BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 1320|
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THIRD READING
Bill No: AB 1320
Author: Allen (D), et al.
Amended: 9/2/11 in Senate
Vote: 21
SENATE PUBLIC EMPLOYMENT & RETIRE. COMM. : 3-0, 6/27/11
AYES: Negrete McLeod, Padilla, Vargas
NO VOTE RECORDED: Walters, Gaines
SENATE APPROPRIATIONS COMMITTEE : 6-3, 8/25/11
AYES: Kehoe, Alquist, Lieu, Pavley, Price, Steinberg
NOES: Walters, Emmerson, Runner
ASSEMBLY FLOOR : 51-26, 6/2/11 - See last page for vote
SUBJECT : Public employees retirement: employer
contribution rates
SOURCE : California Professional Firefighters
DIGEST : This bill establishes the Employer Rate
Stabilization Fund, to be administered by the California
Public Employees Retirement System (CalPERS) Board
effective July 1, 2013, for the purpose of receiving
employer payments made to stabilize state and contracting
agency employer retirement contributions.
Senate Floor Amendments of 9/2/11 take provisions of the
bill impacting CalPERS and place them into a chapter in the
Public Employees' Retirement Law known as "employer Rate
CONTINUED
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Stabilization."
ANALYSIS :
Existing law:
1. Creates the California Public Employees' Retirement
System, and the 1937 Act County Retirement System ('37
Act), which administer retirement and other benefit
programs for public employees throughout the state.
2. Generally requires that retirement benefits are funded
through contributions paid by member contributions,
which are fixed in statute or contract; earnings from
investments; and employer contributions, which tend to
be higher when investment returns drop and lower when
investment returns are high.
3. Requires pension system actuaries to determine employer
rates, by periodic (usually annual) "actuarial
valuations." The actuarial valuations are based on the
benefit formulas the employer provides, the employee
groups covered, and other actuarial data, such as
experience and demographic data.
4. Specifies that the employer rate consist, in part, of
the "normal cost of benefits," which is the amount of
funding required to pay for the annual cost of service
accrual for the upcoming fiscal year for active
employees.
5. Allows the rate paid by the employer to be reduced or
eliminated in years when the employee contribution rate
and the investment returns are high enough to fully fund
the cost of benefits.
6. Allows for the establishment of small reserves against
deficiencies. The CalPERS law permits the reserve to be
0.20 percent of assets, and the '37 Act law permits the
reserve to be not more than one percent 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.
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7. Added by Proposition 162 of 1992, requires 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.
This bill:
1. Establishes, for each employer within CalPERS and the
twenty '37 Act county retirement systems a Rate
Stabilization Account in the Employer Rate Stabilization
Fund (also established by this bill), for the purpose of
stabilizing employer retirement contributions.
2. Specifies that the Rate Stabilization Account is an
employer asset, but will not be counted as an asset for
the purpose of determining the employer's contribution
rate.
3. Requires employers to make payments to the account when
the actuarial value of assets exceeds the accrued
liability, which will be calculated based on the
employer normal cost of benefits and which will be
credited to each employer's Rate Stabilization Account.
4. Provides that the assets in the account be drawn upon to
pay a portion of the employer contribution when the
employer contribution rate is greater than the employer
normal cost of benefits.
5. Provides that the employer is not required to make that
additional contribution when the employer's Rate
Stabilization Account exceeds an amount equal to 50
percent of the employer's assets, exclusive of the
assets in the Rate Stabilization Account.
6. Provides that the assets in an account will be invested
in the same manner as other funds in the retirement
system.
7. Allows the CalPERS Board to, at its discretion,
establish administrative terms and conditions governing
the Rate Stabilization Fund in the State Treasury,
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including methods of payment, disbursements, reports to
employers, allocation of investment income, and
allocation of assets upon termination of participation
by an employer.
Comments
What problem does the bill attempt to solve ? In the late
1990s, superior investment returns, when added to employee
contributions, were enough to significantly reduce, and in
some cases eliminate, employer pension contributions
because the retirement systems were approximately 100
percent funded.
Employers, in some cases, redirected pension monies to
other programs and costs. When the economy hit a downturn
in 2001, employer rates rose significantly in the following
years at a time when local and state budgets were
negatively impacted overall and least able to afford
increases. A similar impact occurred in 2008 and 2009
following significant investment gains in prior years.
Had employers continued 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.
This bill creates reserve, or TARP, accounts and a
requirement to redirect employer normal cost contributions
into the TARP accounts when the pension plans are fully
funded.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13
2013-14 Fund
Admin expenses -unknown, potentially over
$150-Special*
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* Public Employees' Retirement Fund
SUPPORT : (Per Senate Public Employment and Retirement
Committee analysis of 6/27/11) (Unable to reverify at time
of writing)
California Professional Firefighters (source)
California Labor Federation
California Professional Firefighters
California Public Defenders Association
Laborers' Locals 777 & 792
San Diego County Court Employees Association
ARGUMENTS IN SUPPORT : According to the bill's 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."
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
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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."
CalPERS states that there are some plans in the CalPERS
system that are fully or even super-funded and, in some
cases, closed to new employees, therefore not accruing
additional liabilities. In such cases, CalPERS believes
that it needs the flexibility to refuse to take additional
contributions if doing so would conflict with CalPERS'
fiduciary duty.
ASSEMBLY FLOOR : 51-26, 6/2/11
AYES: Alejo, Allen, Ammiano, Atkins, Beall, Block,
Blumenfield, Bonilla, Bradford, Brownley, Buchanan,
Butler, Charles Calderon, Campos, Carter, Cedillo,
Chesbro, Davis, Dickinson, Eng, Feuer, Fong, Fuentes,
Furutani, Galgiani, Gatto, Gordon, Hayashi, Roger
Hernández, Hill, Huber, Hueso, Huffman, Lara, Bonnie
Lowenthal, Ma, Mendoza, Mitchell, Monning, Pan, Perea, V.
Manuel Pérez, Portantino, Skinner, Solorio, Swanson,
Torres, Wieckowski, Williams, Yamada, John A. Pérez
NOES: Achadjian, Bill Berryhill, Conway, Donnelly,
Fletcher, Beth Gaines, Garrick, Grove, Hagman, Halderman,
Harkey, Jeffries, Jones, Knight, Logue, Mansoor, Miller,
Morrell, Nestande, Nielsen, Norby, Olsen, Silva, Smyth,
Valadao, Wagner
NO VOTE RECORDED: Cook, Gorell, Hall
CPM:mw 9/6/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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