HOUSE BILL REPORT

                  HB 1297

                      As Passed House:

                        March 8, 1995

Title:  An act relating to complying with federal limits on the maximum compensation used to calculate state retirement system benefits.

Brief Description:  Calculating retiree benefits.

Sponsors:  Representatives Sehlin, Sommers and Carlson; by request of Department of Retirement Systems.

Brief History:

  Committee Activity:

Appropriations:  2/23/95, 2/28/95 [DP].

  Floor Activity:

     Passed House:  3/8/95, 96-0.

HOUSE COMMITTEE ON APPROPRIATIONS

Majority Report:  Do pass.  Signed by 30 members:  Representatives Silver, Chairman; Clements, Vice Chairman; Huff, Vice Chairman; Pelesky, Vice Chairman; Sommers, Ranking Minority Member; Valle, Assistant Ranking Minority Member; Basich; Beeksma; Brumsickle; Carlson; Chappell; Cooke; Crouse; Dellwo; Foreman; Grant; Hargrove; Hickel; Jacobsen; Lambert; Lisk; McMorris; Poulsen; Reams; Rust; Sehlin; Sheahan; Talcott; Thibaudeau and Wolfe.

Staff:  Dan Chang (786-7191).

Background:  Retirement system benefits are calculated based on three factors:  1) a percentage factor; 2) years of service; and 3) average final compensation (afc).   For  example, the formula for calculating retirement benefits under Plan 2 of the Public Employees' Retirement System (PERS II) is:

 2%  x   years of service  x  afc  =  Annual Retirement Benefit.

Federal tax laws establish requirements for becoming a "qualified retirement trust fund."  In the early 1980s, the state's retirement systems became "qualified trusts" under these requirements, allowing two major federal tax benefits: 1) the systems do not have to pay taxes on employer contributions; and 2) member contributions can be made with pre-tax income.  To continue as a qualified trust, the state retirement systems must comply with federal tax laws.

The federal tax laws place a ceiling on the amount of compensation used in calculating benefits.  Until 1993, that ceiling was $235,840 per year;  in 1993 the limit was lowered to $150,000, indexed to inflation.  This limit applies to public systems beginning January 1, 1996.

Summary of Bill:  This bill brings the state retirement systems into compliance with the $150,000 federal limit on annual compensation used to calculate retirement benefits.  The limit applies only to members hired after January 1, 1996; there is no impact on existing members.

Appropriation:  None.

Fiscal Note:  Available.

Effective Date:  Ninety days after adjournment of session in which bill is passed.

Testimony For:  This bill is necessary for complying with federal regulations.

Testimony Against:  None.

Testified:  Jim Justin, Association of Washington Cities; Heidi Pehl, Port of Chehalis; Scott Taylor, Washington Public Ports Association; and Jim Hamilton, King County Fire Protection District 39.