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.