BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 637
                                                                  Page  1

          Date of Hearing:   May 6, 2009

                        ASSEMBLY COMMITTEE ON APPROPRIATIONS
                                Kevin De Leon, Chair

                     AB 637 (Hill) - As Amended:  April 2, 2009 

          Policy Committee:                              P.E.R. &  
          S.S.Vote:    6-0

          Urgency:     No                   State Mandated Local Program:  
          No     Reimbursable:              

           SUMMARY  

          This bill authorizes the California Public Employees' Retirement  
          System (CalPERS) to (a) require that contracting agencies use  
          Electronic Funds Transfer (EFT) for the payment of amounts due  
          to CalPERS, and (b) charge a fixed interest rate on late  
          employer payments, equal to the actuarial rate of return on  
          investments. 

           FISCAL EFFECT

           Significant administrative savings and investment earnings to  
          CalPERS due to reduced processing costs and earlier receipt of  
          investable funds from its contracting agencies.
           
          COMMENTS

          1)Background.  Current law allows local governments and other  
            agencies contracting with CalPERS for pension and health  
            benefits to remit their employees' retirement contributions  
            through EFT or paper check. It also allows CalPERS to charge  
            contracting agencies interest on late payments using its  
             actual  average rate of return on investments. This rate varies  
            dramatically from year to year and, as recent experience  
            demonstrates, can be negative.  An alternative measure for the  
            rate of return is the  actuarial rate of return  , which is the  
            long-term assumed rate-of-return used for making calculations  
            about future investment returns and the fund's financial  
            condition. It is a fixed rate, currently set at 7.75% per  
            year.

           2)Rationale  . This proposal, sponsored by CalPERS, is intended to  








                                                                  AB 637
                                                                  Page  2

            reduce processing costs and time lags, and to simplify  
            calculations of interest on late payments. CalPERS also  
            asserts that   EFT permits it to provide payroll reports online,  
            allowing contracting agencies and employees faster access to  
            their accounts, with fewer errors or lags in posting  
            information.

            Regarding the use of actuarial rate of return, CalPERS asserts  
            that unless the basis for calculating interest charges on late  
            payments is changed, CalPERS will be unable to fully realize  
            the increases in speed and efficiency made possible by its new  
            automated  IT system.  It will also enable CalPERS to charge  
            interest on late payments during periods when its investment  
            returns are negative.

           Analysis Prepared by  :    Brad Williams / APPR. / (916) 319-2081