BILL ANALYSIS
AB1856
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Date of Hearing: May 5, 2010
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 1856 (Fong) - As Amended: March 25, 2010
Policy Committee: P.E.R. &
S.S.Vote: 6-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill allows members of California Public Employees'
Retirement System (CalPERS) making after-tax installment
payments on a service credit purchase to suspend or cancel their
service credit purchase election. Specifically, the bill:
1)Allows a member making after-tax service credit purchase
installment payments to elect in writing to suspend
installment payments for up to one year, provided that the
balance due at the end of the suspension period is
recalculated to reflect interest that has accrued during the
suspension period.
2)Allows a member making after-tax service credit purchase
installment payments to voluntarily cancel payment of the
remaining balance of the service credit purchase, and reduces
the service credited to the member's account accordingly.
3)Prohibits service purchase installment payments from being
cancelled if the contribution or adjustment is required by law
or agreement, the purchase is for a tier conversion, or is
part of a court ordered community property division or other
court order or settlement agreement.
4)Allows a member to "re-purchase" the remaining credit from his
or her cancelled election at any time prior to retirement.
FISCAL EFFECT
CalPERS indicates that the bill will result in no net costs to
either the pension fund or the administration of the program. It
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indicates that:
1)Any cancelled service credit election will be pro-rated to
reflect the payments received and interest will continue to
accrue during a suspension period. Any resumption of a
cancelled election will be calculated using a present-value
calculation method, which requires the purchase to be
cost-neutral.
2)The suspension and cancellation workload will replace current
workload involved with reviewing requests, making hardship
determinations, explaining cancellation denials, and handling
subsequent 'second opinion' requests/appeals.
COMMENTS
1) Rationale . The bill, sponsored by CalPERS,is intended to help
members that have made an election to purchase service credits
through installment sales, but face unexpected hardship
because of the economic downturn, mortgage related losses,
furloughs, or other factors. CalPERS notes that existing law
provides limited flexibility for them to allow members to
cancel or suspend elections.
2)Background . CalPERS retirement benefits are based on a formula
taking into account the member's highest compensation, age at
retirement, and years of creditable service. CalPERs permits
members to purchase service credits prior to retirement to
enhance their benefits under several programs. The member can
make the purchase on a pre-tax or after tax basis, and can
either make a full payment with the purchase election or enter
into an installment payment plan. The full amount of service
credit purchased by the election is immediately posted to the
member's retirement account whether a lump sum payment is
submitted or an installment payment plan is chosen.
Members choosing to pay with a pre-tax installment payment
plan must abide by Internal Revenue Code (IRC) restrictions.
If pre-tax payroll deductions are chosen, an active member is
unable to alter a pre-tax payment schedule in any manner
unless the member separates from employment and retires, is no
longer employed with a CalPERS contracting agency, or under
other narrow circumstances.
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Members on an after-tax installment payment plan can change
payment schedules within the restrictions of state laws and
regulations. The California Code of Regulations allows an
extension of payments up to the maximum of 180 monthly
payments, upon determination of hardship by the board. In
addition, a few Government Code sections provide a form of
'cancellation' or suspension of payments under limited
conditions. However, many members do not qualify under these
suspension provisions, or do not realize sufficient payment
relief from them, so they seek a more complete, long term
solution through cancellation.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081