BILL ANALYSIS                                                                                                                                                                                                    



                                                                      



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          |SENATE RULES COMMITTEE            |                   AB 340|
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                              CONFERENCE COMPLETED


          Bill No:  AB 340
          Author:   Furutani (D)
          Amended:  Proposed Conference Report No. 1 - 8/28/12 
          Vote:     21

           
           CONFERENCE COMMITTEE VOTE  :  4-0, 8/20/12
          AYES:  Senators Negrete McLeod and Simitian, 
            Assemblymembers Allen and Furutani
          NO VOTE RECORDED:  Senator Walters, Assemblymember Silva


           SUBJECT  :    Public employees retirement

           SOURCE  :     Author


           DIGEST  :    This bill makes major revisions to the public 
          retirement systems' laws (see Analysis section for details 
          of the bill as developed by the Senate Public Employment 
          and Retirement Committee staff).

           Conference Committee Amendments  delete the prior version of 
          the bill which expressed intent concerning the public 
          retirement systems, and replace it with the major revisions 
          to the retirement laws.

           ANALYSIS  :    This bill would:

          1. Establish the Public Employees' Pension Reform Act of 
             2013 (PEPRA) which will apply to all public employers 
             and public pension plans on and after January 1, 2013.
           
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             A.    Exclude from the PEPRA requirements the University 
                of California and stand-alone, independent retirement 
                plans offered by charter cities and counties that do 
                not participate in the California Public Employees' 
                Retirement System (CalPERS) or the 1937 Act County 
                Retirement System requirements. Accordingly, plans 
                approved by voters prior to the implementation of 
                this bill are not impacted.

          2. Establish a cap on the amount of compensation that can 
             be used to calculate a retirement benefit on for all new 
             members, as specified, of a public retirement system 
             equal to the Social Security wage index limit ($110,100) 
             for employees who participate in Social Security, or 
             120% of that limit ($132,120) if they do not participate 
             in Social Security.

          3. Require the retirement systems to adjust the 
             compensation cap annually, as specified, based on 
             changes in the Consumer Price Index (CPI) for all Urban 
             Consumers.  

          4. Specify that the Legislature reserves the right to 
             modify the annual CPI adjustments to the compensation 
             cap prospectively.

          5. Prohibit an employer from offering a defined benefit 
             (DB) plan, or combination of DB plans, on compensation 
             in excess of the compensation cap.
             
          6. Allow an employer to offer a defined contribution (DC) 
             plan on earnings above the compensation cap up to the 
             federal limit on compensation that can be creditable to 
             DB plans.  Any such DC plan must comply with federal 
             laws, and employees do not have a vested right to an 
             employer contribution to such a plan.

          7. Define "new member" with regard to eligibility for PEPRA 
             as:

             A.    An individual who has never been a member of any 
                public retirement system prior to January 1, 2013.

             B.    An individual who moved between retirement systems 







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                with more than a six month break in service, as 
                specified.
              
             C.    An individual who moved between public employers 
                within a retirement system after more than a six 
                month break in service, as specified. 

          8. Allow employers that offer alternate DB plans 
             established prior to January 1, 2013 that have lower 
             benefit formulas and that result in a lower normal cost 
             to continue offering those plans to new employees.

          9. Allow employers that offer a retirement benefit plan 
             established prior to January 1, 2013 that consists 
             solely of a DC plan to continue offering that plan to 
             new employees.

          10.Excludes members of the Judges Retirement Systems I and 
             II (JRS I and JRS II) from the PEPRA retirement formula 
             and the compensation cap. 

          11.Specify that the retirement formula for the DB plan will 
             be 2% at age 62 for all new non-safety employees, 
             excluding teachers.  The formula is adjusted to 
             encourage members to retire at later ages.  The earliest 
             an employee would be eligible to retire is age 52 with a 
             1% factor and the maximum retirement factor of 2.5% is 
             provided at age 67.

          12.Specify that the retirement formula for new members of 
             the California State Teachers' Retirement System 
             (CalSTRS) will be 2% at age 62.  The earliest an 
             employee would be eligible to retire is age 55 with an 
             actuarially reduced formula, and with a maximum formula 
             of 2.4% at age 65. 

          13.Specify three retirement formulas for the DB plan that 
             will apply to new safety employees, as specified.  The 
             three formulas are:  2% at age 57 (basic plan); 2.5% at 
             age 57 (safety option plan one); and 2.7% at age 57 
             (safety option plan 2).

          14.Require contributions from employees to the DB plan to 
             equal to one-half of normal cost of the DB.







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          15.Require that final compensation be defined for all new 
             employees as the highest average annual compensation 
             over a three-year period.

          16.Define "pensionable compensation" and prohibit the 
             following types of compensation from being used to 
             calculate a retirement benefit: compensation paid to 
             enhance a retirement benefit; compensation previously 
             provided "in-kind" and converted to cash in the final 
             comp period; one-time or ad hoc payments; terminal pay; 
             pay for unused leave or time off; pay for work outside 
             of normal hours; uniform, housing or vehicle allowances; 
             pay for overtime, except planned overtime, extended duty 
             workweek, or pay defined in the federal labor codes; 
             employer contributions to DC plans; and bonuses.

          17.Prohibit a public employer from providing a better 
             health benefit vesting schedule for excluded and exempt 
             employees than for represented employees in the same 
             retirement classes.

          18.Limit the maximum salary taken into account for  any  
             retirement plan (DB and DC combined) to the federal 
             limit established under 401(a)(17) of the Internal 
             Revenue Code (IRC) and prohibit an employer from seeking 
             a federal exemption from the limit.

          19.Prohibit an employer from making contributions to any 
             public retirement plan (DB or DC) on any amounts of 
             compensation that exceed the 401(a)(17) limit.

          20.Prohibit a public employer from offering a benefit 
             replacement plan for any member or survivor who is 
             subject to the federal limit on benefits established by 
             section 415(b) of the IRC for an employee first hired on 
             and after January 1, 2013, or to any group of employees 
             that was not offered a benefits replacement plan prior 
             to that date.

          21.Authorize a public retirement system to continue 
             administering a 415(b) benefit replacement plan for 
             employees first hired prior to January 1, 2013.








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          22.Prohibit a retroactive enhancement to a benefit formula, 
             either due to a change to an existing formula, or due to 
             a change to the retirement classification for a specific 
             job.

          23.Prohibit the purchase of non-qualified time ("airtime") 
             on and after January 1, 2013.  Any application to 
             purchase airtime received by a retirement system prior 
             to January 1, 2013 is grandfathered.

          24.Specify that local elected members first elected on or 
             after January 1, 2013 may not receive a retirement 
             benefit for the elected service based on compensation 
             earned in any other public employment.  The retirement 
             benefit for the elected service shall only be based on 
             compensation earned for that service.

          25.Prohibit all employers from suspending employer and/or 
             employee contributions necessary to fund annual pension 
             normal costs.

          26.Prohibit post-retirement employment from exceeding 960 
             hours in a consecutive 12 month period.  If a retiree 
             receives unemployment benefits, he or she is prohibited 
             from working for 12 months as a retiree for a public 
             employer.

          27.Prohibit a person who retires on or after January 1, 
             2013, from returning to work as a retired annuitant for 
             a period of 180 days after retirement unless the action 
             is approved in an open meeting, as specified by the 
             governing body of the employer, or by California 
             Department of Human Resources (CalHR) authority if state 
             retiree, as specified.  However, in no case could a 
             person who receives a retirement incentive (e.g., a 
             "golden handshake") return to work as a retired 
             annuitant for a period of 180 days after retirement.

          28.Establish the following exceptions to 180 day rule:

             A.    The retiree is participating in the Faculty Early 
                Retirement Program pursuant to a collective 
                bargaining agreement with the California State 
                University.







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             B.    The retiree is a public safety officer or 
                firefighter.

             C.    The retiree is a trustee, administrator, or fiscal 
                advisor appointed to address academic or financial 
                weaknesses in a school or community college district, 
                pursuant to specified requirements.

             D.    The retiree is a subordinate judicial officer 
                whose position, upon retirement, is converted to a 
                judgeship and he or she returns to work in the 
                converted position.

             E.    The retiree is a person taking office as a judge, 
                as specified.

          29.Prohibit a public retiree who is first appointed on or 
             after January 1, 2013 from serving full-time on a 
             salaried state board or commission without suspending 
             their retirement allowance or choosing to serve as a 
             non-salaried member of the board or commission, as 
             specified.  Retiree health care benefits for these 
             individuals would be protected so that the person is 
             eligible to receive any prior employer provided retiree 
             healthcare coverage upon re-retirement after leaving the 
             board or commission. Appointees to the Parole Board are 
             exempt from this prohibition.

          30.Specify that retirees of the California State Teachers' 
             Retirement System (CalSTRS) are subject to the 
             post-retirement employment limitations specified in that 
             system.

          31.Require public officials and employees to forfeit 
             pension and related benefits if they are convicted of a 
             felony in carrying our official duties, in seeking an 
             elected office or appointment, or in connection with 
             obtaining salary or pension benefits.

          32.Allow public safety members who qualify for Industrial 
             Disability Retirement (IDR) and are under age 50 to 
             receive an actuarially reduced retirement benefit.  This 
             pilot project will sunset in 2018 unless extended by 







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             subsequent legislation.

          33.Prohibit newly elected statewide officers and 
             legislative officers from participating in the 
             Legislators' Retirement System.  They would continue to 
             be optional members in CalPERS.

          34.Specify that the Alternate Retirement Plan will not 
             apply to new state employees subject to PEPRA.

          35.Allow more flexibility for bargaining increased cost 
             sharing between employers and existing employees in 
             CalPERS and retirement systems established pursuant to 
             the County Employees' Retirement Law of 1937 ('37 Act).  
             Using impasse procedures to impose cost sharing 
             arrangements achieved through this new flexibility would 
             be prohibited if the proposed contribution exceeds 
             statutorily required contributions for current employees 
             or half of the normal cost of benefits for employees 
             first hired on or after January 1, 2013.

          36.Provide additional flexibility to CalPERS contracting 
             agencies to achieve cost sharing goals with current 
             employees, as specified.

          37.Require CalPERS contracting agencies and school 
             employers to achieve specific cost sharing goals by 
             January 1, 2018.

          38.Require additional contributions for various state 
             bargaining units, and excluded and exempt employees of 
             the state, executive, legislative and judicial branches 
             that have not yet achieved equal cost sharing of normal 
             cost.

          39.Require CalPERS to develop a system for monitoring 
             excessive increases to salaries that create significant 
             liabilities for former employers due to reciprocity, and 
             for requiring the employers that caused the significant 
             liability to be responsible for it.

          40.Increase the retirement formula for new state 
             miscellaneous members who opt to participate in the 
             Second Tier from 1.25% at age 65 to 1.25% at age 67.







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          41.Prohibit certain cash payments from being counted as 
             compensation earnable for retirement purposes in '37 Act 
             counties

          42.Provide '37 Act retirement boards with more independence 
             to perform audits and assess penalties relating to 
             pension spiking.

          43.Require '37 Act county employers and districts to 
             achieve specific cost sharing goals by January 1, 2018.

          44.Specify that if any provision of the bill is held 
             invalid, the rest may still be given effect.

          45.Makes conforming changes to provisions of the Education 
             Code administered by CalSTRS.

           Comments

           The comprehensive pension reform proposal contained in the 
          Conference Committee Report is based on the Governor's 
          12-Point Pension Reform Plan.  

          The Conference Committee Report includes 10 of the 12 
          points included in the Governor's plan.  As an alternative 
          to the hybrid plan proposed by the Governor, the Report 
          includes a hard cap on the amount of compensation that can 
          be used when calculating a retirement benefit and lower 
          retirement formulas.  There are only other two provisions 
          of the Governor's Plan that were not included in the 
          Report: changes to the CalPERS Board of Administration and 
          the proposal to increase state retiree health care vesting. 
           The Governor chose to drop the CalPERS Board proposal.  
          Regarding state retiree health care vesting, state employee 
          bargaining units have shown a willingness to bargain over 
          this issue and so the Conference Committee believed it 
          should remain subject to collective bargaining.

          Additionally, in order to achieve the goal of comprehensive 
          reform, included are some pension reform changes found in 
          bills going through the Legislature this session that were 
          not included as part of the Governor's plan.  Finally, the 
          Report includes a number of other changes that are part of 







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          comprehensive pension reform.

           Existing Law  

          California currently has many public retirement systems and 
          individual retirement plans.  The largest are CalPERS, 
          serving over 1.6 million members and retirees, and the 
          California State Teachers' Retirement System (CalSTRS), 
          serving over 850,000 members and retirees.  CalPERS also 
          administers the Judges' Retirement Systems I and II and the 
          Legislators' Retirement System.  In addition, there are 
          many independent public retirement systems, including the 
          20 county systems that operate under the 1937 Act County 
          Employees' Retirement Law, the University of California 
          Retirement Plan, plans for the City and County of San 
          Francisco, and Cities of San Diego, Fresno, Sacramento, 
          Oakland, San Jose, and others.

          Some of these retirement systems and individual retirement 
          plans are established under a statutory framework, while 
          others operate under their own regulations and charters.  
          Benefit formulas vary widely with differing retirement 
          formulas for non-safety and safety employees and benefit 
          levels and plan designs varying among retirement systems 
          and employers.  Finally, Social Security (SS) coverage 
          varies.  Non-safety state employees are coordinated with 
          SS, while state safety employees are not.  Teachers are not 
          coordinated with SS, but school classified employees are 
          coordinated.  Employees of counties, cities, and districts 
          have varying coverage.  It is most common that safety 
          employees do not have SS, while non-safety employees do 
          have SS; however, that is not the case for every public 
          employer. In some cases all employees of a public employer 
          are coordinated, and in other cases none of the employees 
          are coordinated.

          The unifying factor for all public retirement systems and 
          plans (with one or two known exceptions) is that they 
          provide a defined benefit for retirees that is derived by 
          multiplying the individual's years of service, highest 
          average compensation over a 12 or 36 month period, and the 
          individual's retirement benefit age factor (e.g., two 
          percent per year of service upon reaching age 60).  In 
          addition, all systems provide cost-of-living adjustments in 







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          varying levels to retiree benefits, death and disability 
          benefits, and survivor benefits. Finally, all defined 
          benefit plans must comply with applicable federal laws in 
          order to maintain their status as tax-qualified plans.

          Benefits for retirement system members are funded over the 
          employee's working career from three sources.  First, 
          employees make contributions as a percentage of payroll.  
          Employee contribution rates are established in statute, or 
          in rules and charters for the smaller plans.  In some 
          cases, employers and employees agree, through collective 
          bargaining, to adjust employee contribution rates.  The 
          second source of funding is derived from investment returns 
          on the retirement funds.  For example, CalPERS estimates 
          that historically, investment returns have paid for 
          approximately 2/3 of the cost of providing benefits. 

          The third source of funding is employer contributions, 
          which are also determined and paid as a percentage of 
          employee income.  When investment returns do not perform as 
          expected, unfunded liability may occur and employers make 
          up the difference in the form of higher rates.  The 2008 
          economic crisis resulted in significant unfunded 
          liabilities in the retirement systems, impacting most 
          employer rates.  Similarly, when investment returns exceed 
          expectations, surpluses may accrue, and employer rates are 
          reduced accordingly.  These rate reductions and increases 
          are actuarially "smoothed" over a period of years in order 
          to ease employer rate volatility and ensure continued 
          funding of the retirement systems.

          The basic cost of providing an employee's future benefit at 
          any given time is the "normal cost."  The normal cost is 
          calculated separately from the unfunded liability or any 
          surplus, and system actuaries use all of these calculations 
          to annually set the employer contribution rate for that 
          year.

          One exception to the forgoing exists with regard to the 
          CalSTRS retirement plan.  CalSTRS contribution rates for 
          both employers and employees are set in statute.  The 
          CalPERS board does not currently have the authority to 
          raise or reduce employer rates in response to increased 
          unfunded liability or the accrual of a surplus.







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           FISCAL EFFECT  :    Appropriation:  Yes   Fiscal Com.:  Yes   
          Local:  No

           SUPPORT  :   (Verified  8/30/12)

          League of California Cities
          Urban Counties Caucus

           OPPOSITION  :    (Verified  8/30/12)

          California Association of Professional Scientists
          CDF Firefighters
          Laborers' International Union, Locals 777 and 792
          Local Government Employees
          Professional Engineers in California Government
          Service Employees International Union

           ARGUMENTS IN SUPPORT  :    The League of California Cities 
          states, "The board of directors of the League of California 
          Cities urges the Legislature to enact AB 340 (Furutani), 
          the California Employees' Pension Reform Act of 2013 
          (PEPRA).  While not perfect, the League views this 
          legislation as a substantial step forward in implementing 
          pension reform largely in keeping with the League's own 
          comprehensive pension reform principles.  This 
          recommendation is made in recognition that there are 
          numerous questions of implementation and interpretation 
          that will need to be resolved in the days and months ahead. 
           The League and cities will continue to be vigilant in 
          advocating for effective pension reform to ensure the 
          intent of this historic legislation is respected.  Finally, 
          the League board congratulates the elected and appointed 
          city leaders of California for their pension reform actions 
          to date, and it respectfully urges them to continue their 
          leadership on this vital issue at the local level. ? The 
          city officials of California recognize that pension reform 
          is a journey and not just a destination.  They have enacted 
          a number of cost-saving pension reforms already, and this 
          legislation would give them valuable new tools for 
                                                                                    achieving additional savings with existing employees while 
          at the same time requiring more sustainable and affordable 
          pension plans for new employees. This is a win-win for the 
          cities and taxpayers of California ?  This year reform of 







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          the state's pension laws is the first and most important 
          strategic goal of the League of California Cities.  
          Hundreds of cities have already made major strides in the 
          last few years to reduce current and future pension costs.  
          A League survey of city managers earlier this year revealed 
          that 47 percent of the responding cities had already 
          adopted a new pension tier for new employees and 64 percent 
          of the cities had already secured higher employee 
          cost-sharing for pensions from existing employees through 
          collective bargaining."

           ARGUMENTS IN OPPOSITION  :    Opponents argue that AB 340 
          circumvents the collective bargaining process, and 
          unilaterally imposes severe cuts to public employee 
          pensions.  AB 340 also imposes the biggest retirement 
          benefit rollback in California history, cutting benefits to 
          levels below those that existed before SB 400.  The bulk of 
          these cuts will not be borne by high wage earners, who can 
          offset them by relying on other retirement savings.  Rather 
          the brunt of these cuts will be borne by low wage workers 
          who have devoted their lives to public service-teaching our 
          kids, taking care of us when we are sick, and making our 
          streets safer.  AB 340 will both decrease benefit formulas 
          and increase the age factors, resulting in new employees 
          earning substantially lower retirement benefits.  The 
          formulas in AB 340 impose a 2% at age 62 formula for local 
          government non-safety employees and require these employees 
          to work until age 67 to receive the maximum retirement 
          factor of 2.5%  There are myriad non-safety jobs that are 
          so physically demanding that working to age 67 would be a 
          physical and practical impossibility.  Accordingly, these 
          workers will never be able to achieve their maximum benefit 
          allowance, and rather will have to rely on an additional 
          reduction to already diminished retirement benefits."  
           

          DLW:md  8/31/12   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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