BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1320
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          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









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