BILL ANALYSIS �
AB 2224
Page 1
Date of Hearing: April 26, 2012
ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL
SECURITY
Warren T. Furutani, Chair
AB 2224 (Smyth) - As Introduced: February 24, 2012
SUBJECT : Public employees' retirement.
SUMMARY : Makes the statutory changes necessary to implement
the Governor's 12 Point Pension Reform Plan. Specifically, this
bill :
1)Requires that the normal, ongoing cost of retirement benefits
be shared equally between the employee and the employer.
Allows the increase of the employee share to at least 50
percent to be phased in over a period not to exceed three
years. Prohibits an employer from paying the employees'
required contribution.
2)Requires each retirement system to provide a hybrid pension
plan for all employees first hired on or after July 1, 2013,
consisting of a defined benefit component, a defined
contribution component or an undefined alternative plan
component, and when applicable, benefits under the federal
Social Security Act. The hybrid plan would be designed with
the goal of providing retirement income of 75% of an
employee's final compensation, based on a full career (30
years for safety employees and 35 years for non-safety
employees), and with a targeted cap on the combined defined
benefit and defined contribution benefit amount as specified.
3)Increases the normal retirement for the hybrid plan to age 67
for non-safety members and defines full career as 35 years of
service. The minimum retirement age is also increased from the
current 50 or 55, depending on service credit amounts, to 57
with five years of service credit for non-safety members and
to 52 with 5 years of service credit for safety members. The
minimum age would continue to increase by the amount of any
future increases in the minimum Social Security retirement
age.
4)Requires for all employees who first become members of the
retirement system on or after July 1, 2013, to have their
final compensation based on the member's highest average
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payrate as defined, for a period of at least 36 consecutive
months.
5)Defines "payrate" as the normal monthly rate of pay or base
pay of the member paid in cash to similarly situated members
of the same group or class of employment for services rendered
on a full-time basis during normal working hours, pursuant to
publicly available pay schedules. Payrate for a member who is
not in a group or class means the monthly rate of pay or base
pay of the member, paid in cash and pursuant to publicly
available pay schedules, for services rendered on a full-time
basis during normal work hours.
6)Prohibits a person, who retires from a public employer from
being employed by another public employer without
reinstatement from retirement, except:
a) Upon appointment by the appointing power of a public
employer either during an emergency to prevent the stoppage
of a public business, or
b) Because the retired employee has skills needed to
perform work of limited duration.
Such authorized appointments are not to exceed a total for
all employers in that retirement system of 960 hours or 120
full-time days or other equivalent limit, in a twelve
consecutive month period. Additional limitations apply to
someone who has received unemployment insurance.
7)Requires that a member forfeit pension and related benefits if
convicted of a felony in carrying out official duties, in
seeking an elected office or appointment or in connection with
obtaining salary or pension benefits and includes felonies in
connection with obtaining disability retirement and service
retirement. Requires the employer (if the conviction occurs
before the member terminates employment) and the member to
notify the retirement system within 60 days of the conviction.
8)Prohibits applying pension enhancements to service performed
prior to the effective date of the measures.
9)Prohibits all employers from suspending employer and/or
employee contributions necessary to fund annual pension costs
and requires that employer and employee contributions not be
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less than the normal cost for the defined benefit plan or
component for that fiscal year.
10)Eliminates the ability of an employee to purchase
nonqualified service, or "airtime", upon the effective date of
the measure. This prohibition would not apply to applications
for the purchase of "airtime" received prior to January 1,
2013. Members who do not have at least 5 years of service
credit before the operative date of the bill or who are hired
after that date are also prohibited from purchasing "airtime".
11)Changes the composition of the CalPERS Board of
Administration by eliminating the position of the member of
the State Personnel Board and replacing it with the Director
of the Department of Finance and by adding to additional
positions to the Board appointed by the Governor. The
official of a life insurer (currently a gubernatorial
appointee) would be replaced by a person who has expertise in
health insurance and does not have an interest in CalPERS
(also a gubernatorial appointee).
12)Increases the retiree health benefit vesting schedule for
state employees hired on and after January 1, 2013.
Currently, most state employees earn a 50% employer
contribution for retiree health benefits at 10 years of
service increasing to a 100% employer contribution at 20 years
of service. The bill increases that schedule to 50% at 15
years, increasing to 100% at 25 years.
13)Increases the amount future state retirees, hired on and
after January 1, 2013, must pay for health benefits. The bill
requires these retirees to pay a percentage of health care
benefits equal to the percentage paid during their final three
years as an active employee.
EXISTING LAW :
In California, most public employees are covered by a defined
benefit (DB) retirement plan which provide participants with a
guaranteed annual pension based upon age at retirement, years of
service, and salary. According to information provided by the
Legislative Analyst's Office in their analysis of the Governor's
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12 Point Plan, "In total, about four million Californians-11
percent of the population-are members of one or more of the
state's 85 defined benefit public pension systems."
The California Public Employees' Retirement System (CalPERS)
administers the retirement plans for state employees and
classified school employees, while the California State
Teachers' Retirement System (CalSTRS) administers the plans for
teachers. Many local government entities also contract with
CalPERS to administer their retirement plans. Additionally,
twenty counties have chosen to establish their own retirement
systems under the County Employees Retirement Law of 1937 Act
('37 Act).
Funding for defined benefit retirement systems generally come
from three sources - employee contributions, employer
contributions, and interest earnings. Employee contributions
are generally a fixed percentage amount, while employer
contributions generally vary from year to year.
Defined contribution (DC) plans include 401(k), 403(b), or
public sector 457 plans. A participant's benefit from a DC plan
is based upon the contribution by the participant, any employer
contributions, and investment gains or losses. A DC plan is
primarily a savings accumulation program, not technically a
pension program. A DC plan does not provide a guaranteed
benefit level at retirement nor do they include disability or
death benefits. The balance in a DC account can be paid out as
either a lump sum or partial lump sum, in installment payments,
or it can be used to purchase an annuity.
Hybrid plans can include a variety of benefits for participants,
as well as investment options. A hybrid plan most often
consists of a combined DB and DC plan, providing the employee
with lower DB benefits than provided under a standard DB plan in
addition to returns from the DC portion. The employer's
contribution to the DC component is often fixed or tied to the
employee's contribution while contributions to the DB component
can fluctuate.
FISCAL EFFECT : Unknown.
COMMENTS : According to the author, "Current law outlines the
benefit requirements provided by California's Public Employee
Retirement System. At current rates, the pension system is
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likely to drastically deteriorate if reform is not implemented.
AB 2224, the 12-point pension reform plan generated by Governor
Brown's office, provides the best framework for pension reform.
"While the health of retirement funds is based on fluctuations
in the market, the benefits given to employees are fixed. As a
result state and local liability is increasing at an
unsustainable rate. The estimated burden of unfunded liability
is $50-300 billion.
"Each of the 12 points pragmatically and justly amends the
pension benefit structure for primarily future public employees,
which will reduce pension costs to the state and initiate a
reduction in the growing unfunded liability."
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
Desert Water Agency
Newhall County Water District
Orchard Dale Water District
Rowland Water District
Opposition
California Professional Firefighters
Professional Engineers in California Government
AB 2224
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Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957