Existing law, the Public Employees Retirement Law (PERL), creates the Public Employees Retirement System (PERS) and authorizes local entities to join PERS as contracting agencies for the provision of benefits to their employees. Existing law authorizes retirement systems to enter into agreements to provide certain reciprocal benefits to employees that are employed by other agencies that are parties to the agreement if the employees meet specified requirements, a practice commonly referred to as reciprocity. Reciprocity provides for the application of the final compensation paid by a subsequent employer to service provided to a prior employer. PERL provides that a public agency that has agreed to reciprocity with PERS also has reciprocity with all other agencies that have entered into those agreements with PERS, among others. PERL requires the Board of Administration of PERS to ensure that a contracting agency that creates a significant increase in actuarial liability as a result of increased compensation paid to a nonrepresented employee bears the associated liability, except as specified, including a portion that would otherwise be bourne borne by another contracting agency. PERL requires the system actuary to assess an increase in liability, in this regard, to the employer that created it at the time the increase is determined and to make adjustments to that employers contribution rates to account for the increased liability.

This bill would require that an agency participating in PERS that increases the compensation of a member who was previously employed by a different agency to bear all actuarial liability for the action, if it results in an increased actuarial liability beyond what would have been reasonably expected for the member. The bill would require, in this context, that the increased actuarial liability be in addition to reasonable compensation growth that is anticipated for a member who works for an employer or multiple employers over an extended time. The bill would require, if multiple employers cause increased liability, that the liability be apportioned equitably among them. The bill would apply to an increase in actuarial liability, as specified, due to increased compensation paid to an employee on and after January 1, 2019.

Existing law, the Public Employees Retirement Law (PERL), creates the Public Employees Retirement System (PERS) and authorizes local entities to join PERS as contracting agencies for the provision of benefits to their employees. Existing law authorizes retirement systems to enter into agreements to provide certain reciprocal benefits to employees that are employed by other agencies that are parties to the agreement if the employees meet specified requirements, a practice commonly referred to as reciprocity. Reciprocity provides for the application of the final compensation paid by a subsequent employer to service provided to a prior employer. PERL provides that a public agency that has agreed to reciprocity with PERS also has reciprocity with all other agencies that have entered into those agreements with PERS, among others. PERL requires the Board of Administration of PERS to ensure that a contracting agency that creates a significant increase in actuarial liability as a result of increased compensation paid to a nonrepresented employee bears the associated liability, except as specified, including a portion that would otherwise be bourne by another contracting agency. PERL requires the system actuary to assess an increase in liability, in this regard, to the employer that created it at the time the increase is determined and to make adjustments to that employers contribution rates to account for the increased liability.

This bill would require that an agency participating in PERS that increases the compensation of a member who was previously employed by a different agency to bear all actuarial liability for the action, if it results in an increased actuarial liability beyond what would have been reasonably expected for the member. The bill would require, in this context, that the increased actuarial liability be in addition to reasonable compensation growth that is anticipated for a member who works for an employer or multiple employers over an extended time. The bill would require, if multiple employers cause increased liability, that the liability be apportioned equitably among them. The bill would apply to an increase in actuarial liability, as specified, due to increased compensation paid to an employee on and after January 1, 2019.

SENATE COMMITTEE ON

PUBLIC EMPLOYMENT AND RETIREMENT

Dr. Richard Pan, Chair

2017 - 2018 Regular

Bill No: SB 1033 Hearing Date: 4/23/18

Subject: Public employees’ retirement: reciprocal benefits: actuarial liability

SOURCE: Author

DIGEST: This bill would allocate actuarial liability arising from increases in compensation, as specified, to the employers of a represented employee for an increase to the employee’s compensation beyond what would have been reasonably expected and which results in increased actuarial liability for the employee’s prior employer or employers due to reciprocity.

ANALYSIS:

Existing law:

1. Allows members of public retirement systems with reciprocity agreements to maintain certain benefits, as specified, and authorizes, among other things, the use of final compensation at an ensuing employer when calculating the retirement service from a prior employer. Thus, changes to compensation at ensuing employers can affect the pension liability of prior employers.
2. Requires California Public Employees’ Retirement System (CalPERS) to define a significant increase in actuarial liability due to increased compensation paid to a nonrepresented employee and to implement program changes to ensure that a contracting agency that creates the significant increase in actuarial liability bears the cost for increased liability, including any portion of that liability that otherwise would be borne by another contracting agency or agencies due to reciprocity.
3. Requires the CalPERS actuary, upon determining the significant increase in actuarial liability, to assess the increase to the employer that created it and adjust that employer’s rates to account for the increased liability.
4. Exempts actuarial liability resulting from compensation paid to an employee for service performed while covered by a memorandum of understanding or compensation paid for service performed while a member of a recognized employee organization.
5. Provides that the specified adjustment to actuarial liabilities apply to any significant increase in actuarial liability determined by CalPERS after January 1, 2013, regardless of when the increase in compensation causing the liability occurred.

This bill:

1. Makes the following definitions:
   1. “Agency” means the state, the university, a school employer, or a contracting agency.
   2. “Causative agency” means an agency that employs or has employed a member who was previously employed by an agency and for which the more recent employing agency’s action causes the employee’s previous employer to incur an increase in actuarial liability beyond what would have been reasonably expected for the member.
   3. “Impacted agency” means an agency that experiences an increase in actuarial liability beyond what would have been reasonably expected for the member as a result of actions by a causative agency or agencies.
2. Requires a causative agency to bear all actuarial liability for an action that would otherwise be borne by an impacted agency if the action increases the compensation of a member who was previously employed by an impacted agency, and that results in an increased actuarial liability for the previous employer agency beyond what would have been reasonably expected for the member.
3. Provides that the increased liability is that which is in addition to reasonable compensation growth that is anticipated for a member who works for an employer or multiple employers over an extended time. Reasonable compensation growth shall take into account both the increase in, and value of, compensation.
4. Requires the liability to be apportioned equitably among multiple causative agencies if there is more than one.
5. Applies to an increase in actuarial liability, as specified, due to increased compensation paid to an employee on and after January 1, 2019.

Related/Prior Legislation

AB 340 (Furutani, Chapter 296, Statutes of 2012), established the Public Employees’ Pension Reform Act and among other reforms, required CalPERS to define significant increases in actuarial liability due to compensation increases for nonrepresented employees and to devise a program to ensure that the agencies responsible for the compensation increases bear the cost of the associated actuarial liability.

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

SUPPORT:

Association of California Cities-Orange County

City of San Marcos

OPPOSITION:

California Federation of Teachers, AFT, AFL-CIO

California Professional Firefighters

Peace Officers Research Association of California

ARGUMENTS IN SUPPORT: According to the author,

SB 1033 simply repositions financial responsibility upon appropriate agencies which increase compensation and benefit to bear all actuarial liability resulting from such action.

ARGUMENTS IN OPPOSITION:

According to the California Federation of Teachers, CalPERS allows employers to share risk, as specified.

It is this very scheme that allows risk to be diluted among the entire system, for the benefit of all employees and employers.

This bill would cut against that risk dilution and pin the increased actuarial liability on the employer who pays higher wage to employees, thus stifling any incentive to promote employees to higher salaries. This policy is repugnant to the shared risk that is inherent to PERS and the reason why the system exists and functions.

According to the California Professional Firefighters,

SB 1033 is duplicative and unnecessary. Collective bargaining agreements between employee organizations and those employers that contract with CalPERS for the administration of retirement benefits address these issues. The provisions of such agreements are negotiated in good faith, publicly vetted, and ultimately approved by an agency’s governing body.