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



























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