BILL ANALYSIS Ó
AB 1320
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 1320 (Allen)
As Amended September 2, 2011
Majority vote
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|ASSEMBLY: |51-26|(June 2, 2011) |SENATE: |22-14|(September 7, |
| | | | | |2011) |
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Original Committee Reference: P.E.,R. & S.S.
SUMMARY : Establishes, for each employer within the California
Public Employees' Retirement System (CalPERS) and the twenty
retirement systems established under the County Employees
Retirement Act of 1937 ('37 Act) a Rate Stabilization Account
(RSA) in the Employer Rate Stabilization Fund (also established
by this bill), for the purpose of stabilizing employer
retirement contributions. Specifically, this bill :
1)Establishes, for each employer within CalPERS and the '37 Act
county retirement systems a RSA in the Employer Rate
Stabilization Fund, for the purpose of stabilizing employer
retirement contributions.
2)Specifies that the RSA 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 RSA.
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)Authorizes CalPERS to establish administrative terms and
conditions governing the program including the method of
payments to the employer's RSA, the method of disbursements
from the employer's RSA, the frequency and content of the
reports from or to employers, the allocation of investment
income, and the allocation of assets upon termination of
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participation of an employer.
6)Provides that the employer is not required to make that
additional contribution when the employer's RSA exceeds an
amount equal to 50% of the employer's assets, exclusive of the
assets in the RSA.
7)Provides that the assets in an account will be invested in the
same manner as other funds in the retirement system.
The Senate amendments :
1)Rename the accounts from the Taxpayer Adverse Risk Prevention
Accounts to the RSA.
2)Change the operative date from January 1, 2013, to July 1,
2013.
3)Create a separate, continuously appropriated fund in the State
Treasury for the purpose of receiving CalPERS employer
payments rather than holding the employer payments within the
Public Employees' Retirement Fund.
4)Clarify that the CalPERS Board of Administration has sole and
exclusive control over the administration of the fund and that
the investment of its assets will be in accordance with
strategies established by the board.
5)Authorize CalPERS to establish administrative terms and
conditions governing the program including the method of
payments to the employer's RSA, the method of disbursements
from the employer's Rate Stabilization Account, the frequency
and content of the reports from or to employers, the
allocation of investment income, and the allocation of assets
upon termination of participation of an employer.
6)Clarify that employers do not continue to pay into the RSA
after their account balance reaches an amount equal to 50% of
the employer's assets, as specified.
7)Narrow the use of the funds in the RSA to the employer's
unfunded liability.
8)Delete authority for CalPERS to use the funds in the RSA to
pay all or part of the employee contribution or for retiree
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health care.
EXISTING LAW states that:
1)Generally, retirement benefits are funded through
contributions paid by employers, member contributions, and
earnings from investments. Employee contribution rates are
usually a fixed percentage of salary while employer
contribution rates are determined by periodic "actuarial
valuations" and, therefore, subject to fluctuation. The
actuarial valuations are based on the benefit formulas the
employer provides and the employee groups covered.
2)Existing CalPERS and '37 Act laws provide for small reserves
against deficiencies; the CalPERS law permits the reserve to
be 0.20% of assets, and the '37 Act law permits the reserve to
be not more than 1% 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.
3)Existing constitutional provisions, added by Proposition 162
of 1992, require 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.
AS PASSED BY THE ASSEMBLY, this bill required, on and after
January 1, 2013, the establishment of Taxpayer Adverse Risk
Prevention Accounts in both CalPERS and in the '37 Act
retirement systems for the purpose of stabilizing public
employer contributions to the retirement systems.
FISCAL EFFECT : According to the Senate Appropriations
Committee, CalPERS indicates unknown, but likely significant
one-time administrative expenses to establish Taxpayer Adverse
Risk Prevention (TARP) accounts for all of its approximately
1,500 contracting employers.
COMMENTS : According to the 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
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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."
According to a recent study by Fitch Ratings, "The main driver
of the current level of pension funding pressure is market
losses in late 2008 and early 2009, which represent a major
setback toward prefunding of retirement obligations."
Consequently, the sponsor believes there is a need to further
help minimize the impact of the market losses on the funding
status of the CalPERS and '37 Act county retirement plans,
specifically to help mitigate the volatility in the employer
contributions, as well as the average future employer
contribution going forward.
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 RSA, the
employer contribution rate is incrementally reduced.
Conversely, the funds in the RSA will be 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 RSA's for each participating
employer, AB 1320 will ultimately safeguard against any sudden
increases in employer contribution rates, thereby providing
budgeting stability and sustainability."
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957
FN: 0002725
AB 1320
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