BILL ANALYSIS
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: AB 821
Deborah V. Ortiz, Chair Hearing date: July 12, 1999
AB 821 (PER&SS Com.) as amended 6/14/99 FISCAL: YES
PERS AND STRS: 12-MONTH FINAL AVERAGE COMPENSATION USED TO
COMPUTE THE PENSION BENEFITS OF ALL SCHOOL EMPLOYEES
HISTORY :
Sponsor: California Teachers' Association (CTA)
California Federation of Teachers (CFT)
Association of California School
Administrators (ACSA)
Prior legislation: SB 414 (Roberti) 1993
Vetoed
AB 2882 (Elder) 1988
Vetoed
ASSEMBLY VOTES :
PER & SS 7 - 0 4/07/99
Appropriations 15 - 6 5/26/99
Assembly Floor 68 - 8 6/01/99
SUMMARY :
Would change the period to be used for computing "final
compensation" for retirement benefits for school employees
(STRS and PERS) from the average of the three highest years
compensation to the highest compensation earnable by a member
during a 12-month period.
BACKGROUND AND ANALYSIS :
1) Existing STRS law :
a) defines "final compensation" for its members as the
highest average annual compensation earnable by a member
during any period of three consecutive years of paid
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employment covered by STRS,
b) provides that, for STRS members whose salary has been
reduced because of a reduction in school funds, final
compensation may be defined as the highest average annual
compensation earnable during any three non-consecutive
12-month periods, and
c) one-year final compensation is also available for STRS
members if it has been included in a written collective
bargaining agreement (which must also include a mechanism
to pay STRS the actuarial difference between the one-year
final compensation and the three-year final compensation
plus STRS' administrative costs).
2) Existing PERS law defines "final compensation" for
classified school employees who are members of PERS as the
highest average annual compensation earnable during any three
consecutive years of a member's PERS employment.
3) This bill :
a) changes the definition of final compensation from a
three-year average to one year for all members of STRS
(certificated school employees - teachers), and
b) changes the definition of final compensation from a
three-year average to one year for all classified school
employees (non-certificated school employees - cafeteria
workers, bus drivers, etc.) who are members of PERS.
4) This bill also specifies that the costs of this bill
relating to STRS will be paid for from funds in the STRS
Fund.
FISCAL EFFECT :
1) STRS COSTS
According to STRS, the estimated additional program cost to
use one-year final compensation for all STRS members would be
1.639% of payroll, which, given current payroll levels, would
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equal $282.7 million annually. STRS states that any costs
associated with administering the bill could be absorbed.
2) PERS COSTS
According to PERS, due to the large surplus in its school
employees fund, about $3.5 billion, this increased benefit
could be provided to classified school employees for 19 years
without having to increase contribution rates.
COMMENTS :
1) PERS and STRS law both provide that benefit payments are
computed based upon various factors, including the employee's
final compensation.
For example, the retirement allowance for a STRS member is
calculated using the following formula: years of service
credit multiplied by the age factor (generally 2% at age 60)
multiplied by final compensation equals the persons
unmodified retirement allowance.
2) Governor Pete Wilson vetoed a similar bill, SB 414
(Roberti) 1993. His veto message stated:
"This bill would permit school districts to finance
payments over a four-year period to fund the costs of the
optional one year final compensation benefit they may
negotiate with their employees.
In 1989 school districts were authorized to negotiate with
their employees to provide the use of a highest 12 month
average salary to compute retirement benefits rather than
the use of a 36 month average. The enhanced retirement
benefit was intended to save money by encouraging early
departure of the more expensive senior teachers.
In 1990 legislation was enacted which required school
districts to pay the actuarial cost of the increased
benefit in one "up-front" lump sum.
This bill would permit school districts to finance the
costs of the increased benefit over a four-year time period
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instead of in a lump sum. In doing so, this bill would
encourage school districts to borrow money to pay for
increased retirement benefits. I believe that it is
irresponsible, however, to defer expenditures into the
future without securing the necessary additional funding to
cover the debt.
Moreover, the sponsor of this bill has not demonstrated
that savings have been realized by school districts that
have already extended this benefit. Nor has the sponsor
demonstrated that savings will accrue from the financing
option contained in this bill. Instead, this bill may
actually cost money due to the accumulation of interest on
the unpaid amounts to fund the benefit.
I am reluctant to provide flexibility for more employers to
provide this benefit when it may deplete the money
otherwise available for use in the classroom."
3) Supporters state that this bill would create a basis of
determining final compensation comparable to that used for
PERS state employees. Additionally, proponents contend that
this bill would help improve the adequacy of school employee
retirement benefits which have traditionally lagged behind
those of other public employees.
4) SUPPORT :
California School Employees Association
California Public Employees' Retirement System (PERS)
California School Boards Association
United Teachers of Los Angeles (UTLA)
California Independent Public Employees Legislative
Council (CIPELC)
5) OPPOSITION :None to date.
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