BILL ANALYSIS                                                                                                                                                                                                    




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair

                                           (Allen)
          
          Hearing Date: 8/25/2011         Amended: 6/23/2011
          Consultant: Maureen Ortiz       Policy Vote: PE&R 3-0
          _________________________________________________________________
          ____
          BILL SUMMARY:  AB 1320 establishes the Employer Rate 
          Stabilization Fund, to be administered by the California Public 
          Employees Retirement System board effective July 1, 2013, for 
          the purpose of receiving employer payments made to stabilize 
          state and contracting agency employer retirement contributions.  

          _________________________________________________________________
          ____
                            Fiscal Impact (in thousands)

           Major Provisions         2011-12      2012-13       2013-14     Fund
                                                                      
          Admin expenses                      -------unknown, potentially 
          over $150-----        Special*                          

          *Public Employees Retirement Fund
          _________________________________________________________________
          ____

          STAFF COMMENTS: SUSPENSE FILE.  AS PROPOSED TO BE AMENDED.
          
          Author's proposed amendments create the Employer Rate 
          Stabilization Fund, delete the requirement that the funds be 
          invested according to investment strategies established by the 
          CalPERS board, delete the authorization for the funds to be used 
          for other purposes, and delay implementation until July 1, 2013.
          
          CalPERS indicates unknown, but likely significant one-time 
          administrative expenses to establish TARP accounts for all of 
          its approximately 1,500 contracting employers.  CalPERS is in 
          the midst of implementing the Pension System Resumption (PSR) 
          Project, a significant information technology effort involving 
          all facets of CalPERS operations.  The project is currently 
          scheduled to implement the first phase in September 2011.  
          Consequently, CalPERS would incur significant one-time costs to 
          incorporate the TARP accounts into the PSR system.  In addition, 
          there will be on going administrative costs to track, account 








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          for, report on, and invest the TARP account assets.

          Since most employers are funded at about 60-70%, the 
          establishment of TARP accounts would not immediately impact 
          them.  However, there are a limited number of public agencies 
          that are 100% funded, and would be required to immediate 
          payments to their TARP account.  CalPERS estimates those 
          additional employer contributions at an estimated $2.9 million.

          AB 1320 does the following:

          a)  Requires a separate account be established within CalPERS 
          for each employer.  The TARP account will be funded by all or a 
          portion of employer contributions when the actuarial value of 
          assets exceeds the present value of benefits.  Employers will be 
          required to always pay a rate equal to not less than the normal 
          cost of benefits and any excess contributions which would 
          currently reduce the employer rate, would instead be contributed 
          into the TARP account.

          b)  Requires employers to deposit into the TARP when the 
          actuarial value of assets exceeds the accrued liability 
          according to the most recently completed annual valuation.

          c)  Provides that the TARP may be drawn from to pay for that 
          portion of the employer contribution rate that exceeds the 
          employer normal cost of benefits.

          d)  Authorizes funds in the TARP to be used to make asset 
          transfers for purposes such as retiree health benefits.

          e)  Requires funds in the TARP to be invested according to 
          investment strategies established by the board.

          AB 1320 will allow employer contribution rates to be reduced 
          when an employer's TARP account exceeds an amount greater than 
          50 percent of the employer's assets, excluding the assets in the 
          TARP account.

          Currently, employee contributions are a fixed percentage of 
          salary, and employer contributions fluctuate based on the annual 









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          actuarial valuation of retirement system assets compared to 
          liabilities.  When investment earnings on assets are high, 
          employer contributions can generally be reduced, and when 
          investment earnings are low, employer contribution rates 
          generally are increased.  The actuarial valuation prepared by 
          CalPERS contains both the present value of benefits and the 
          actuarial accrued liability.  The accrued liability is the 
          amount needed to pay for all accrued benefits, while the present 
          value of benefits is the amount needed to fully fund both past 
          and future service.  Employer rates are based on the actuarial 
          accrued liability.

          Pension contribution stabilization accounts are intended to 
          reduce or eliminate large fluctuations in the amount an employer 
          is required to contribute to the retirement fund.
          AB 1320 will create a stabilization method to ensure that 
          employer contributions remain consistent. 

          In 2005, CalPERS adopted an Employer Rate Stabilization Policy 
          to help reduce volatility in the employer contribution rates.  
          This policy made changes to the existing actuarial asset 
          smoothing policy and amortization policy and added a new minimum 
          contribution policy.   In order to minimize contribution 
          holidays, this policy requires that any surplus be amortized 
          over a period of 30 years, and allows employers to a full 
          contribution holiday only if they are very well funded.

          AB 1320 stipulates that it's provisions will not be construed to 
          interfere with a public retirement board's authority and 
          fiduciary responsibility as set forth in Section 17 of Article 
          XVI of the California Constitution, and allows the board to 
          refuse the receipt of contributions if doing so would be deemed 
          as a conflict with the board's fiduciary responsibility.

          In 2005, CalPERS considered the possible methods for employer 
          rate stabilizations, but instead choose to implement a smoothing 
          package which adopted a minimum contribution policy.  With this 
          minimum contribution policy, and the fact that most plans at 
          CalPERS are between 60% - 70% funded, it is estimated that very 
          little money will go into the TARP accounts in the near future.










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          AB 1320 is intended to address a situation that occurred in the 
          early 1990s where investment returns were high, and many 
          employers enjoyed pension contributions holidays where little or 
          no contributions were required.  Then, in 2001 and later when 
          investment earnings were dramatically reduced, many employers 
          were forced to make extraordinarily high pension contributions 
          at a time when local and state budgets were negatively impacted 
          overall and employers were least able to afford increases.  If 
          employers had been required to make normal cost contributions 
          when the plans were fully funded, the excess contributions could 
          have been placed in reserve accounts to protect and ease 
          employer rates in the event of an economic downturn.