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