BILL ANALYSIS AB 3252 Page 1 ASSEMBLY THIRD READING AB 3252 (Kaloogian) As Amended May 28, 1996 Majority vote PUBLIC EMPLOYEES 4-1 APPROPRIATIONS 12-6 Ayes: Kaloogian, Ackerman, Battin,Ayes: Poochigian, Ackerman, Baldwin, Richter Bordonaro, Brewer, House, Morrissey, Morrow, Olberg, Takasugi, Thompson, Woods Nays: Burton Nays: Brown, Archie-Hudson, Friedman, Gallegos, Martinez, Villaraigosa SUMMARY: Establishes the Public Employees' Defined Contribution Retirement Plan for state and local public agency employees whose employers elect to participate in the plan. The defined contribution plan would be administered by the California Public Employees' Retirement System (CalPERS), the State Teachers' Retirement System (STRS), a private company, or the public employer. The plan will be funded by employer and employee contributions negotiated between employers and employees. 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 conducted by CalPERS, STRS, the public employer, or a private pension, insurance, annuity, mutual fund or other qualified company. 2) Allows public employers to establish a defined contribution (DC) retirement plan. The details of the plan, such as contribution rates and vesting schedules, would be negotiated between employees and employers. 3) Allows state or other public agency employees, except safety members and California State University employees, who are members of any existing retirement system, to transfer retirement coverage to a DC 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. 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 DC plan offered by the employer if the member elects to transfer to a DC plan. 5) Requires public employers to continue offering defined benefit (DB) plans if they choose to also offer a defined contribution plan. AB 3252 Page 2 FISCAL EFFECT: Savings of $1,642 per employee, per year, according to the Department of Finance. 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 DB plans, where employees receive a predetermined 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 DC 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, i.e. it 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 DB 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 13% for CalPERS Tier I members, stays with the system and is not returned to employees upon withdrawl from the system. When 7 out of 10 CalPERS and STRS members never draw a benefit from the system, it is employees who lose. This bill provides public employers funding certainty, flexibility and predictable costs. This bill will reduce costs of public employers, and allow employees to capture the actual return of their retirement investments. ARGUMENTS IN OPPOSITION: This bill shifts the investment market risk from the employer to the employee. Analysis prepared by: Michael J. D'Arelli / aper&ss / 322-4320 AB 3252 Page 3 FN 025136