BILL ANALYSIS Ó
AJR 10
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Date of Hearing: May 6, 2013
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Roger Dickinson, Chair
AJR 10 (Grove) - As Introduced: February 6, 2013
SUBJECT : State debt.
SUMMARY : Urges the Federal government to not take any action
to redeem, assume, or guarantee state debt. Specifically, this
bill :
1)Makes the following findings:
a) Each state of the Union is a sovereign entity with a
constitution and the authority to issue sovereign debt;
and,
b) Each state legislature has the authority to reduce
spending or raise taxes to pay the obligations to which the
state has committed itself; and,
c) The officials of each state of the Union are legally
obligated to fully disclose the financial condition of the
state to investors who purchase the debt of that state;
and,
d) Congress has rejected prior requests from state
creditors for payment of defaulted state debt; and,
e) During the national financial crisis in 1842, the United
States Senate requested the Secretary of State to report
any negotiations with state creditors to assume or
guarantee state debts, to ensure that promises of federal
government support were not proffered.
EXISTING LAW provides for the California Public Employees'
Pension Reform Act, which is discussed in more detail later in
this analysis.
FISCAL EFFECT : None
COMMENTS :
The impetus behind this resolution is a concern that states with
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unfunded future pension liabilities will seek funds from the
Federal government to backfill those liabilities. The sponsor
of the resolution, Illinois Policy Institute (IPI) published a
report, A Federal Bailout of State Pensions Systems will Reward
Future Failure, on September 20th, 2012 that raised concerns
regarding state governments that might seek Federal assistance
to offset their pension obligations. In the fiscal year budget
proposed by Governor Quinn of Illinois the budget relied on a
potential federal government guarantee for the state's pension
debt.
The IPI report mentions that "states such as Illinois and
California that have failed to reform their runaway pension
costs, what about those that have been more responsible with
taxpayer dollars?" Notwithstanding the hyperbole contained in
this statement, California has passed pension reform since the
publication of that report. Additionally, the IPI report suggest
that changes to federal tax policy is a scheme to bailout state
pension costs, though a change in tax policy that could bring
federal dollars to the state may be entirely unrelated to
pension obligations. This is remarked as the most direct way
for the Federal government to provide a bailout, according to
IPI.
If it is appropriate to urge the Federal government not to take
on any state debt, putting aside the vagueness of just what that
means, then perhaps a resolution dealing with a broader array of
fiscal inequalities would provide a better vehicle for
discussion. Clearly the motivation behind AJR 10 is a concern
with state pension debt and that the Federal government might
decide to "bail-out" state pension debt thereby creating
conditions in which states without such debt would bear the
burden of those states deemed as irresponsible with their
budgetary finances. In reviewing inequalities relating to
federal spending, Alaska and Virginia rank number one and two in
per capital federal spending. Alaska receives $17,762 of
federal spending per capita, accounted for mostly through
defense spending, as well as, Virginia with $17,008 in spending
per capita. This spending is the direct result of federal
policies in budgeting, military spending and procurement. If we
are to be concerned with potential pension bailouts, then we may
also be concerned with policies that shift large scale federal
benefits through defense spending to a few key states outside of
California.
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In addition to the aforementioned fiscal issues, the financial
crisis led to one of the largest injections of federal money
into the financial system in history. Bloomberg News, at one
point last year revealed that the United States had lent, spent
or guaranteed as much as $12.8 trillion to rescue the economy.
Much of this support was in loans, loan guarantees, and
continued federal government support for financial institutions.
This is in contrast to the estimated $757 billion (Pew Center
on the States) in unfunded pension liability nationwide. IPI,
in its report on pension bailouts, found that a federal bailout
would create a "moral hazard" and that "responsible states"
would pay for the fiscal irresponsibility of other states. It
is unclear how a state might be measured as "responsible." The
basic idea is that states can be measured and categorized
between those that are fiscally responsible versus states that
presumably have created their own debt trap. However, this
one-dimensional analysis fails to provide any contextual
explanation as to the impact of federal budgetary policies that
have nothing to do with pensions. For example, states with a
large agriculture base receive millions, if not billions, in
federal subsidies relating to direct aid for certain agriculture
products, as well as, price controls on various commodities.
More importantly, federal fiscal policy already rewards and
punishes states in a myriad of ways.
How likely is a collapse of California's pension systems?
CalPERS is currently projecting a 7.5% annual return on its
investments. Critics call that "unrealistic." Some suggest 3%
is a safer figure. However, the system yielded a 13.3% return in
2012, and over the past two decades it has earned an average of
8% every year. The years in which returns were negative
coincided with peak troughs of the recent recession. CalPERS
has funding ratios well over 60% in its various plan categories.
Detractors of public pensions often point to a lack of 100%
funding ratio for public pension plans. In reality, very few
if any, large scale investment portfolios have 100%
asset/liability ratios, however CalPERS is collateralized above
and beyond our nation's largest private financial institutions.
The falter of these private institutions has had, and could
have in the future a far larger impact on state and federal
budgets than pension obligations.
Finally, the Center on Budget and Policy Priorities,
Misunderstandings Regarding State Debt, Pensions, and Retiree
Health Costs Create Unnecessary Alarm, puts the pension debt
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into proper perspective. First, pension funds invest for the
long term so a few years of low returns can be mitigated when
averaged with years of above average returns. Second, state and
local governments share of pensions as a portion of their
budgets is only 3.8%.
California pension reform.
Benefits for retirement system members are funded over the
employee's working career from three sources. First, employees
make contributions as a percentage of payroll. Employee
contribution rates are established in statute, or in rules and
charters for the smaller plans. In some cases, employers and
employees agree, through collective bargaining, to adjust
employee contribution rates. The second source of funding is
derived from investment returns on the retirement funds. For
example, CalPERS estimates that historically, investment returns
have paid for approximately 2/3 of the cost of providing
benefits.
The third source of funding is employer contributions, which are
also determined and paid as a percentage of employee income.
When investment returns do not perform as expected, unfunded
liability may occur and employers make up the difference in the
form of higher rates. The 2008 economic crisis resulted in
significant unfunded liabilities in the retirement systems,
impacting most employer rates. Similarly, when investment
returns exceed expectations, surpluses may accrue, and employer
rates are reduced accordingly. These rate reductions and
increases are actuarially "smoothed" over a period of years in
order to ease employer rate volatility and ensure continued
funding of the retirement systems.
The basic cost of providing an employee's future benefit at any
given time is the "normal cost." The normal cost is calculated
separately from the unfunded liability or any surplus, and
system actuaries use all of these calculations to annually set
the employer contribution rate for that year.
On September 12, 2012, the Governor signed into law a pension
reform bill, AB 340 - as amended by trailer bill AB 197 - that
will make substantial changes to pension benefits for public
employees who become members of a retirement system on or after
January 1, 2013, as well as some changes that affect current
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members.
AB 340 enacts the California Public Employees' Pension Reform
Act of 2013 (PEPRA), which mandates changes to pension benefits
and contributions for all public employee pension systems in
California (with a few exceptions noted below). Since public
employers are covered by a myriad of retirement laws, AB 340
both adds a new Act to the Government Code and amends existing
sections of the State Teachers' Retirement Law (STRS), the
Public Employees Retirement Law (PERL), and the County Employees
Retirement Law of 1937 (1937 Act).
Summary of pension reform:
1)Requires that final compensation be defined for all new
employees as the highest average annual compensation over a
three-year period.
2)Requires that compensation for all new public sector employees
be defined as the normal rate of regular, recurring pay,
excluding special bonuses, unplanned overtime, payouts for
unused vacation or sick leave, and other pay perks.
3)Limits all non-safety employees who retire from public service
from working more than 960 hours or 120 days per year for a
public employer. Additionally, the Conference Committee
Report requires a 180-day "sit-out" period before a retiree
could return to work. A retiree would be allowed to return as
an annuitant before 180 days if the appointment is approved by
the governing body of the local agency in a public meeting and
is necessary to fill a critically needed position.
4)Requires public officials and employees to forfeit pension and
related benefits if they are convicted of a felony in carrying
out official duties, in seeking an elected office or
appointment, or in connection with obtaining salary or pension
benefits.
5)Prohibits applying pension improvements to prior service.
6)Prohibits all employers from suspending employer and/or
employee contributions necessary to fund annual pension costs.
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7)Ends the ability of a public employee to purchase nonqualified
service or "airtime."
8)Requires all new employees and current state employees to
contribute 50% of the normal cost of their pension benefits.
Current local employees would be required to reach the 50%
level through collective bargaining by January 1, 2018.
9)Requires all new public sector employees to participate in a
retirement plan where the amount of compensation that can be
used to determine a defined benefit plan is capped at the
Social Security wage limit ($110,000) or 120% of that limit if
they do not participate in Social Security.
10)Implements a 2% at age 62 defined benefit component of the
hybrid plan for all new non-safety employees and adjusts the
retirement formulas to encourage members to retire at later
ages. The earliest an employee would be eligible to retire is
age 52 (increased from age 50) and the formula tops out at
2.5% at age 67 (increased from 63). Additionally, eliminates
the 3% at age 50 safety retirement formulas and reduces the
number of available retirement formulas for the defined
benefit component of the hybrid plan for safety members to
three - 2% at age 57; 2.5% at age 57; and, 2.7% at age 57.
11)Prohibits certain cash payments for current employees from
being counted as compensation earnable for retirement purposes
in counties operating retirement systems pursuant to the
County Employees' Retirement Law of 1937.
12)Requires CalPERS to determine what constitutes excessive
compensation paid by a public employer that creates a
significant liability for a former employer (which may occur
due to reciprocity when final compensation is applied to all
years of service), and to develop a plan to assess that excess
liability to the employer who paid the excessive compensation.
13)Prohibits a retirement board from administering, and a public
employer from offering, a benefit replacement plan for any new
member who is subject to the IRC Section 415(b) benefit limit.
14)Prohibits newly elected statewide officers and legislative
officers from participating in the Legislators' Retirement
System. They would continue to be optional members in
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CalPERS.
15)Requires all public retirement systems in California to
adhere to the federal compensation limit under Internal
Revenue Code (IRC) Section 401(a)(17) when calculating
retirement benefits for members who first join the retirement
system on or after January 1, 2013, and prohibits a public
employer from making contributions to any qualified public
retirement plan based on any portion of compensation that
exceeds that amount.
16)Eliminates the ability of an employer to provide better
health benefit vesting schedule to non-represented employees
than it does for represented employees.
17)Prohibits local elected members from being eligible for
salary reciprocity for elected service.
18)Requires a public retiree appointed to a full time state
board or commission to suspend their retirement allowance and
or serve as a non-salaried member of the board or commission.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file.
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081