable to charges
of discrimination.
As stated by the Association of California Water Agencies:
"AB 1184 is too broad and casts too wide a net.
Reciprocity exists to allow labor mobility among
employees and to pool the liabilities of the government
employers involved in the retirement system. Doing away
with the policy of reciprocity as we know it could have
many unintended consequences. 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 trade's
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."
3) SUPPORT :
American Federation of State, County and Municipal
Employees (AFSCME), AFL-CIO
Association for Los Angeles Deputy Sheriffs (ALADS)
California Professional Firefighters (CPF)
California Public Employees' Retirement System (CalPERS),
Support with committee amendments
California School Employees Association (CSEA), AFL-CIO
City of Glendale
City of Simi Valley
City of Ventura
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Glendale City Employees Association (GCEA)
Los Angeles Probation Officers' Union, AFSCME, Local 685
Orange County Professional Firefighters' Association
Organization of SMUD Employees (OSE)
Riverside Sheriffs' Association
San Bernardino Public Employees Association (SBPEA)
San Luis Obispo County Employees Association (SLOCEA)
Santa Rosa City Employees Association (SRCEA)
Service Employees International Union (SEIU)
4) OPPOSITION :
Association of California Healthcare Districts (ACHD)
Association of California Water Agencies (ACWA)
California Association of Joint Powers Authorities (CAJPA)
California Special Districts Association (CSDA)
California State Association of Counties (CSAC)
Regional Council of Rural Counties (RCRC)
Urban Counties Caucus (UCC)
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