BILL ANALYSIS Ó
AB 1320
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Date of Hearing: May 18, 2011
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 1320 (Allen) - As Introduced: February 18, 2011
Policy Committee: PERS Vote:4-2
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill 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 CalPERS and the 20 '37 Act county retirement systems
to establish TARP Accounts for each participating employer and
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.
2)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.
3)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.
4)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.
5)Specifies that funds in the TARP Account may be used by
employers to pay all or part of the employee contribution or
AB 1320
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for retiree health care, as specified and that the funds are
to be invested in the same manner as other funds in the
retirement system.
FISCAL EFFECT
CalPERS estimates that implementing this bill would require
significant changes to their administrative systems to establish
these separate accounts. Costs are estimated to be
approximately $500,000 in one-time costs.
COMMENTS
1)Purpose . This bill's sponsor, the California Professional
Firefighters, notes employer contributions vary greatly. When
investment earnings on retirement system assets are high,
employer contribution rates can be reduced, even to the point
that an employer had no required contribution. 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.
AB 1320 requires that the employer contribution meets or
exceeds the normal cost of benefits (without accounting for
market losses or gains). 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 safeguards against sudden increases in
employer contribution rates, thereby providing budgeting
stability and sustainability
3)Background . 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.
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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.
4)There is no registered opposition to this bill
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081