BILL ANALYSIS Ó
AB 1320
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CORRECTED : 6/7/11 Changes per consultant.
ASSEMBLY THIRD READING
AB 1320 (Allen)
As Amended May 27, 2011
Majority vote
PUBLIC EMPLOYEES 4-2 APPROPRIATIONS 12-5
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|Ayes:|Furutani, Allen, Ma, |Ayes:|Fuentes, Blumenfield, |
| |Wieckowski | |Bradford, Charles |
| | | |Calderon, Campos, Davis, |
| | | |Gatto, Hall, Hill, Lara, |
| | | |Mitchell, Solorio |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Mansoor, Harkey |Nays:|Harkey, Donnelly, |
| | | |Nielsen, Norby, Wagner |
| | | | |
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SUMMARY : Requires, on and after January 1, 2013, 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 20 '37 Act county retirement systems
establish TARP Accounts for each participating employer on and
after January 1, 2013.
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.
AB 1320
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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.
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 states that:
1)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.
2)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.
3)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 : According to the Assembly Appropriations Committee,
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.
AB 1320
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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 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."
AB 1320
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Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957
FN: 0001221