BILL ANALYSIS                                                                                                                                                                                                    



                                                                    AB 2201
                                                                    Page  1

          Date of Hearing:   May 3, 2000

                        ASSEMBLY COMMITTEE ON APPROPRIATIONS 
                              Carole Migden, Chairwoman

                 AB 2201 (Honda) - As Introduced: February 24, 2000 

          Policy Committee:                               
          P.E.R.&S.S.Vote:7-0

          Urgency:     No                   State Mandated Local  
          Program:NoReimbursable:           

           SUMMARY  :

          This bill enacts several significant benefit enhancements to the  
          California State Teachers' Retirement System (CalSTRS).   
          Specifically, this bill:

          1)Changes the final compensation amount used in calculating a  
            member's retirement allowance from the highest average annual  
            compensation over a consecutive three-year period to the  
            highest annual compensation during any 12-month period.

          1)Requires that the annual 2% Cost of Living Adjustment (COLA)  
            be compounded, effective September 1, 2003.  Current law  
            provides a 2% simple interest COLA.

          1)Increases the purchasing power protection for members from 75%  
            of the initial value of their retirement allowance to 80%.

          1)Provides a 2% at age 55 service retirement allowance to member  
            retiring on or after January 1, 2003.  Current law provides a  
            2% at age 60 service retirement allowance.

          1)Increase the cap on the maximum age factor, with career bonus,  
            used in calculating a member's retirement allowance from 2.4%  
            to 2.5%.

          1)Makes a variety of changes to the composition of the Teachers'  
            Retirement Board.
           
          FISCAL EFFECT  :

          According to CalSTRS, the benefit enhancements in the bill would  








                                                                    AB 2201
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          result in a present value cost to the Teachers Retirement Fund  
          (TRF) of $17.45 billion, with a first-year cost of $1.2 billion.  
           The costs of each benefit enhancement are as follows:

           1)2% @ 55 Retirement Formula  .  Present value cost of $8.95  
            billion; first-year cost of $548 million.

           2)One-Year Final Compensation  .  Present value cost of $5.1  
            billion; first-year cost of $313 million.

           3)Compounded COLA  . Present value cost of $3.4 billion;  
            first-year cost of $267 million.

           4)Purchasing Power Protection  .  Present value cost not  
            available; first year cost of 76.2 million.

           5)Board Elections  .  First year cost of $208,000; ongoing costs  
            of $52,000
            
          COMMENTS  :

           1)Background  .  Under current law, retirement benefits for  
            CalSTRS members are based upon (1) an age factor, multiplied  
            by (2) years of credited service, and (3) the average of the  
            member's three highest consecutive years of compensation.  The  
            age factor is 2% at age 60, and reaches a maximum of 2.4% at  
            age 63.  (For early retirement, the age factor is reduced by  
            one-half of 1% for each month the member is less than 60, and  
            an additional one-quarter of 1% for each month the member is  
            less than 55.   However, members with 30 years of service may  
            receive a career bonus of .2%, thereby allowing the member to  
            reach the maximum age factor of 2.4% at age 61 and six months.  
             Current law authorizes one-year final compensation for  
            CalSTRS members subject to a collective bargaining agreement  
            between a school district and employee organization.  

           2)CalSTRS Surplus  .  The TRF presently has an actuarial surplus  
            of roughly $8.5 billion.  In addition, the combined  
            employer/employee contribution rate of 16% exceeds the "normal  
            cost" of providing the CalSTRS defined benefit program of  
            13.4%.  The present value of the 2.6% "normal cost surplus" is  
            about $7.5 billion.  Thus, CalSTRS has roughly $16 billion in  
            surplus resources that could be devoted to benefit  
            enhancements.  This bill alone would cost the TRF $17.5  
            billion.  The sponsor of this bill, the California Teachers'  








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            Association (CTA), also is sponsoring AB 1933 (Strom-Martin),  
            which would provide a Rule of 85 retirement benefit and  
            additional career bonuses, at a present value cost of about $8  
            billion.  There are an additional 22 CalSTRS bills active in  
            the Legislature.  Thus, the Legislature has an opportunity to  
            prioritize these bills and develop a benefit enhancement  
            package for CalSTRS along the lines of the CalPERS package  
            enacted last year.

           3)Potential Initiative  .  AB 2201 is the model for an initiative  
            measure that the CTA is considering circulating for signatures  
            next year, if the Legislature does not approve a benefit  
            package for CalSTRS.


           Analysis Prepared by  :    Stephen Shea / APPR. / (916) 319-2081