BILL ANALYSIS Ó
AB 1320
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Date of Hearing: May 4, 2011
ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL
SECURITY
Warren T. Furutani, Chair
AB 1320 (Allen) - As Introduced: February 18, 2011
SUBJECT : Public employees' retirement: employer contribution
rates.
SUMMARY : Requires the establishment of Taxpayer Adverse Risk
Prevention (TARP) Accounts in both the California Public
Employees' Retirement System (CalPERS) and in retirement systems
established under the County Employees Retirement Act of 1937
('37 Act) for the purpose of stabilizing public employer
contributions to the retirement systems. Specifically, this
bill :
1)Requires that CalPERS and the twenty '37 Act county retirement
systems establish TARP Accounts for each participating
employer.
2)Specifies that the TARP Accounts will be part of the
employer's account but will not be used when determining the
employer's contribution rate.
3)Requires deposits into the TARP Accounts to be made from the
employer's contributions when the actuarial value of assets
exceeds the present value of benefits.
4)Specifies that the assets in the TARP Accounts will be drawn
upon to pay a portion of the employer contribution when the
employer contribution rate is greater than the normal cost of
benefits.
5)Provides that once the assets in the TARP Account exceed 50%
of the employer's assets, excluding the TARP Account assets,
the employer contribution may be reduced to an amount less
than 100% of the normal cost, as determined by the system
actuary.
6)Specifies that funds in the TARP Account may be used by
employers to pay all or part of the employee contribution or
for retiree health care, as specified.
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7)Specifies that the funds in the TARP Accounts are to be
invested in the same manner as other funds in the retirement
system.
EXISTING LAW : Generally, retirement benefits are funded through
contributions paid by employers, member contributions, and
earnings from investments. Employee contribution rates are
usually a fixed percentage of salary while employer contribution
rates are determined by periodic "actuarial valuations" and,
therefore, subject to fluctuation. The actuarial valuations are
based on the benefit formulas the employer provides and the
employee groups covered.
Existing CalPERS and '37 Act laws provide for small reserves
against deficiencies; the CalPERS law permits the reserve to be
0.20% of assets, and the '37 Act law permits the reserve to be
not more than 1% of assets. The systems are permitted to use
the reserves against deficiencies in interest earned, losses
under investments, court-mandated costs and specified actuarial
losses.
Existing constitutional provisions, added by Proposition 162 of
1992, require that the public retirement system boards of
administration in California have plenary authority to determine
the rates of contributions necessary to properly fund the
respective retirement systems.
FISCAL EFFECT : Unknown.
COMMENTS : According to the sponsor, the California
Professional Firefighters, "When investment earnings on
retirement system assets are high, employer contribution rates
can be reduced. In some cases, such as during the upswing
market periods of the 1990's, employers were granted
contribution 'holidays', wherein their contribution to the
system was $0.00. Conversely, when investment earnings are low,
employer contribution rates are increased, and in a bad economy,
such as the latest Great Recession, employer contributions to
their retirement systems can increase significantly.
"Despite their modest pensions and years of dedicated public
service, California public employees are doing their fair share
to help strengthen and stabilize our state's public pension
systems. Across California, dozens of employee organizations
have successfully negotiated changes to their retirements, which
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improve the sustainability of their funds. At the state level,
bargaining units have voluntarily limited future retirement
costs and agreed to contribute more of their own money to the
fund."
According to a recent study by Fitch Ratings, "The main driver
of the current level of pension funding pressure is market
losses in late 2008 and early 2009, which represent a major
setback toward prefunding of retirement obligations."
Consequently, the sponsor believes there is a need to further
help minimize the impact of the market losses on the funding
status of the CalPERS and '37 Act county retirement plans,
specifically to help mitigate the volatility in the employer
contributions, as well as the average future employer
contribution going forward.
The sponsor concludes, "AB 1320 requires that the employer
contribution meets or exceeds the normal cost of benefits
(without accounting for market losses or gains). So, when market
performance generates enough surplus in the TARP account, the
employer contribution rate is incrementally reduced.
Conversely, the funds in the TARP account will be used when
market declines require an employer contribution that is greater
than the normal cost. By ensuring that CalPERS and the '37 Act
county retirement systems establish TARP accounts for each
participating employer, AB 1320 will ultimately safeguard
against any sudden increases in employer contribution rates,
thereby providing budgeting stability and sustainability."
REGISTERED SUPPORT / OPPOSITION :
Support
AB 1320
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California Professional Firefighters (Sponsor)
California Labor Federation
California Public Defenders Association
Laborers' Locals 777 & 792
San Diego County Court employees Association
Opposition
None on file
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957