BILL ANALYSIS �
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|SENATE RULES COMMITTEE | AB 1184|
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THIRD READING
Bill No: AB 1184
Author: Gatto (D), et al.
Amended: 8/22/11 in Senate
Vote: 21
SENATE PUBLIC EMPLOY. & RETIRE. COMMITTEE : 5-0, 6/27/11
AYES: Negrete McLeod, Walters, Gaines, Padilla, Vargas
SENATE APPROPRIATIONS COMMITTEE : 8-0, 8/15/11
AYES: Kehoe, Walters, Alquist, Emmerson, Lieu, Pavley,
Price, Steinberg
NO VOTE RECORDED: Runner
ASSEMBLY FLOOR : 54-23, 6/1/11 - See last page for vote
SUBJECT : Public employees retirement benefits
SOURCE : Author
DIGEST : This bill requires California Public Employees
Retirement System (CalPERS) to develop and implement
program changes to ensure that a contacting agency that
creates a significant increase in actuarial liability due
to increased compensation bears the costs of the associated
liability. This bill further prohibits CalPERS from
providing a plan of replacement benefits effective for
persons who become members on or after January 1, 2013.
ANALYSIS :
CONTINUED
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Existing law:
1. Establishes the CalPERS, which provides benefits for
state employees and approximately 1,500 school districts
and 1,500 contracting local agencies.
2. 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.
3. 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/her lifetime at the time of
retirement.
4. 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.
5. 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.
6. Establishes reciprocity between CalPERS employers,
which provides, among other rights, the right of a
member to have his/her highest compensation applied to
all of his/her years of service under all employers in
the system.
7. 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).
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8. 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
individuals between the ages of 60 and 61 and higher for
ages over 65).
9. 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).
10.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.
11.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.
This bill:
1. Expresses the intent of the Legislature that a
contracting agency shall not experience a significant
increase in actuarial liability due to increased
compensation paid by another contracting agency to a
nonrepresented employee subject to the Public Employees'
Retirement Law.
2. Requires the CalPERS Board of Administration (Board) to
develop requirements for defining a significant increase
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in actuarial liability due to increased compensation
paid to a nonrepresented employee.
3. Requires the Board to implement program changes to
ensure that a contracting agency that creates a
significant increase in actuarial liability due to
increased compensation paid to a nonrepresented employee
that would also apply to another contracting agency or
agencies shall instead bear that liability.
4. Requires the system actuary to assess the increase in
liability to the employer that created it at the time
the increase is determined and to make adjustments to
that employer's rates as needed to comply with the
requirements.
5. States the provisions shall apply to any significant
increase in actuarial liability, due to increased
compensation paid to a nonrepresented employee, that is
determined after January 1, 2012, regardless of when the
increase in compensation occurred.
6. Requires the Board to report to the Legislature, no
later than June 30, 2012, on the implementation of this
bill. Requires the report to include:
A. An explanation of the guidelines developed by the
Board.
B. An assessment of the implementation and
effectiveness of the guidelines.
7. Sunsets the provisions on the report to the Legislature
on June 30, 2016.
8. Prohibits CalPERS from administering the RBP for persons
who become members of the system on and after January 1,
2013.
Comments
The CalPERS actuary will be required to assess and adjust
the increased liability to the employer that created that
liability. This provision will be effective for any
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significant increases determined after January 1, 2012,
regardless of when the increase in compensation occurred.
The Board will report to the Legislature no later than June
30, 2012, and the report will include an explanation of the
guidelines developed by the board as well as an assessment
of the implementation and effectiveness of the guidelines.
This bill contains legislative intent stating that a
contracting agency shall not experience a significant
increase in actuarial liability due to increased
compensation paid by another contracting agency. The
provisions of this bill will not apply to compensation paid
to an employee who is covered by a memorandum of
understanding or who is a member of a recognized employee
organization.
The Public Employees' Retirement Law provides a defined
benefit to its members based on age at retirement, service
credit, and final or highest compensation paid to the
employee. Existing law authorizes any public agency to
contract with CalPERS for retirement benefits to its
employees. In the case of an employee who has been
employed by one or more contracting public agencies,
retirement benefits distributed to that employee are based
on the highest final compensation under any system, and
each system makes a separate retirement payment to the
employee based upon the number of years that the employee
worked for each of those agencies. Reciprocity agreements
provide the right of a member to have his/her highest
compensation applied to all of his/her years of service
under all employers in the system.
This bill requires CalPERS to develop requirements for
defining a significant increase in actuarial liability due
to increased compensation paid to a nonrepresented employee
and to implement program changes to ensure that a
contracting agency that creates a significant increase in
actuarial liability due to increased compensation paid to a
nonrepresented employee shall bear the costs of that
liability.
Internal Revenue Code 415(b) places a dollar limit on the
annual benefit that can be received from a tax-qualified
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pension plan such as CalPERS. The maximum annual
retirement benefit payable at the Social Security "normal
retirement age" is $195,000 for calendar years 2010 and
2011. This annual limit may be increased by the IRS
annually for cost-of-living adjustments. The IRS allows
some members to be "grandfathered" and, therefore, not
subject to the limitation as follows: (1) persons who were
members of CalPERS prior to January 1, 1990, and (2)
persons for whom the employer has provided no new or
enhanced benefits since October 14, 1987.
The Replacement Benefit Plan is a program that allows for
replacement of the annual benefit allowance amount that
exceeds the Section 415(b) limit with wages. Its purpose
is to make a member's retirement allowance "whole". This
plan is funded by the employer through collections by
CalPERS and then it is disbursed to affected retirees as
wages in quarterly payments. In 2010, out of 30,000
retirees, only 60 individuals exceeded the federal cap due
to long careers and high wages. This bill will prohibit
CalPERS from administering a plan of replacement benefits
for members hired on or after January 1, 2013.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
CalPERS liability
Unknown, probably less than $150
Special*
assessment and report
to Legislature
RBP elimination Unknown future savings to
employers Local
*Public Employees Retirement Board
SUPPORT : (Verified 8/22/11)
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American Federation of State, County and Municipal
Employees, AFL-CIO
Association for Los Angeles Deputy Sheriffs
California Professional Firefighters
California School Employees Association, AFL-CIO
Cities of Glendale, Simi Valley, and Ventura
Glendale City Employees Association
Los Angeles Probation Officers' Union, AFSCME, Local 685
Orange County Professional Firefighters' Association
Organization of SMUD Employees
Riverside Sheriffs' Association
San Bernardino Public Employees Association
San Luis Obispo County Employees Association
Santa Rosa City Employees Association
Service Employees International Union
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 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. The 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."
ASSEMBLY FLOOR : 54-23, 6/1/11
AYES: Alejo, Allen, Ammiano, Atkins, Beall, Block,
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Blumenfield, Bonilla, Bradford, Brownley, Buchanan,
Butler, Charles Calderon, Campos, Carter, Cedillo,
Chesbro, Davis, Dickinson, Eng, Feuer, Fong, Fuentes,
Furutani, Galgiani, Gatto, Gordon, Hall, Hayashi, Roger
Hern�ndez, Hill, Huber, Hueso, Huffman, Jeffries, Lara,
Bonnie Lowenthal, Ma, Mansoor, Mendoza, Mitchell,
Monning, Pan, Perea, Portantino, Skinner, Smyth, Solorio,
Swanson, Torres, Wieckowski, Williams, Yamada, John A.
P�rez
NOES: Achadjian, Bill Berryhill, Conway, Cook, Donnelly,
Fletcher, Beth Gaines, Garrick, Grove, Hagman, Halderman,
Harkey, Jones, Knight, Logue, Miller, Morrell, Nielsen,
Norby, Olsen, Silva, Valadao, Wagner
NO VOTE RECORDED: Gorell, Nestande, V. Manuel P�rez
CPM:kc 8/23/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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