BILL ANALYSIS Ó AB 1320 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 1320 (Allen) As Amended September 2, 2011 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |51-26|(June 2, 2011) |SENATE: |22-14|(September 7, | | | | | | |2011) | ----------------------------------------------------------------- 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 AB 1320 Page 2 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 AB 1320 Page 3 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 AB 1320 Page 4 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 Page 5