BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
1856 (Fong)
Hearing Date: 06/28/2010 Amended: 06/07/2010
Consultant: Maureen Ortiz Policy Vote: PE&R 6-0
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BILL SUMMARY: AB 1856 authorizes a member of CalPERS who is
making after-tax installment payments for service credit
purchase to elect to suspend or prospectively cancel their
service credit purchase election.
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Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12 2012-13 Fund
Admin expenses ------unknown new costs likely less
than $150-----
potentially
offset by existing workload ---- Special*
*Public Employment Retirement Fund
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STAFF COMMENTS:
CalPERS indicates that AB 1856 will result in no net cost
increases to either the pension fund or the administration of
the program, although the election to suspend or cancel that is
authorized by this bill will likely generate a greater number of
requests from members than is currently received. CalPERS
indicates that program and administrative costs will be neutral
due to the following:
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 to CalPERS will
replace current workload involved with reviewing requests,
making hardship determinations, explaining cancellation denials,
and handling subsequent 'second opinion' requests/appeals.
AB 1856 will allow a member who is making after-tax service
credit purchase installment payments to suspend installment
payments for up to one year. Interest will continue to accrue
during the suspension period and payments will automatically
resume after one year unless the member requests the payment to
resume at an earlier time. A member who suspends a service
credit installment payment election may not do so again until
after a 3 year waiting period. If a member retires during a
suspension period, that member can choose to either make a
lump-sum payment for the recalculated balance due, or request a
cancellation of purchase for the remaining service credit.
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AB 1856 (Fong)
AB 1856 will also allow a member who is making after-tax service
credit purchase installment payments to cancel the election upon
the signed request of the member.
Voluntary cancellations will not be allowed if the member is
already receiving benefit payments on the service credit
purchase, for tier conversions or reclassifications, or for
mandatory adjustments. The service credit purchase will be
adjusted to reflect the
payments that had been made. However, a member may choose to
repurchase service credit after a cancellation request has been
made.
Currently, CalPERS receives service credit purchase cancellation
requests based on a variety of reasons, and each request is
reviewed individually. Since the service credit election is
currently considered irrevocable at the time of election,
requests for cancellation are generally not honored unless no
payments had yet been received, or unless an error is
discovered. However, there has been an increase in the number
of requests for suspensions and cancellations due to a variety
of reasons including furloughs, disability, loss of family
income and other life changing circumstances.
Current law also allows a CalPERS member who receives a
Disability Retirement and safety members who receive an
Industrial Disability Retirement to elect to cancel their
service credit purchase installment payments on a prospective
basis when the purchase would not improve the member's
retirement allowance. If a member's employment is consequently
reinstated, payments automatically resume.
CalPERS retirement benefits are calculated based on a formula
that considers the member's highest compensation, age at
retirement, and years of creditable service. Members are
authorized to purchase service credit for a number of reasons to
enhance their retirement benefits, as long as the member pays
the full actuarial cost of the benefit. Members can choose to
pay on an "after-tax" or "pre-tax" basis if their contract
allows, and can choose to pay in a lump sum or by making
installment payments.
This bill does not affect members choosing to pay with a pre-tax
installment payment plan since those plans are governed by
Internal Revenue Service guidelines. In a pre-tax payroll
deduction option, an active member is unable to alter a pre-tax
payment schedule in any manner unless a) the member separates
from employment and retires, b) the payments are reported
through another CalPERS employer which does not have a pre-tax
option, or c) the member is no longer employed with a CalPERS
contracting agency.