BILL ANALYSIS �
AB 1639
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Date of Hearing: April 26, 2012
ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL
SECURITY
Warren T. Furutani, Chair
AB 1639 (Hill) - As Introduced: February 13, 2012
SUBJECT : Retirement: public employees.
SUMMARY : Requires all public retirement systems in California
to adhere to the federal compensation limit under Internal
Revenue Code (IRC) Section 401(a)(17) when calculating
retirement benefits for members who first join the retirement
system on or after January 1, 2013, and prohibits a public
employer from making contributions to any qualified public
retirement plan based on any portion of compensation that
exceeds that amount.
EXISTING FEDERAL LAW : Section 401(a)(17) of the Internal
Revenue Code limits the amount of annual compensation that can
be taken into account under qualified retirement plans. The
compensation limit for the 2012 calendar year is $250,000. The
compensation limit is only applicable 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 taken into account under the
retirement plan.
FISCAL EFFECT : Unknown.
COMMENTS : According to the author, "AB 1639 closes two
loopholes that allow for high salaried public employees to
collect excessive pensions. The first loophole allows public
entities in California to request a waiver from the IRS to
section 401(a)(17) of the Internal Revenue Code. That section
caps the maximum salary that can be used to calculate pension
benefits at $250,000 per year.
"This problem was brought to light in December 2010 when 36 UC
executives threatened to pursue litigation if they did not
receive pensions calculated on the entirety of their salaries.
Each of the individuals had a salary in excess of the federal
limit of $245,000. The IRS had previously granted a waiver to
the University of California (in 2007) and that prior waiver was
AB 1639
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cited in the 2010 letter.
"While this bill would not apply to UC because of they are not
subject to legislative authority (unless UC adopts the policy
independently), the potential loophole exists for other
entities. A Freedom of Information Act request for a list of
all public entities in California who received a waiver was
denied.
"The second loophole allows public entities to structure
payments to high salaried employees that circumvent the existing
pension cap of $195,000. Public entities have funded, for
example, so called excess benefit plans, wherein they contribute
public funds to a 401K fund thereby allowing the combined
payments of pension and benefits to exceed the cap.
"AB 1639 would prohibit employer contributions to a public
retirement system based on any portion of compensation exceeding
the federal limit."
This bill is similar to the May 9, 2011 version of AB 89 (Hill).
While those provisions had no opposition, Assemblyman Hill
agreed to remove them from the bill and defer to the stated
desire of the Governor and legislative leaders to temporarily
suspend pension reform measures.
In 2011, the Legislature established the Conference Committee on
Public Employee Pensions under the provisions of AB 340
(Furutani) and SB 827 (Simitian). The Conference Committee is
tasked with crafting "?responsible, comprehensive legislation to
reform state and local pension systems in a manner that reflects
both the legitimate needs of public employees and the fiscal
circumstances of state and local governments." Since that time,
the Conference Committee has met five times and anticipates
releasing its report in the next several months. The
Legislature will then have the opportunity to vote on the
Conference Committee report in both houses.
The subject matter of this bill is under the purview of the
Conference Committee. It is, therefore, the recommendation of
this Committee that this bill be referred to interim study.
REGISTERED SUPPORT / OPPOSITION :
Support
AB 1639
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None on file
Opposition
California School Employees Association
Desert Water Agency
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957