BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB1856
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          Date of Hearing:   May 5, 2010

                        ASSEMBLY COMMITTEE ON APPROPRIATIONS
                                Felipe Fuentes, Chair

                    AB 1856 (Fong) - As Amended:  March 25, 2010 

          Policy Committee:                              P.E.R. &  
          S.S.Vote:    6-0

          Urgency:     No                   State Mandated Local Program:  
          No     Reimbursable:              

           SUMMARY  

          This bill allows members of California Public Employees'  
          Retirement System (CalPERS) making after-tax installment  
          payments on a service credit purchase to suspend or cancel their  
          service credit purchase election.   Specifically, the bill:

          1)Allows a member making after-tax service credit purchase  
            installment payments to elect in writing to suspend  
            installment payments for up to one year, provided that the  
            balance due at the end of the suspension period is  
            recalculated to reflect interest that has accrued during the  
            suspension period.

          2)Allows a member making after-tax service credit purchase  
            installment payments to voluntarily cancel payment of the  
            remaining balance of the service credit purchase, and reduces  
            the service credited to the member's account accordingly.

          3)Prohibits service purchase installment payments from being  
            cancelled if the contribution or adjustment is required by law  
            or agreement, the purchase is for a tier conversion, or is  
            part of a court ordered community property division or other  
            court order or settlement           agreement.

          4)Allows a member to "re-purchase" the remaining credit from his  
            or her cancelled election at any time prior to retirement.

           FISCAL EFFECT
        
          CalPERS indicates that the bill will result in no net costs to  
          either the pension fund or the administration of the program. It  








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          indicates that:

          1)Any cancelled service credit election will be pro-rated to  
            reflect the payments received and interest will continue to  
            accrue during a suspension period.  Any resumption of a  
            cancelled election will be calculated using a present-value  
            calculation method, which requires the purchase to be  
            cost-neutral.

          2)The suspension and cancellation workload will replace current  
            workload involved with reviewing requests, making hardship  
            determinations, explaining cancellation denials, and handling  
            subsequent 'second opinion' requests/appeals. 

           
          COMMENTS
           
           1) Rationale  . The bill, sponsored by CalPERS,is intended to help  
            members that have made an election to purchase service credits  
            through installment sales, but face unexpected hardship  
            because of the economic downturn, mortgage related losses,  
            furloughs, or other factors. CalPERS notes that existing law  
            provides limited flexibility for them to allow members to  
            cancel or suspend elections.

           2)Background . CalPERS retirement benefits are based on a formula  
            taking into account the member's highest compensation, age at  
            retirement, and years of creditable service. CalPERs permits  
            members to purchase service credits prior to retirement to  
            enhance their benefits under several programs.  The member can  
            make the purchase on a pre-tax or after tax basis, and can  
            either make a full payment with the purchase election or enter  
            into an installment payment plan. The full amount of service  
            credit purchased by the election is immediately posted to the  
            member's retirement account whether a lump sum payment is  
            submitted or an installment payment plan is chosen.
                     
            Members choosing to pay with a pre-tax installment payment  
            plan must abide by Internal Revenue Code (IRC) restrictions.   
            If pre-tax payroll deductions are chosen, an active member is  
            unable to alter a pre-tax payment schedule in any manner  
            unless the member separates from employment and retires, is no  
            longer employed with a CalPERS contracting agency, or under  
            other narrow circumstances.  
                     








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            Members on an after-tax installment payment plan can change  
            payment schedules within the restrictions of state laws and  
            regulations. The California Code of Regulations allows an  
            extension of payments up to the maximum of 180 monthly  
            payments, upon determination of hardship by the board. In  
            addition, a few Government Code sections provide a form of  
            'cancellation' or suspension of payments under limited  
            conditions. However, many members do not qualify under these  
            suspension provisions, or do not realize sufficient payment  
            relief from them, so they seek a more complete, long term  
            solution through cancellation.   
                     


           Analysis Prepared by  :    Brad Williams / APPR. / (916) 319-2081