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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