The Public Employees Retirement Law establishes the Public Employees Retirement System and the Teachers Retirement Law establishes the State Teachers Retirement System for the purpose of providing pension benefits to specified public employees and teachers. Existing law establishes the Judges Retirement System II, which provides pension benefits to elected judges, and the Legislators Retirement System, which provides pension benefits to elective officers of the state other than judges and to legislative statutory officers. The County Employees Retirement Law of 1937 authorizes counties to establish retirement systems pursuant to its provisions in order to provide pension benefits to county, city, and district employees. Existing law provides for the application of cost-of-living adjustments to allowances paid to persons retired under, or survivors or beneficiaries of persons retired under, various public retirement systems. The California Public Employees Pension Reform Act of 2013, on and after January 1, 2013, requires a public retirement system, as defined, to modify its plan or plans to comply with the act and, for its purposes, defines pensionable compensation, establishes limits on benefits, and requires the sharing of normal costs between members and employers for the pension systems to which it applies.

The bill would prohibit a public retirement system, as defined, from making a cost-of-living adjustment to any allowance payable to, or on behalf of, a person retired under the system, system who becomes a new member on or after January 1, 2019, or to any survivor or beneficiary of a that member or person retired under the system, for any year beginning on or after January 1, 2019, in which the unfunded actuarial liability of that system is greater than 20%. The bill would require that the determination of unfunded actuarial liability be based on a specified financial report and would apply the prohibition on cost-of-living adjustments, if any, to the calendar year following the fiscal year upon which the report is based.

The Public Employees Retirement Law establishes the Public Employees Retirement System and the Teachers Retirement Law establishes the State Teachers Retirement System for the purpose of providing pension benefits to specified public employees and teachers. Existing law establishes the Judges Retirement System II, which provides pension benefits to elected judges, and the Legislators Retirement System, which provides pension benefits to elective officers of the state other than judges and to legislative statutory officers. The County Employees Retirement Law of 1937 authorizes counties to establish retirement systems pursuant to its provisions in order to provide pension benefits to county, city, and district employees. Existing law provides for the application of cost-of-living adjustments to allowances paid to persons retired under, or survivors or beneficiaries of persons retired under, various public retirement systems. The California Public Employees Pension Reform Act of 2013, on and after January 1, 2013, requires a public retirement system, as defined, to modify its plan or plans to comply with the act and, for its purposes, defines pensionable compensation, establishes limits on benefits, and requires the sharing of normal costs between members and employers for the pension systems to which it applies.

The bill would prohibit a public retirement system, as defined, from making a cost-of-living adjustment to any allowance payable to, or on behalf of, a person retired under the system, or to any survivor or beneficiary of a member or person retired under the system, for any year beginning on or after January 1, 2019, in which the unfunded actuarial liability of that system is greater than 20%. The bill would require that the determination of unfunded actuarial liability be based on a specified financial report and would apply the prohibition on cost-of-living adjustments, if any, to the calendar year following the fiscal year upon which the report is based.

SENATE COMMITTEE ON

PUBLIC EMPLOYMENT AND RETIREMENT

Dr. Richard Pan, Chair

2017 - 2018 Regular

Bill No: SB 1031 Hearing Date: 4/23/18

Subject: Public employees’ retirement: cost-of-living adjustments: prohibitions

SOURCE: Author

DIGEST: This bill would prohibit a public retirement system from making a cost-of-living adjustment to any allowance payable to, or on behalf of, a person retired under the system who becomes a new member on or after January 1, 2019, or to any survivor or beneficiary of that member or person retired under the system, for any year in which the unfunded actuarial liability of the system is greater than 20 percent.

ANALYSIS:

Existing law:

1. Provides pension benefits, as specified, to California public employees under various statutory bodies of law including the Public Employees’ Retirement Law (PERL), the Teachers’ Retirement Law (TRL), and the County Employees Retirement Law of 1937 (’37 Act).
2. Creates various pension systems, including the California Public Employees’ Retirement System (CalPERS), the California State Teachers’ Retirement System (CalSTRS), several county retirement systems, as well as independent local systems, to administer public employee pension plans and invest plan assets.
3. Establishes, under the various pension plan benefit structures, cost-of living adjustments (COLAs) to retiree allowances to mitigate the erosion of the purchasing power of those allowances over time due to inflation.
4. Establishes, under various plan benefit structures, purchasing power protection benefits designed to restore the original purchasing power of allowances whose purchasing power has fallen below a specified amount.
5. Requires public employers and employees to collectively bargain over terms and conditions of employment, including compensation, through various statutory frameworks governing labor relations among public employers and their employees.
6. Makes comprehensive reforms to public employee pension plans through the enactment of the California Public Employees’ Pension Reform Act of 2013 (PEPRA) that apply to all public employers and public pension plans on and after January 1, 2013, excluding the University of California and charter cities and counties that do not participate in a retirement system governed by state statute.

This bill:

1. Prohibits a public retirement system, as specified, from making a cost-of-living adjustment to any allowance payable to, or on behalf of, a person retired under the system who becomes a new member on or after January 1, 2019, or to any survivor or beneficiary of that member or person retired under the system, for any year in which the unfunded actuarial liability of the system is greater than 20 percent. The COLA prohibition shall supersede any other law except as otherwise required by the provision of the California Constitution prohibiting bills of attainder, ex post facto laws, or laws impairing the obligation of contracts.
2. Does not apply to a retirement system established by the University of California, a charter county, or a charter city, unless the respective entity elects to apply the bill’s provisions to itself.
3. Provides that if a system is found to have an unfunded liability of greater than 20 percent pursuant to the comprehensive annual financial report (CAFR), as specified, the specified COLA prohibition shall apply to the calendar year following the fiscal year upon which the CAFR is based.

Background

According to the author, public pension systems face additional increases in unfunded liability when inflation drives up costs associated with COLAs to provide higher pension beneficiary payments to current retirees. “Effecting freezes on COLAs will help to curb accruing further unfunded pension liabilities. Per the CalPERS Comprehensive Annual Financial Report, the total [CalPERS] unfunded actuarial accrued liability has reached $142,053,672,000, and this number is expected to increase.”

Committee Concerns

This bill would impose a prohibition on one aspect of deferred compensation for public employees. Existing labor relations laws require compensation, including elements of deferred compensation, to be collectively bargained between public employers and their employees, as parts of the terms and conditions of employment. This bill is premature in that no bargaining and agreement over the terms of a ban or limitation on COLAs for new plan members has occurred.

The committee sets aside any discussion about vested or constitutionally protected contractual rights to the existing provision of COLAs since this bill does not apply to current retirees or existing members of a retirement system but only to allowances derived from the service of a person who becomes a new member of a public retirement system on or after January 1, 2019. However, the committee notes that it is unclear how SB 1031 could substantially slow the growth of the existing unfunded liability of CalPERS or any of its companion pension systems since that liability arises from benefits promised to current retirees and existing members. Any savings from the COLA freeze proposed by SB 1031 would be many years away and dependent on inflationary conditions far in the future. Thus, any costs associated with the benefit could be adequately addressed through prefunding. Since the bill does not address a need sufficiently urgent as to break with established laws governing public employer and employee labor relations without first engaging in the collective bargaining process, it is premature.

Related/Prior Legislation

SB 32 (Moorlach, 2017), Died in Senate Public Employment and Retirement Committee, would have made several changes to California public pension plans (except those of the University of California, Charter Counties, and Charter Cities, for which the bill’s changes would be optional at the election of the respective entity), including prohibiting any COLA for public pension plans, as specified.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

SUPPORT:

Association of California Cities-Orange County

City of Fullerton

City of La Habra

City of Mission Viejo

City of San Marcos

OPPOSITION:

American Federation of State, County and Municipal Employees

CAL FIRE Local 2881

California Alliance for Retired Americans

California Association of Highway Patrolmen

California Association of Professional Scientists

California Conference Board of the Amalgamated Transit Union

California Conference of Machinists

California Federation of Teachers, AFT, AFL-CIO

California Retired Teachers Association

California State Teaches’ Retirement System

California Teachers Association

California Teamsters Public Affairs Council

Los Angeles County Professional Peace Officers Association

Orange County Employees Association

Organization of SMUD Employees

Peace Officers Research Association of California

Professional & Technical Engineers, IFPTE, Local 21, AFL-CIO

Retired Public Employees Association

San Diego County Court Employees Association

Service Employees International Union, Local 1000

United Public Employees

1 Individual Letter

ARGUMENTS IN SUPPORT: According to the City of Fullerton,

While local governments such as Fullerton are taking steps to address long-term fiscal sustainability to include partnering with our employees to forgo compensation increases or shared pick-up of pension costs, we have no control over the increased unfunded liability caused by retiree COLAs. Fullerton has twice as many retirees as active employees and, even when in partnership with our employees, we have no control over increased unfunded liabilities associated with retiree COLAs, thereby putting future sustainability in question.

ARGUMENTS IN OPPOSITION: According to the Retired Public Employees Association,

The Cost-of-Living Adjustment (COLA) is a benefit to ensure your value of money at retirement keeps up with the rate of inflation. The average annual salary allowance of CalPERS retirees is around $34,000, which is a modest sum, especially in a high cost state like California.

The COLA received by retirees is small and most of the time does not cover the rising costs for healthcare and medicine that retirees generally spend more for than active employees.

SB 1031 is punitive and affects the most vulnerable of California citizens; retirees.