BILL ANALYSIS
AB 446
Page 1
Date of Hearing: April 22, 2009
ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL
SECURITY
Ed Hernandez, Chair
AB 446 (Niello) - As Amended: April 2, 2009
SUBJECT : Public employees' retirement: additional retirement
service credits.
SUMMARY : Requires the administrators of the California Public
Employees' Retirement System (CalPERS) to prepare a report for
the legislature, by February 1, 2010, on the use of the
additional retirement service credits (ARSC), as specified.
Specifically, this bill:
1)Makes and declares specified findings of the Legislature,
specifically:
a) That CalPERS has a "sizeable unfunded liability" which
has been growing over the last decade.
b) That public perception places partial blame for this
liability on the ARSC program.
c) That there is "significant and growing public concern"
about the method of calculation of the receipt of ARSC.
d) That, in order to assess the validity of these concerns,
the Legislature must be provided with pertinent information
by CalPERS.
2)Requires CalPERS to file a report with the Legislature by
February 1, 2010.
3)Specifies the information to be included in the report,
specifically:
a) The number of members who have purchased ARSC,
subtotaled by employer category.
b) The number of members who subsequently retired,
subtotaled by employer category.
c) The average number of years of service purchased, and
the respective totals of each.
d) The average purchase price, according to number of years
and member demographics.
e) An estimate of how many members have chosen each payment
method and any noticeable changes in trends over the last
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three years.
f) A list of the key assumptions used in pricing for each
state retirement formula, and any changes made in these
assumptions.
g) Additional data on members who have subsequently
retired.
h) An estimate of the number of purchasers who retire
within one year, two years, three years, four years, and
five years.
i) For state members who purchased ARSC, and subsequently
retired earlier than anticipated by the assumptions in use,
an estimate of annual state costs for their benefits, and
the amount that these costs contribute to any unfunded
liability CalPERS is experiencing.
j) An estimate of the amount of the state's unfunded
liability that is attributable to purchases of ARSC.
aa) An estimate of the amount of present value paid compared
to the present value gained, on average.
EXISTING LAW :
Service retirement allowances for members of CalPERS are
calculated, in part, based on years of credited service.
CalPERS members may receive service credit for public service
not otherwise subject to credit, upon payment of specified
additional contributions.
AB 719 (Negrete McLeod), Chapter 838, Statutes of 2003, allows
eligible CalPERS members to purchase "additional retirement
service credit" that can be applied toward retirement benefits.
The program is available to any active CalPERS member who has at
least five years of earned service credit. Inactive and retired
members are ineligible, unless CalPERS received their election
while they were still active. A member can purchase up to five
years of ARSC in full-year increments. Only one service credit
purchase may be made, even if the member chose to purchase less
than the maximum of five years. The service credit added to a
member's account by this program is only considered for
retirement calculations and does not impact a member's health
vesting or vacation accrual.
The Internal Revenue Code allows a member of a tax-qualified
defined benefit program, such as CalPERS, to purchase up to 5
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years of nonqualified time. Nonqualified time is sometimes
referred to as "air time" because it does not correspond to any
service actually performed. The only requirements for
purchasing nonqualified time are that the amount purchased
cannot exceed 5 years, and a member purchasing nonqualified time
must have earned at least 5 years of service credit before being
eligible to purchase the nonqualified time.
FISCAL EFFECT : Unknown.
COMMENTS : According to CalPERS, "The cost to purchase ARSC is
calculated using a present value method, which is based on the
highest monthly full-time pay rate and an average of any special
compensation (i.e., uniform allowance, holiday pay, longevity
pay, etc.) reported to CalPERS by their employer during the last
36 months. This provides CalPERS the best estimate of the
potential future Final Compensation figure that may be used at
retirement for calculating the retirement benefit. CalPERS'
Actuarial Valuation System (AVS) projects the retirement benefit
increase one may receive from this additional service credit (at
retirement, disability, death, or other termination from
employment), and the potential benefit stream is then converted
to a lump sum cost in today's dollars.
"Determining the increase to a member's future benefits involves
a number of actuarial assumptions, including projected age at
retirement, life expectancy, and the probability that some
members may never receive service retirement benefits but
instead become disabled, die, or terminate their CalPERS
membership. These probabilities are the same assumptions used to
ensure all benefits are adequately funded."
The Committee is informed that as of 2004 there were 18 public
retirement systems nationwide who reported offering some form of
purchasing program for nonqualified time. All but one of these
systems also reported using the "present value" method for
determining purchase price.
According to the author, "CalPERS is experiencing a sizeable
unfunded liability, which has been growing over the last decade.
The purchase of additional retirement service credits seems to
exacerbate the unfunded liability in the system. It is
necessary for CalPERS to provide pertinent information about the
program to the Legislature. If the Legislature identifies
necessary revisions to the program, this information will enable
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the Legislature to properly address those concerns."
AB 55 (Correa), Chapter 261, Statutes of 2003, authorizes a
county board of supervisors, in counties operating retirement
systems under the County Employees' Retirement Law of 1937, to
allow active members of the retirement system to purchase up to
5 years of nonqualified time in that system.
SB 2126 (Public Employment and Retirement Committee), Chapter
1076, Statutes of 1998, authorized vested members of the
California State Teachers' Retirement System to purchase up to
five years of additional service credit for nonqualified
service.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957