BILL ANALYSIS                                                                                                                                                                                                    




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair

                                           1856 (Fong)
          
          Hearing Date:  06/28/2010           Amended: 06/07/2010
          Consultant:  Maureen Ortiz      Policy Vote: PE&R 6-0
          _________________________________________________________________ 
          ____
          BILL SUMMARY:   AB 1856 authorizes a member of CalPERS who is  
          making after-tax installment payments for service credit  
          purchase to elect to suspend or prospectively cancel their  
          service credit purchase election.
          _________________________________________________________________ 
          ____
                            Fiscal Impact (in thousands)

           Major Provisions        2010-11      2011-12       2012-13     Fund
                                                                  
          Admin expenses             ------unknown new costs likely less  
          than $150-----
                                                               potentially  
          offset by existing workload ----   Special*

          *Public Employment Retirement Fund
          _________________________________________________________________ 
          ____

          STAFF COMMENTS: 
          
          CalPERS indicates that AB 1856 will result in no net cost  
          increases to either the pension fund or the administration of  
          the program, although the election to suspend or cancel that is  
          authorized by this bill will likely generate a greater number of  
          requests from members than is currently received.  CalPERS  
          indicates that program and administrative costs will be neutral  
          due to the following:
           
          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 to CalPERS will  










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

          AB 1856 will allow a member who is making after-tax service  
          credit purchase installment payments to suspend installment  
          payments for up to one year.  Interest will continue to accrue  
          during the suspension period and payments will automatically  
          resume after one year unless the member requests the payment to  
          resume at an earlier time.  A member who suspends a service  
          credit installment payment election may not do so again until  
          after a 3 year waiting period.  If a member retires during a  
          suspension period, that member can choose to either make a  
          lump-sum payment for the recalculated balance due, or request a  
          cancellation of purchase for the remaining service credit.


          Page 2
          AB 1856 (Fong)


          AB 1856 will also allow a member who is making after-tax service  
          credit purchase installment payments to  cancel  the election upon  
          the signed request of the member.  

          Voluntary cancellations will not be allowed if the member is  
          already receiving benefit payments on the service credit  
          purchase, for tier conversions or reclassifications, or for  
          mandatory adjustments.  The service credit purchase will be  
          adjusted to reflect the 
          payments that had been made.  However, a member may choose to  
          repurchase service credit after a cancellation request has been  
          made.

          Currently, CalPERS receives service credit purchase cancellation  
          requests based on a variety of reasons, and each request is  
          reviewed individually.  Since the service credit election is  
          currently considered irrevocable at the time of election,  
          requests for cancellation are generally not honored unless no  
          payments had yet been received, or unless an error is  
          discovered.  However, there has been an increase in the number  
          of requests for suspensions and cancellations due to a variety  
          of reasons including furloughs, disability, loss of family  
          income and other life changing circumstances.

          Current law also allows a CalPERS member who receives a  










          Disability Retirement and safety members who receive an  
          Industrial Disability Retirement to elect to cancel their  
          service credit purchase installment payments on a prospective  
          basis when the purchase would not improve the member's  
          retirement allowance.  If a member's employment is consequently  
          reinstated, payments automatically resume.

          CalPERS retirement benefits are calculated based on a formula  
          that considers the member's highest compensation, age at  
          retirement, and years of creditable service.  Members are  
          authorized to purchase service credit for a number of reasons to  
          enhance their retirement benefits, as long as the member pays  
          the full actuarial cost of the benefit.  Members can choose to  
          pay on an "after-tax" or "pre-tax" basis if their contract  
          allows, and can choose to pay in a lump sum or by making  
          installment payments. 

          This bill does not affect members choosing to pay with a pre-tax  
          installment payment plan since those plans are governed by  
          Internal Revenue Service guidelines.  In a pre-tax payroll  
          deduction option, an active member is unable to alter a pre-tax  
          payment schedule in any manner unless a) the member separates  
          from employment and retires, b) the payments are reported  
          through another CalPERS employer which does not have a pre-tax  
          option, or c) the member is no longer employed with a CalPERS  
          contracting agency.