BILL ANALYSIS
Date of Hearing: April 24, 1996
ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT & SOCIAL
SECURITY
Howard Kaloogian, Chairman
AB 3252 (Kaloogian) - As Amended: April 22, 1996
SUMMARY: Establishes the Public Employees' Defined Contribution
Retirement Plan for state and other local public agency employees
whose employers elect to participate in the plan. The daily
operation of the plan would be contracted out to a third party
administrator. The plan will be funded by employer and employee
contributions established by the Public Employees' Defined
Contribution Retirement Plan Board. Specifically, this bill:
1) Creates an alternative retirement plan for state and local
public agency employees whose employers choose to participate.
The day-to-day operation of the plan would be contracted out to
a private pension, insurance, annuity, mutual fund, or other
qualified company.
2) Specifies that the contribution rates would be set by the
board. The board consists of two local government officials
appointed by the Governor; the Director of Personnel
Administration; the Controller; the Treasurer; and two persons
from the active or retired membership, one appointed by the
Speaker of the Assembly and the other appointed by the Senate
Committee on Rules.
3) Allows any state or other public agency employee who is a
member of any existing retirement system to transfer retirement
coverage to a defined contribution plan offered by the
employer. Defines an existing retirement system to include any
state, university, or local public retirement system or systems
providing defined retirement benefits to employees of local
agencies. Specifies that an agreement between the employees'
bargaining unit and employer must be in place prior to any such
transfer.
4) Requires the transfer of a payment equal to the actuarial
present value of the member's accrued service benefit from the
existing retirement system to the defined contribution plan
offered by the employer if the member elects to transfer their
retirement coverage.
5) Allows the governing body of any local public agency and the
Board of Regents of the University of California to elect to
have any or all of their employees (employed part-time or
full-time) participate in a defined contribution plan either as
an alternative or as a supplement to an existing retirement
system. These employers would also be permitted to contract
with an existing retirement system for an elective partial
defined benefit option to supplement retirement benefits in the
defined contribution plan.
6) Permits employers to require new employees to participate in
the defined contribution plan as long as it is not in conflict
with any bargaining agreement covering those new employees.
7) Requires all employees who terminate employment after January
1, 1997, and are later reemployed by their former employer into
the defined contribution plan, unless that participation would
be in conflict with a collective bargaining agreement covering
the employee.
AB 3252
Page 3
8) Requires existing systems to provide, at the employer's
request, a disability benefit with an actuarially determined
employer contribution rate for employees who transfer their
membership to a defined contribution plan.
FISCAL EFFECT: Unknown. To the extent that existing and future
employers opt out of the existing defined benefit retirement
systems, funding to these plans will be impacted. Contribution
rates to the existing defined benefit plans is based on a
percentage of payroll, and when fewer employees participate in
such plans the payroll and contributions funding the plans will be
decreased.
For employers, increased competition could drive down costs
substantially.
BACKGROUND: Currently the California Public Employees' Retirement
System (CalPERS) and the State Teachers' Retirement System (STRS)
provide retirement benefits to the great majority of California's
public employees. The plans offered by these systems are defined
benefit plans, where employees receive a pre-specified benefit
upon retirement. The benefit is typically determined by a formula
that includes the number of years of service, the employee's
"final compensation," and a factor to be applied to the years of
service. While the benefit is specified in advance for the
employee, the actual cost to the employer is not known ahead of
time. The employer's contribution to fund this benefit is based
on actuarial calculations, incorporating projections for future
earnings, wage inflation, and other factors outside of the
employer's control.
A defined contribution plan, as proposed by this bill, does not
specify the retirement benefit to be received by the employee.
Rather, it specifies a contribution, typically expressed as a
percentage of compensation, which is deposited into an individual
account for each participant. The actual benefit for the
participant is based solely on the amount contributed to the
account by the employer and participant, and the investment
earnings attributable to that account.
ARGUMENTS IN SUPPORT: The Bureau of Labor Statistics projects
that future workers will change jobs more than ever before.
Employees need a retirement plan that is portable and will follow
them from employer to employer.
This bill allows an employee to immediately vest for the employer
contribution, instead of leaving it in the system. In the typical
defined benefit plan, if an individual withdraws from the system
without drawing a benefit, the employee only receives his or her
contribution and a meager 6% interest or so. For instance, the
employer contribution, which is roughly 12.3% for CalPERS Tier I
members, stays with the system and is returned to the employers to
reduce their future contributions. When seven out of ten CalPERS
members never draw a benefit from the system, it is the employee
who loses.
AB 3252
Page 4
This bill will provide the state and local government public
employers funding certainty, flexibility and predictable costs.
This bill will likely reduce costs of public employers, and allow
employees to take a more active role in self-directing their
retirement investments.
AB 3252
Page 5
ARGUMENTS IN OPPOSITION: This bill will impact the funding of
existing public retirement systems. This bill also shifts the
investment market risk from the employer to the employee.
REGISTERED SUPPORT / OPPOSITION:
Support
California State Association of Counties
California Taxpayers' Association
League of California Cities
Opposition
Association of California School Administrators
Association of California State Attorneys and Administrative Law
Judges
Association for Los Angeles Deputy Sheriffs, Inc.
CalPERS
California Association of Highway Patrolmen
California Association of Professional Scientists
California Conference Board of the Amalgamated Transit Union
California Correctional Peace Officers Association
California School Employees Association
California State Employees' Association
CDF Firefighters
California Federation of Teachers
California Professional Firefighters
California State University
California Teachers Association
Los Angeles County Probation Department Union
Peace Officers Research Association
Professional Engineers in California Government
Retired Public Employees Association
Service Employees
State Teachers' Retirement System
Analysis prepared by: Michael J. D'Arelli / aper&ss / 322-4320