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
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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
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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
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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:
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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
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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
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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
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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
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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
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ICMA Retirement Corporation
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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
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David Felderstein AB 3252
June 27, 1996
page 12 (end)