BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 1320| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ 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 AB 1320 Page 2 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. AB 1320 Page 3 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, AB 1320 Page 4 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* AB 1320 Page 5 * 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 AB 1320 Page 6 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 **** END **** AB 1320 Page 7