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.