BILL ANALYSIS
AB 2456
Page 1
Date of Hearing: May 3, 2000
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Carole Migden, Chairwoman
AB 2456 (Wright) - 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 establishes the Deferred Retirement Option Program
(DROP) as a supplemental benefit for members of the California
State Teachers Retirement System (CalSTRS). Specifically, this
bill:
1)Allows participating members to work for a period of 36 months
past his or her "deferred retirement calculation date." The
member's retirement allowance during that period would be
credited with interest to an account that would be paid to the
employee upon retirement in a lump sum or an additional
annuity benefit.
2)Establishes eligibility for CalSTRS members to participate in
the DROP at age 60 with at least 5 years service credit.
3)Stipulates that the decision to participate in the DROP is
irrevocable.
FISCAL EFFECT :
1)CalSTRS indicates that the DROP benefit could have an impact
on the Teacher's Retirement Fund if members participate in the
DROP program before the time they would have retired in the
absence of the program. CalSTRS did not estimate the size of
this potential impact.
2)CalSTRS would incur administrative costs of approximately
$500,000 annually to develop and operate the DROP.
COMMENTS :
AB 2456
Page 2
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 member's highest
average annual compensation over a consecutive three-year
period. 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.
2)DROP Incentive . The DROP is intended to encourage experienced
teachers to continue teaching beyond their normal retirement
age in return for the opportunity to receive a lump sum
payment (or an additional annuity) upon retirement, in
addition to their normal retirement allowance. The DROP would
appeal to teachers who already have reached the maximum age
factor of 2.4%. In return for the DROP benefit, however, a
member would forgo earning additional years of service credit
to be applied to his or her retirement allowance.
Additionally, benefit enhancements and pay increases enacted
after the member elects to participate in DROP would not apply
to the calculation of the member's retirement benefit.
3)Related Legislation . SB 1312 (Baca), which passed both houses
of the Legislature in 1999 and currently is on the Senate
Inactive File, would establish a DROP within the California
Public Employees' Retirement System (CalPERS).
4)Suggested Amendments . CalSTRS recommends the bill be amended
to address the questions of (1) whether member and employer
retirement contributions would be required during the period
of DROP participation, and (2) the rate of interest to be paid
on DROP annuity payments.
Analysis Prepared by: Stephen Shea / APPR. / (916) 319-2081