The California Public Employees Pension Reform Act of 2013, on and after January 1, 2013, established various limits on retirement benefits generally applicable to a public employee retirement system in the state, with specified exceptions.

This bill would state the intent of the Legislature to enact legislation to resume the public employee pension reform begun in the California Public Employees Pension Reform Act of 2013.

SENATE COMMITTEE ON

PUBLIC EMPLOYMENT AND RETIREMENT

Dr. Richard Pan, Chair

2017 - 2018 Regular

Bill No: SB 32 Hearing Date: 4/24/17

Subject: California Public Employees’ Pension Reform Act of 2018

SOURCE: Author

DIGEST: This bill mandates 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). The bill also creates an oversight committee (OC) appointed jointly by the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to review and report on CalPERS’ and CalSTRS’ pension costs and obligations.

Additionally, SB 32 requires CalPERS to reclassify some positions from the safety member classification to the state miscellaneous or state industrial classifications and to increase employer contribution rates by 10 percent any year in which CalPERS has an unfunded liability.

ANALYSIS:

Existing law:

1. 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.
2. Establishes, through PEPRA, the retirement benefit plans that are offered to new public employees, including:
3. Uniform retirement formulas, including a 2 percent at age 62 formula for non-safety workers, which caps out at 2.5 percent at age 67;
4. A three-year final compensation period for determining a pension;
5. Employee member contributions equal to 50 percent of the normal cost of the employee's benefit plan;
6. A cap on the amount of compensation that can count toward a pension; and
7. A restriction on pay items that may be included in pensionable compensation.
8. Specifies, with some exceptions, that the PEPRA requirements are applicable to new retirement plan members who first become members on and after January 1, 2013.
9. Authorizes an employer, upon approval of the Legislature, to adopt a new, different retirement benefit plan or formula on or after January 1, 2013, if that formula or plan is determined and certified by the retirement system's chief actuary and the retirement board to have no greater risk and no greater cost to the employer than the PEPRA formula or plan.
10. Establishes the California Actuarial Advisory Panel (CAAP) to provide impartial and independent information on pensions, other postemployment benefits, and best practices to public agencies and report thereon to the Legislature annually.

This bill:

1. Creates the Citizens’ Pension Oversight Committee (OC) to serve in an advisory role to CalPERS and CalSTRS. Requires that the OC consist of 5 to 9 members jointly appointed by CalPERS and CalSTRS from persons with experience in fiduciary matters who do not receive benefits from the two systems.
2. Requires the OC to review on or before January 1, 2019, and annually thereafter, the two systems’ actual pension costs and obligations and report thereon to the public.
3. Requires CalSTRS and CalPERS to file a copy of their respective independent audit reports with the OC.
4. Finds and declares that the “normal monthly rate of pay or base pay” for purposes of determining pensionable compensation does not include nor was intended to include incentive pay, educational pay, premium pay, special assignment pay, or holiday pay and prohibits a public retirement board under PEPRA from deeming those pay categories from being a form of pensionable compensation.
5. Creates the California Public Employees’ Pension Reform Act of 2018 (PenRA^[1]), which does the following:
   1. Definitions – Defines the following terms for purposes of PenRA:
6. “Member” means a public employee who is a member of a public retirement system.

“New Member as of January 1, 2018” means an individual who becomes a member of any public retirement system for the first time on or after January 1, 2018, and who was not a member of any other public retirement system prior to that date.

“Public employee” means an officer, including one who is elected or appointed, or an employee of a public employer.

“Public employer” includes:

The state and every state entity, including, but not limited to, the Legislature, the judicial branch, including judicial officers, and the California State University.

Any political subdivision of the state, or agency or instrumentality of the state or subdivision of the state, including, but not limited to, a city, county, city and county, school district, community college district, joint powers authority, joint powers agency, and any public agency, authority, board, commission, or district.

Any charter school that elects or is required to participate in a public retirement system.

“Public employer” does not include the University of California, Charter Counties, or Charter Cities except to the extent that the entity elects to make PenRA, or any section thereof, applicable to the entity.

“Public retirement system” means the Public Employees’ Retirement System, the State Teachers’ Retirement System, the Legislators’ Retirement System, the Judges’ Retirement System, the Judges’ Retirement System II, county and district retirement systems created pursuant to the County Employees Retirement Law of 1937 (37 Act), independent public retirement systems, and to individual retirement plans offered by public employers.

However, “public retirement system” does not include a retirement system created by the University of California, Charter Counties, or Charter Cities except to the extent that the entity elects to make this article, or any section thereof, applicable to the entity.

• 1. Five Year Final Compensation - Provides that final compensation, for the purposes of determining a retirement benefit to be paid to a new member as of January 1, 2018, shall mean the highest average annual pensionable compensation earned by the member during a period of at least 60 consecutive months, or at least five consecutive school years if applicable, immediately preceding his or her retirement or last separation from service if earlier, or during any other period of at least 60 consecutive months, or at least five consecutive school years if applicable, during the member’s applicable service that the member designates on the application.
  2. Cost of Living Adjustments - Prohibits (except as otherwise required by state constitutional provisions prohibiting a law impairing the obligation of contracts, et al.) a public retirement system from making a cost of living adjustment (COLA) 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, 2018, in which CalSTRS or CalPERS has an unfunded actuarial liability
  3. Membership Transmutation and Reciprocity upon Subsequent Re-employment - Provides that a new member as of January 1, 2018, who, on or after January 1, 2018, leaves the employment of a public employer participating in the public retirement system for employment with an employer that does not participate in the public retirement system and who is subsequently reemployed by the same public employer at least one year after he or she left, shall be subject upon the date of his or her reemployment to the same benefits, contributions, and other terms and conditions applicable to an individual who becomes a member of the public retirement system for the first time on that date, for service rendered on or after that date.

1. Hybrid Plan - Requires CalPERS to develop and submit to the Legislature for approval a hybrid plan on or before January 1, 2019, that consists of a defined benefit component that utilizes low-risk investments and a defined contribution component under which an employee’s contributions will be matched by employer contributions up to an unspecified percent.
2. Requires a member who is first employed by the state, a contracting agency, or a school employer, and who becomes a CalPERS member on or after the approval of the hybrid plan by the Legislature, to participate in the hybrid plan and authorizes all other CalPERS members to elect to participate in the hybrid plan.
3. Requires CalPERS to determine what the level of the unfunded liability of the system was in 1980 and to reduce the system’s unfunded liability to that level, to be achieved by 2030, with the goal of fully funding the system.
4. Requires CalPERS on or before January 1, 2019, to review the duties of officers and employees in positions included in the CalPERS safety member classification and to reclassify the positions as the following: 1) “patrol member,” “state peace officer/firefighter member” or “state safety member,” for those positions whose principal duties “place the employee or officer in in harm’s way,” or 2) “state miscellaneous member” or “state industrial member,” for those position not described in the first category.
5. Prohibits CalPERS from reclassifying a position as “patrol member,” “state peace officer/firefighter member,” or “state safety member” on the sole basis that the position involves law enforcement.
6. Provides that the reclassification of “patrol member,” “state peace officer/firefighter member” or “state safety member” positions shall apply to any person who is first employed by the state and becomes a state member of the system on or after January 1, 2018.
7. Requires CalPERS to increase employer contribution rates by 10 percent any year in which CalPERS has an unfunded liability.

Background

Existing law, through PEPRA, requires, as of January 1, 2013, comprehensive and statewide reform for the state’s public pension systems and plans. PEPRA requires new public employees in California first hired after January 1, 2013, to pay 50 percent of the actuarial normal costs of their pension plans as member contributions to the retirement systems and includes specific caps and limits on pensionable compensation, anti-spiking measures, and revised benefit formulas for new members, as specified.

Issues and Concerns

1. Hybrid Plan - SB 32 requires CalPERS to develop a hybrid plan composed of a low-risk defined benefit component and an unspecified employee match defined contribution component by January 1, 2019, and upon Legislative approval, requires a member first employed after the Legislature approves the plan to participate in the hybrid plan. Other members could elect to participate in the plan. This mandate presents several issues, including the following:
   1. The bill unnecessarily complicates the existing Classic and PEPRA plans by revising them with the PenRA plan for new members starting in January 1, 2018, only to implement a new, required Hybrid plan in 2019.
   2. It is unclear whether Classic, PEPRA, and PenRA plan members who elect to participate in the Hybrid plan retain any rights to their original plan.
   3. It is unclear whether public agencies that contract with CalPERS for pension benefits would all have to offer the same employer contribution match in the Hybrid plan or if they could offer different employer matches. Different match options could lead to escalating costs as public agencies compete with one another for employees.

Alternatively, a system-wide match could lock in compensation disparities between high and low wage areas of the state; prevent wealthier agencies from offering attractive benefits to compete with their region’s private sector if the match was set too low; or create financial difficulties for agencies with fewer resources if the match was set too high.

1. Artificial Acceleration of Costs and Usurpation of Actuarial Function – SB 32 contains provisions that appear to accelerate future costs into the present and may artificially inflate the expense of the existing Classic and PEPRA plans.

By requiring CalPERS to increase contribution rates 10 percent any year in which it has an unfunded liability - irrespective of the CalPERS’ actuary’s recommendations and the board’s determination of the appropriate level of funding - the bill may seek to impermissibly transfer the actuarial function from the board to the Legislature in contravention of the state constitution. This issue is compounded by the mandate on CalPERS to determine the system’s unfunded actuarial liability in 1980 and to reduce the unfunded liability to that level by 2030.

1. Safety Member Reclassification and Vested Rights – It is unclear which of the following bill intends: 1) to shift some current members in the patrol member, state peace officer/firefighter member, and state safety member classifications to the state miscellaneous or state industrial member classifications upon completion of the mandated review and reclassification of the positions; or 2) to affect only new members by the reclassification. The former position would implicate current members’ vested rights. Also, the requirement that CalPERS base its reclassification on determining that a position’s principal duties place the employee in “harm’s way” is vague and overbroad.
2. Normal Monthly Rate of Pay or Base Pay – The bill would limit the definition of “normal monthly rate of pay or base pay” for purposes of determining pensionable compensation. The revised definition would apply to all California public pension systems and have retroactive effect. The change would supersede any determinations or regulations by pension boards regarding the composition of normal monthly rate of pay and base pay. Since the change would affect members and employers who have already relied on those determinations and regulations in exercising retirement decisions or making decisions in bargaining negotiations, this provision would likely result in substantial litigation. Additionally, the new definition could affect ongoing litigation involving those determinations and regulations.
3. COLA - The bill’s provisions prohibiting any public retirement system from making a COLA to any retirement allowance after January 1, 2018, are unclear. The specified condition for the COLA prohibition is whether either state system has an unfunded liability. Thus, an independent local system that is super-funded could not provide a COLA to its retirees if either CalSTRS or CalPERS has an unfunded liability. The prohibition is further confused by the exception for any COLA that, if prohibited, would be found to be an impairment of contract under the state constitution. The language, vague in its application, would invite ongoing litigation to define which COLAs were permissible and which were not.
4. Oversight Committee - The establishment of an oversight committee is redundant because the pension boards already provide comprehensive information on funding status to the Legislature and the public through publicly noticed meetings, required reports to the Legislature, and publication of their Comprehensive Annual Financial Reports (CAFRs). In addition, the California Actuarial Advisory Panel provides independent and impartial information on pensions and related issues to the Legislature each year. Also, the bill does not address whether or how OC committee members would be compensated, how the committee would be staffed, or how the activities and reporting mandates of the committee would be funded.
5. Administrative Costs - According to CalSTRS, SB 32 would result in approximate administrative “costs of $1 to 10 million with a one- to two-year effort to make the needed system changes to CalSTRS current pension administration system.” The bill “constitutes a very large change of additional unknown cost to the Pension Solution Project that is currently underway. Extensive resources would be needed to update publications, training and educational materials and train staff.” While CalPERS has not yet provided cost information on this bill, it seems reasonable to assume that it would face similar or greater costs given that the bill places more mandates on CalPERS than CalSTRS.

Related/Prior Legislation

AB 340 (Furutani, Chapter 296, Statutes of 2012), implemented the 2012 Conference Committee Report on Public Pension Benefits and established PEPRA which required substantial reforms to California public pension systems.

SB 520 (Walters, 2011), which would have required CalPERS to create a hybrid retirement plan, as specified, for public employee members of CalPERS who become members on and after January 1, 2012, was returned to the Secretary of Senate pursuant to Joint Rule 56.

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

SUPPORT:

City of Costa Mesa

Rossmoor-Los Alamitos Republican Women Federated

OPPOSITION:

American Federation of State, County and Municipal Employees, AFL-CIO

Association of Deputy District Attorneys

Association for Los Angeles Deputy Sheriffs

CAL FIRE Local 2881

California Association of Highway Patrolmen

California Association of Professional Employees

California Association of Professional Scientists

California Association of Psychiatric Technicians

California Federation of Teachers

California Nurses Association

California Professional Firefighters

California School Employees Association

California State Teachers’ Retirement System

California Teachers Association

Los Angeles County Deputy Probation Officers’ Union, AFSCME, Local 685

Los Angeles Police Protective League

Orange County Employees Association

Peace Officers Research Association of California

Professional Engineers in California Government

Retired Public Employees Association

Riverside Sheriffs’ Association

Safety Employees Benefit Association

Service Employees International Union, Local 1000

ARGUMENTS IN SUPPORT: According to the author, “The original PEPRA law had several weaknesses. Unfortunately, the reform legislation has had a negligible impact to truly reduce – or even constrain – public pension costs and limit further unfunded liabilities. SB 32 seeks to continue fixing the problem, consistent with Governor Brown’s original plan.”

ARGUMENTS IN OPPOSITION: According to the California Association of Highway Patrolmen, the Peace Officers Research Association of California, and CAL FIRE Local 2881, “The reforms enacted in 2012 were designed to bolster the long-term health of California’s public pension systems, and they are doing exactly that. Their effects will be measured over the lifetime of thousands of police officers, firefighters, engineers, scientists, teachers, bus drivers, and others whose labor provides the public services upon which California relies.”

According to the California School Employees Association, “In more than 400 jurisdictions across the state since 2012, public employees are making sacrifices at the bargaining table to help our communities deal with pension costs. These changes includ increasing employee contributions and reducing pension formulas, which have already cut state costs by hundreds of millions of dollars.”

The California Teachers Association, “believes this measure would further erode the teacher shortage that is causing a crisis in our educational system and would eliminate the retirement security that educators currently have. California’s teachers do not enter the profession to be rich, but they do count on a modest retirement. This measure would eliminate the limited security our teachers count on in their retirement years.”

Service Employees International Union Local 1000 adds, “In addition to PEPRA, CalPERS has taken several steps to ensure the sustainability of the Fund for decades to come. In September 2016, CalPERS shifted from riskier assets to lower risk assets to lessen the impact of another financial downturn. CalPERS also lowered its discount rate from 7.5% to 7.0%, and adopted a lower threshold on their risk mitigation policy to ensure the Fund is funded at the appropriate level”.

According to the American Federation of State, County and Municipal Employees, “these reforms are unnecessary given recent reforms that have already begun to change the public pension landscape.” PEPRA related changes are “projected to reduce collective retirement benefits to public workers by $85 billion over time, though a recent study shows that these savings are accumulating even faster than expected.”

1. We use the acronym PenRA rather than PEPRA II or PEPRA 2018 for clarity in distinguishing between this bill’s proposed reform and the original PEPRA reform law and for brevity. ↑