BILL ANALYSIS SENATE PUBLIC EMPLOYMENT & RETIREMENT COMMITTEE BILL NO: AB 3252 Teresa Hughes, Chairwoman Hearing date: 7/1/96 AB 3252 (Kaloogian), as amended 6/26/96 FISCAL: yes PUBLIC RETIREMENT SYSTEMS: oDEFINED CONTRIBUTIONo OPTION FOR ALL PUBLIC EMPLOYEES HISTORY: Sponsor: author Prior legislation: SB 2019 (Russell) 1996 held in Senate P.E. & R. Committee ASSEMBLY VOTES: P.E.R. & S.S. 4-1 4/24/96 Appropriations 12-6 5/15/96 Assembly Floor 43-29 5/31/96 SUMMARY: Would establish the Public Employees' Defined Contribution Retirement Plan for state and local public agency employees whose employers elect to participate in the plan, which would be administered by the Public Employees' Retirement System (PERS), the State Teachers' Retirement System (STRS), a private company, or the public employer, and would be funded by employer and employee contributions negotiated between employers and employees. BACKGROUND: DEFINED BENEFIT PLANS. With the notable exception of the 20 county systems organized under the 1937 County Employees Retirement Act, PERS and STRS provide retirement benefits to most of California's public employees. The plans offered by these systems are Defined Benefit (DB) plans, where employees receive a predetermined benefit upon retirement. In a DB plan, the benefit is determined by a page 1 (more) formula that includes the number of years of service, the employee's "final compensation," and a factor to be applied to equation based on the employeeos age at retirement. While the benefit is specified in advance for the employee, the actual cost to the employer is based on actuarial analyses of accrued assets as they are applied to accrued liabilities, incorporating projections for future earnings, wage inflation and other factors outside of the employer's control. DEFINED CONTRIBUTION PLANS. A Defined Contribution (DC) plan, as proposed in 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. ANALYSIS: 1) This bill: a) 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 PERS, STRS, the public employer, or a private pension, insurance, annuity, mutual fund or other qualified company, as determined by the employer, b) 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, if page 2 (more) the employee is represented by an employee organization. If the employee is not represented, the employer may establish the DC plan and set contribution rates unilaterally, c) 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, d) 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, e) provides that, in determining the present value of the accrued benefits, the agency, not the governing body of the existing retirement plan, determines the discount rate for investment earnings and the assumptions for current final average compensation, f) requires public employers to continue offering defined benefit (DB) plans to current employees if they choose to also offer a defined contribution plan, however, new employees are allowed to be offered only the DC plan, as long that arrangement is not in conflict with any bargaining agreement covering those new employees, g) 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 DC 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, h) requires all employees who terminate employment after January 1, 1997, and are later reemployed by their former page 3 (more) employer are place in the defined contribution plan, unless that participation would be in conflict with a collective bargaining agreement covering the employee, i) 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, and j) contains no provision for public disclosure of the agencyos intent to provide a defined contribution plan, the cost of providing the plan, or the terms of the plan or plans. COMMENTS: 1) The author asserts that the Bureau of Labor Statistics projects that future workers will change jobs more in the future, and therefore, employees need a retirement plan that is portable, i.e. it will follow them from employer to employer. The author states that this bill allows an employee to immediately vest for the employer contribution. 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 the interest it has accrued. Retirement system experience indicates that 7 out of 10 PERS and STRS members withdraw from those systems before achieving the minimum vesting period of service, and thus, never draw a benefit from those systems. The author asserts that this bill provides public employers funding certainty, flexibility and predictable costs, and that this bill will reduce costs of public employers. 2) The committee is advised that PERS has done an extensive analysis of this bill, and has provided the following observations and concerns. According to PERS: page 4 (more) a) transferring non-vested employeeso assets to a defined contribution plan could result in an increase in costs to the employer for its defined benefit plan, b) the potential transfer of employer assets to a defined contribution plan provides a drain of employer assets not previously considered in the funding assumptions used by defined benefit plans. The loss of employer assets reduces the funds available for investment. As it is anticipated that investment return ultimately becomes the primary source of funding retirement benefits, a reduction of those assets delays the point in time when this occurs, c) the bill requires participating agencies to continue to offer membership in existing retirement system to current employees, new employees or retirees. This appears to preclude the statutory authority under PERS for an agency to voluntarily terminate their PERS contract or for the Board of Administration from terminating a contract for cause, d) any state employee, other than safety employees, may elect to participate in the new system instead of PERS on the effective date specified in an agreement between the employer and the employees' bargaining representative, e) the May 28th amendments deleted the term oirrevocableo from the member election. It is assumed that an individual could subsequently file another election to transfer back to the defined benefit plan. No provision is made for the transfer of the defined contribution plan assets to a defined benefit plan should the member make another election to return to the defined benefit plan, f) as the bill does not specify when the election can take place it is assumed that this could be at any time while the individual is an employee of the State or contracting agency and a member of the retirement system. This furthers the potential for anti-selection, employees making decisions that cost the most to the employer, g) the total present value for all individuals transferring page 5 (more) the memberos accrued benefit could exceed the assets in the plan. The bill does not address how this situation should be handled, h) the employer shall have exclusive authority to decide questions of eligibility for re-admission to the existing retirement system. This conflicts with the statutory authority of the PERS Board of Administrationos powers and duties (Sec. 20125) and appears to conflict with the fiduciary responsibility of a retirement board as declared by Article XVI, Section 17 of the State Constitution, i) the State, local agencies and school districts would contract with an existing public retirement system or with a private pension, insurance, annuity, mutual fund, or other qualified company or companies to administer the day-to-day operations of the plan. PERS already provides an employee funded supplemental contribution program which is a defined contribution plan. Public employees may participate in deferred compensation (IRC 457) plans in addition to a PERS defined benefit under existing statute, j) under the bill, local public agencies and the Regents of the University of California are given authority to contract with an existing retirement system for elective partial defined benefit options through which employees may elect to receive a reduced defined benefit and a supplemental defined contribution retirement plan. PERS has no statutory authority to provide such options, k) for public agencies, the defined contribution plan could be an alternative plan or a supplemental plan to the defined benefit plan. PERS law specifically prohibits members from receiving credit for the same service under two publicly funded retirement systems. This bill appears to conflict with those prohibitions, l) the bill requires the transfer of the present value of the accrued benefits in the defined benefit plan to the defined contribution plan. At a minimum, this should include all the employeeso own contribution account. When such a transfer is made there would be nothing left of the memberos account in the defined benefit plan effectively terminating their membership in the defined benefit plan. Consequently, it would not be possible for the defined contribution plan to supplement a defined benefit plan as the employee would no page 6 (more) longer be a member of a defined benefit plan, m) for PERS members, it is assumed that if the employee had worked for more than one public agency that the amount to be transferred would represent the present value of the accrued benefit limited to the service rendered with the current employer. If the remaining service credit left under PERS is less than five years the employee would loose their vested status. This could result in impairment of benefits, n) the bill provides for a pro-rata portion of excess plan assets being transferred from the defined benefit plan to the defined contribution plan. To determine the pro-rata share of excess assets it would be necessary to allocate some portion to current employees, former employees, retirees, survivors and beneficiaries. The bill is silent as to how this would be done, o) because the schools are pooled, the actions of one school employer will affect all the others, p) the bill provides that for State employees a defined contribution plan would be subject to collective bargaining. However, for local public agencies and the University of California the employer may make the defined contribution plan available to some or all public agency employees without collective bargaining. This could result in such plans being deemed discriminatory by the IRS and losing their qualified plan status, q) existing law (Gov. Code Sec. 53215) grants authority to public agencies to establish pension trusts which could include defined contribution plans. This bill appears to duplicate existing statutory authority, r) a Public Employeeso Defined Contribution Retirement Plan Fund is created as a trust fund in the state Treasury. The bill does not create a defined contribution retirement plan for state employees. The bill provides that o...the employer has all powers necessary to effectuate the purposes of this chapter.o It is assumed that the responsibility for page 7 (more) establishing a defined contribution plan would be delegated by the Governor, s) employer assets under defined benefit plans, such as PERS, would decrease as a result of non-vested members electing to join the defined contribution plan and having employer assets transferred to the defined contribution plan. This could cause an increase in the employer contribution rates under the defined benefit plans, t) since members of the new system are not PERS members, there is no lifetime allowance guarantee and the employee may not receive an employer contribution for health insurance, u) this bill would presumably include the Judgeso Retirement System. The Legislature recently acted to provide a hybrid defined benefit/defined contribution plan for judges by establishing Judgeso Retirement System (JRS) II last year. It would seem inappropriate for this bill to include JRS considering the extent of change that has occurred so recently, and v) the term osafety employeeo is not defined and may conflict with those contained in the Public Employeeso Retirement Law, 3) FISCAL IMPACT: According to PERS: oThe fiscal impact on the state, school districts or any of the 1250 PERS contracting agencies would vary depending on their funding status and which employees elect to participate in the program. This bill would result in increased employer contribution rates for some of our contracting agencies, primarily those who have a substantial unfunded liability. Other agencies would experience little or no adverse. Others could potentially reduce their defined benefit costs depending on which employees elect to transfer. This bill would result in substantial, undetermined administrative costs for PERS actuarial staff to provide actuarial present value calculations for those individuals who would be interested in finding out what would be transferred to a defined contribution plan page 8 (more) should they elect to transfer.o 4) SUPPORT: Cal-Tax California State Association of Counties Association of California Life and Health Insurance Companies AEtna Life and Casualty Company League of California Cities City of Bakersfield Camarillo City Council City of Ceres City of Corona El Cajon City Council City of Fullerton City of Hercules City of Jackson City of Laguna Hills Menlo Park City Council City of Merced City of National City City of Oroville City of Palm Springs City of Poway City of Roseville City of Redondo Beach City of Salinas City of San Marcos City of San Mateo City of Santa Maria City of Shafter City of South Pasadena City of Stanton City of Stockton City of Vista National Association of Counties Financial Services Center Nationwide Mutual Insurance Company page 9 (more) ICMA Retirement Corporation page 10 (more) 5) OPPOSITION: California State Employeeso Association Peace Officers Research Association of California San Diego Office of Education California School Employees Association American Federation of State, County and Municipal Employees, City of Pasadena Municipal Employees California Public Employeeso Retirement System Association of California State Attorneys and Administrative Law Judges California Association of Professional Scientists Orange County Employees Association Professional Engineers in California Government Retired Public Employees Association California Association of Highway Patrolmen CDF Firefighters Los Angeles County Employees Retirement Association City of Palm Desert California Labor Federation, AFL-CIO California Conference Board of the Amalgamated Transit Union California Retired Teachers Association Sacramento County Deputy Sheriffos Association California Council of Police & Sheriffos Association of California School Administrators California Professional Firefighters California Federation of Teachers California State University Emeritus & Retired Faculty Association California Teachers Association Service Employees International Union State Teachers Retirement Board California Correctional Peace Officers Association Association for Los Angeles Deputy Sheriffs Los Angeles County Probation Department Union, AFSCME, Local 685 California State Firefighterso Association page 11 (end) David Felderstein AB 3252 June 27, 1996 page 12 (end)