BILL ANALYSIS Ó
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
AB 1320 (Allen)
Page 1
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
AB 1320 (Allen)
Page 2
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.
AB 1320 (Allen)
Page 3
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.