BILL ANALYSIS Ó
SENATE COMMITTEE ON
PUBLIC EMPLOYMENT AND RETIREMENT
Dr. Richard Pan, Chair
2015 - 2016 Regular
Bill No: SB 1251 Hearing Date: 4/11/16
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|Author: |Moorlach |
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|Version: |3/31/16 As amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Pamela Schneider |
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Subject: Publication of state financial obligations: Internet
Web site and ballot pamphlet
SOURCE: Author
DIGEST: This bill establishes the California Financial
Transparency Act of 2016 and requires the Office of the
Legislative Analyst (LAO) to create and maintain a web page
listing specific state financial obligations that shall also be
included by the Secretary of State in voter ballot pamphlets,
including unfunded pension liability and unfunded state retiree
medical benefit liability.
This analysis will focus on requirements in the bill to include
unfunded pension liability and unfunded state retiree medical
benefit liability in the state ballot pamphlet.
ANALYSIS:
Existing law:
1)Establishes the Office of the Secretary State, and defines his
or her duties.
2)States that the Secretary of State is the elections officer of
the state, and shall administer the provisions of the
Elections Code, including the preparation of a state ballot
pamphlet.
SB 1251 (Moorlach) Page 2 of ?
3)Defines the information that shall be included in ballot
pamphlets, including the following:
a) A complete copy of each state measure.
b) A copy of any constitutional or statutory provision that
a measure would repeal or revise.
c) Arguments and rebuttals for and against each measure.
d) An analysis of each state measure.
e) Tables of content, indexes, art work, and other
materials deemed necessary by the Secretary of State to
make the pamphlet easier to understand.
f) A notice relative to obtaining additional copies of the
pamphlet upon request.
g) A written explanation of the judicial retention
procedure.
h) The Voter Bill of Rights.
i) Information regarding candidates included in the ballot,
as specified.
j) A written explanation of the appropriate election
procedures for elective offices, as specified.
aa) A written explanation of the top 10 contributor lists
required by statute and a description of the Internet Web
site where those lists may be found.
4)Establishes the California Public Employees' Retirement System
(CalPERS), which administers the retirement, death,
disability, and health benefits for state employees; the
retirement, death, and disability benefits for school
classified employees; and retirement, death, disability, and
health benefits for local public employers that contract with
CalPERS to provide employee benefits.
5)Requires CalPERS to administer 4 defined benefit retirement
plans: the Public Employees' Retirement System (PERS), which
covers state and school classified employees and local
employees of public agencies that contract with CalPERS for
employee benefits; the Judges' Retirement System (JRS), a
closed fund covering judges elected and appointed prior to
November 9, 1994; the Judges' Retirement System II (JRSII),
covering judges elected and appointed after November 9, 1994;
and the Legislators' Retirement System (LRS), a closed fund
covering state legislators who were entitled to retirement
benefits prior to term limits, constitutional officers, and
legislative statutory officers (after January 1, 2013, new
members who would have been in LRS are in PERS and subject to
SB 1251 (Moorlach) Page 3 of ?
the benefits in that system).
6)In the PERS program, defines a number of member classes,
including state miscellaneous, industrial, safety, peace
officer/firefighter, and patrol classes, and school and local
miscellaneous and safety classes. Each of these groups and
employers have different rates and different individual annual
actuarial asset and liability calculations.
7)Requires CalPERS to administer the Public Employees' Medical
and Hospital Care Act (PEMHCA), which provides health care
coverage for state employees and retirees and their
dependents, and health care for the employees and retirees of
local public agencies that contact with CalPERS for PEMHCA
coverage.
8)Allows, since 2005, public employers and the state to prefund
their retiree health care obligations by contributing to a
fund for that purpose administered by CalPERS.
9)Requires, as the result of collective bargaining agreements
and subsequent statutory changes, state bargaining units 6
(Highway Patrol), 9 (Engineers), and 10 (Scientists) members
and related excluded employees to contribute to prefund their
retiree health care costs.
10)Establishes the California State Teachers' Retirement System
(CalSTRS), which provides retirement, death, and disability
benefits for teachers and specified school personnel. CalSTRS
administers four retirement programs: the defined benefit
program (the primary benefit plan), the defined benefit
supplement program, the cash balance benefit program, and the
replacement benefit program. Each of these plans has separate
actuarial accounting and differing levels of assets and
liabilities.
11)Requires the retirement system boards to administer the
retirement funds, including preparing annual actuarial
reports, which are available on the systems' Internet Web
sites.
12)Establishes the Office of the Legislative Analyst, which
estimates the fiscal effect on state and local government of
all proposed initiatives (prior to circulation) and prepares
analyses of all measures that qualify for the statewide
SB 1251 (Moorlach) Page 4 of ?
ballot.
This bill:
1)Creates the California Financial Transparency Act of 2016.
2)Requires that the Office of the LAO post all of the following
current total amounts on a dedicated Internet Web page that is
hyperlinked to the home page of the LAO:
a) State revenues.
b) State expenditures.
c) Unfunded pension liability.
d) Unfunded state retiree medical benefit liability.
e) Unfunded infrastructure needs.
f) Bond debt.
g) Unrestricted net position from the most recent
Comprehensive Financial Report (CAFR).
3)Requires that the LAO update the required information twice
per year before January 1 and July 1.
4)Requires that a copy of all information posted on the LAO's
internet web page pursuant to the California Financial
Transparency Act be included in the ballot pamphlet.
Background
The two state retirement systems
CalPERS is one of the largest public pension systems in the
world, providing retirement, death, and disability benefits for
approximately 1.8 million active and retired members and their
beneficiaries, and health care benefits for approximately 1.4
million members and their dependents. CalSTRS is the world's
largest educators' pension fund in the world, providing
retirement, death, and disability benefits for approximately
880,000 members and their beneficiaries. CalPERS has been in
existence for over 80 years, CalSTRS for over 100 years.
Based on guidelines of the Governmental Accounting Standards
Board, both systems produce and publish CAFRs. These reports,
which are many pages in length, thoroughly define the systems'
various benefit plans and plan assets and liabilities, including
unfunded liability. In addition, they provide detailed history
SB 1251 (Moorlach) Page 5 of ?
and information on the plans' funded status; employer and
employee contributions; how the actuarial discount rate and
actuarial assumptions are determined and their impact on
employer rates; differences among the different benefit plans
(e.g., safety vs. miscellaneous plans); investment returns and a
discussion of the long-term expected rate of return; discussions
of changes in net pension liability from year to year; an
explanation of rate smoothing; and other important information
relative to the actuarial administration of the systems and
employer rate setting.
In general, pension systems are funded from three sources:
employees, who make contributions as a set percentage of pay;
employer contributions, which are calculated as a percentage of
pay, paid monthly to the retirement systems, and considered to
be part of the total compensation of employees; and investment
returns, which, on average, pay approximately 2/3 of total
pension benefit costs.
CalPERS annually sets employer rates based on a variety of
factors, including the benefit structure of the plan; smoothed
investment gains and losses; actuarial assumptions about
mortality, anticipated compensation, and other factors; expected
average and actual return rates on pension investments; and
employee contribution amounts. CalPERS' most recent CAFR states
that CalPERS was funded at 76.3% as of June 30, 2014. However,
this number is an average number. When plans are separated out,
funding levels vary. For example, the state plans are funded as
follows: miscellaneous-74%; industrial-84%; safety-84%; peace
officer/firefighter-72%; patrol-66%. JRSII and LRS are super
funded at levels over 100%. JRS is a pay-as-you-go system.
CalSTRS uses statutory contribution rates that do not fluctuate
or that only fluctuate slightly from year to year. CalSTRS'
most recent CAFR (June 30, 2015) states a funding level of 69%
funded.
Because the statutory contribution rates for CalSTRS were not
adequate, in 2014, the legislature passed a funding plan to
bring CalSTRS to full funding within 30 years (AB 1469, Bonta,
Chapter 47, Statutes of 2014).
Retiree health benefits
CalPERS administers PEMHCA for approximately 1.4 million
SB 1251 (Moorlach) Page 6 of ?
employees, retirees and their dependents. In the early 2000's,
policy makers, after a number of years of rising health care
costs, became concerned with the prefunding of retiree
healthcare obligations, which historically had been
pay-as-you-go. In 2004, legislation authorized CalPERS to offer
healthcare prefunding accounts for employers (SB 626, Senate
Public Employment and Retirement Committee, Chapter 69, Statutes
of 2004).
In 2009, state patrol members became the first state employee
group to commit employee contributions to prefunding retiree
health care. State engineers and scientists followed in 2015,
and this year, the Legislature will be asked to ratify the
agreement of state correctional officers who will also begin
contributing toward their retiree health care costs. It is
likely that other state bargaining units will be asked by the
Governor to make similar agreements.
Concerns that requiring liability numbers without context is
unlikely to improve transparency
Requiring the printing of unfunded liability numbers in the
ballot pamphlet without the added context provided by a thorough
actuarial analysis of the numbers is unlikely to increase
transparency. Unfunded pension liability numbers are frequently
published with little background information, creating
significant confusion as to what the numbers mean. Sometimes,
the implication is that the total future pension liability will
become due imminently at taxpayer expense. Many people do not
know that investment returns pay approximately 2/3 of all
pension costs, that public employees personally pay a
significant portion of pension debt, or that pensions are funded
over many decades and that liability fluctuates based on
investment returns. Pension liability numbers without any
explanation or context are of little value in understanding how
pensions are funded or what real costs to employers are expected
to be.
Thorough transparency would require a discussion of how pensions
are funded, how costs are determined and employer rates are set,
smoothing and the actuarial discount rate, the role of
investment earnings and employee contributions in paying benefit
costs, and some historical context to the rise and fall of rates
and liability. An accurate description of unfunded liability
should include the information that 75% is expected to be paid
SB 1251 (Moorlach) Page 7 of ?
for by investment returns and the employees themselves and the
remainder will be paid in installments over decades. The state
Controller produces an annual CAFR that includes approximately
40 pages summarizing actuarial information relative to the two
state retirement systems. The document is publicly available
and may be found on the Controller's website at
http://www.sco.ca.gov/ard_state_cafr.html .
Including a transparent discussion of state pension funding in
the ballot along the lines of what the Controller provides in
the CAFR would likely run to 30 or more pages. The information
would not be specifically relevant to ballot measures, which
contain their own cost analysis if appropriate. Including an
adequate discussion of pension funding in the ballot pamphlet
would tend to burden the ballot pamphlet with a significant
amount of extraneous information unrelated to specific measures
on the ballot.
The committee recommends that SB 1251 be amended to remove the
requirement to print pension and retiree health care unfunded
liability numbers in the ballot pamphlet. The annual
contribution of the state for state employee and retiree
benefits and health care would already be included in the
state's annual expenditure number required by this bill, and
thorough actuarial reports on pension funding, including
unfunded liability, are already easily available to the public.
Related/Prior Legislation
SB 99 (Senate Budget Committee, Chapter 322, Statutes of 2015)
required contributions to prefund retiree health care from state
bargaining units 9 and 10 members and related excluded
employees.
AB 1469 (Bonta, Chapter 47, Statutes of 2014) created a funding
plan for employer and employee contributions to make CalSTRS
fully funded in approximately 30 years.
SB 519 (Ashburn, Chapter 188, Statutes of 2009) established
employee contributions to prefund retiree health care from state
bargaining unit 5 members and related excluded employees.
SB 626 (Senate Public Employment and Retirement Committee,
Chapter 69, Statutes of 2004) gave CalPERS the ability to set up
employer accounts to prefund retiree health care obligations.
SB 1251 (Moorlach) Page 8 of ?
FISCAL EFFECT: Appropriation: No Fiscal
Com.: Yes Local: No
SUPPORT:
Howard Jarvis Taxpayers Association
OPPOSITION:
California Professional Firefighters
California School Employees Association, AFL-CIO
California State Council of the Service Employees International
Union
Los Angeles County Professional Peace Officers Association
Organization of SMUD Employees
Professional Engineers in California Government
San Diego County Court Employees Association
San Luis Obispo County Employees Association
ARGUMENTS IN SUPPORT:
According to the author:
Over the past two decades Californians have been asked to
make decisions regarding billions in spending and bond
measures, as well as decide on candidates who have
differing viewpoints regarding fiscal issues. These
decisions impact the state's finances for decades, yet in
the midst of election frenzy, most voters find it difficult
to access basic reliable non-partisan financial information
before making their ballot choices.
SB 1251 provides that the Legislative Analyst compile and
report to the Secretary of State, prior to each statewide
election, select data measures regarding the state's fiscal
health.
ARGUMENTS IN OPPOSITION:
California School Employees Association states the following
concerns, which are shared by other opponents:
SB 1251 fails to provide a reasonable relationship between
SB 1251 (Moorlach) Page 9 of ?
the additional superfluous information added to the voter
guide and the measures on each ballot. There will be many
measures in future California statewide elections, many of
which will not have any relationship to revenues, bond
debt, or retiree medical benefit levels. The additional
information proposed by SB 1251 would add confusion to
voters, who already are provided nonpartisan analyses by
the Legislative Analyst's Office.
Additional information added to the ballot pamphlet should
not be determined by any individual's assessment of what is
important and should not be included in order to shape
voters' decisions. Why would the Legislature decide to
include pension liabilities, but not include the cost of
corporate tax loopholes or any other expenditure? This
bill moves down a dangerous path of allowing individuals to
influence the electorate by skewing the data provided to
voters.