BILL ANALYSIS Ó AB 1320 Page 1 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. AB 1320 Page 2 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 AB 1320 Page 3 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 Page 4 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