SACRAMENTO, Calif. - As much as $165 billion in defined benefit assets may be up for grabs if the California state Senate approves legislation to allow public employers to set up alternative defined contribution plans.
Assembly Bill 3252 - passed by the state Assembly May 31 - allows public employers participating in the California Public Employees' Retirement Systems and the California State Teachers' Retirement System to "establish alternative defined contribution plans, which will be run alongside existing defined benefit plans."
The bill also allows employees to make a one-time choice to stay in their defined benefit plan or move accrued benefits into employer-sponsored defined contribution plans.
The bill before the state Senate provides public employers with considerable flexibility on many elements of plan design, including contribution levels and vesting schedules. The bill also requires plan features be collectively bargained where applicable.
Any exodus of assets from the immense defined benefit plan systems could mean a bonanza for defined contribution service providers.
In fact, many money managers and third-party administrators were instrumental in getting the bill through the Assembly, said observers close to the legislative process.
More than 1.2 million employees now covered by the $100 billion California Public Employees' Retirement System and the $65 billion California State Teachers' Retirement System could opt out of the defined benefit plan systems into defined contribution plans. Only public safety personnel - including police officers and firemen - are exempt.
Should the measure pass, California would become the largest state to move to some form of defined contribution plan model.
And Assemblyman Howard Kaloogian, sponsor of the bill, vows to reintroduce it next year if the Senate doesn't approve the proposal.
"I will keep bringing it up until it goes through. Public employees need to have portable retirement assets and the choice of what kind of retirement system best suits them," he said.
Hearing set for July 1
The Senate Public Employment and Retirement Committee will hold a public hearing on the bill July 1. If the committee approves the measure, the bill will be reviewed by the Senate Appropriations Committee after the summer recess.
AB 3252 probably won't go to the full state Senate for consideration until at least fall, said Mike D'Arelli, pension consultant for the Assembly and a Kaloogian staffer.
Proponents and opponents of the bill are lobbying state Sen. James Costa, whose vote is necessary to get the Republican-sponsored measure out of the retirement committee.
Mr. Costa did not return calls regarding his position on the bill.
The two giant California retirement systems strongly oppose the bill, as do public employee unions.
Representatives of both pension funds said they are not opposed to defined contribution plans for public employees, but want more time to evaluate the implications of the bill. They said they'd prefer to retain full management of retirement assets and would consider the establishment of a defined contribution program within each system.
Mr. Kaloogian said he would not compromise on opening the public defined contribution plan model in California to vendor competition.
"Competition is necessary and the current systems' monopoly on management and administration of pensions must end," he said.
Patricia Macht, public affairs chief for CalPERS, said fund officials believe "the bill has serious flaws, too serious to allow its measures to be implemented."
Ms. Macht said concerns include funding problems caused by the potential drain of the assets of non-vested employees into a defined contribution plan. Such assets often are used to offset the contributions employers have to make for vested employees. Public entities with employees who decide to go into the defined contribution plan might have to make larger contributions to CalPERS and CalSTRS than in the past. The redirection of employer contributions into the defined contribution plan also will negatively affect CalPERS' cash inflows, she said.
CalPERS also is concerned about the ability the bill grants to municipal employers and school districts, not the two retirement systems, to set the formula for determining the present value of an employee's accrued benefits from the defined benefit plans. She also pointed to potential problems for CalPERS and CalSTRS if they are required to pay out the full, present value of an employee's accrued benefit, for employees from public entities with unfunded liabilities.
Current systems being evaluated
CalPERS and CalSTRS officials say they are evaluating their current systems and studying alternative retirement plan models, including the pros and cons of defined contribution plans.
Jennifer Morrill, CalSTRS' director of governmental affairs, said she's working with Mr. Kaloogian and his staff to address some of the fund's main concerns with the bill. But she added: "It is just impossible to address all the issues in this very complicated matter in such a short timeframe. We want time to fully consider the implications of this proposal."
One complaint is the bill's vagueness. CalSTRS participants "want what they are getting defined," Ms. Morrill said.
CalSTRS officials also are concerned with funding inadequacies in Mr. Kaloogian's proposal. Officials at the teachers' plan are concerned, said Ms. Morrill, because the general fund contribution the system receives from the state is based on the payroll coming into the defined benefit plan. If a portion of the payroll is diverted to defined contribution plans, state funding for the defined benefit plan, above employer and employee contributions, would be adversely affected.
Fund officials also insist any defined contribution plan for its members include some type of defined benefit platform, probably a hybrid cash balance plan, like that offered to part-time teachers now.
Proponents of the bill include cities, counties and their representative associations, as well as a variety of mutual fund companies, banks, insurance companies and third-party administrators and their associations.
Influence from the money management community ranges from direct lobbying in Sacramento to a more general presence in the capitol, providing resources and advice to legislators not familiar with pension issues.
As many as 25 money managers, insurers and banks have been in Sacramento, making their views known on the bill, said observers. Industry and public employer associations also are said to be seeking to influence Senate votes on the measure.
No bets on bill's chances
No one is willing to take bets on the bill's passage. Mr. Kaloogian remains confident the measure can pass the retirement committee, particularly with pressure from municipalities and public employees who want portability and investment control.
Many were stunned the bill passed the Assembly at all, and attributed its approval to a lack of serious attention from the two giant pension funds and unions.
One reason state fund officials are worried is the uncertainty surrounding how many public employees might move money out of each system. By CalPERS' own admission, about 70% of public employees within its system retire without collecting a benefit.
In Oakland County, Michigan, for example, 10% of defined benefit assets, representing 40% of eligible employees, were moved into a defined contribution plan during the first year, said Girard Miller, president of ICMA Retirement Corp., which administers the defined contribution plan. If participants in CalPERS and CalSTRS move the same percentage, the two funds would lose $16.5 billion.
"If the bill goes through as it is, there would be an open, competitive market for services," said Kathie Eitelberg, director of government practice for Segal Co., Washington. "No one can estimate how many employees will move their assets, because it's so dependent on individual circumstance."
The California model is different from other public employee conversions because it gives employees a choice of which plan they prefer. Most conversions have been mandatory.
Public entities that made the change or will move soon to some form of defined contribution plan include Washington state teachers, West Virginia teachers and Michigan municipal workers.
Public employers said to be evaluating the move include Vermont, Ohio and Michigan, state universities in Illinois and public employees in Washington.
Dallas Salisbury, director of the Employee Benefit Research Institute, Washington, noted the scrutiny of the defined contribution plan model by public systems on a national scale will approach "a rampage," as public employers draw closer to the examples set by their corporate peers.