BILL ANALYSIS �
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: AB 1320
Gloria Negrete McLeod, Chair Hearing date: June 27, 2011
AB 1320 (Allen) as amended 6/23/11 FISCAL: YES
PUBLIC EMPLOYEES' RETIREMENT: EMPLOYER CONTRIBUTION RATES
HISTORY :
Sponsor: California Professional Firefighters (CPF)
Prior legislation: SBX1 2 (Dunn), 2005
Died in Senate Appropriations Committee
ABX1 4 (Torrico), 2005
Died in Assembly Ways and Means Committee
ASSEMBLY VOTES :
PER & SS 4-2 5/04/11
Appropriations 12-5 5/27/11
Assembly Floor 51-26 6/02/11
SUMMARY :
Requires the establishment of Taxpayer Adverse Risk
Prevention (TARP) accounts in both the California Public
Employees' Retirement System (CalPERS) and in retirement
systems established under the County Employees Retirement Act
of 1937 ('37 Act) for the purpose of stabilizing public
employer contributions to the retirement systems.
BACKGROUND AND ANALYSIS :
1) Existing law :
a) creates the California Public Employees' Retirement
System (CalPERS), and the 1937 Act County Retirement
System (37 Act), which administer retirement and other
benefit programs for public employees throughout the
state.
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b) generally requires that retirement benefits are funded
through contributions paid by member contributions, which
are fixed in statute or contract; earnings from
investments; and employer contributions, which tend to be
higher when investment returns drop and lower when
investment returns are high.
c) requires pension system actuaries to determine employer
rates, by periodic (usually annual) "actuarial
valuations." The actuarial valuations are based on the
benefit formulas the employer provides, the employee
groups covered, and other actuarial data, such as
experience and demographic data.
d) specifies that the employer rate consist, in part, of
the "normal cost of benefits," which is the amount of
funding required to pay for the annual cost of service
accrual for the upcoming fiscal year for active
employees.
e) allows the rate paid by the employer to be reduced or
eliminated in years when the employee contribution rate
and the investment returns are high enough to fully fund
the cost of benefits.
f) allows for the establishment of small reserves against
deficiencies; the CalPERS law permits the reserve to be
0.20% of assets, and the '37 Act law permits the reserve
to be not more than 1% of assets. The systems are
permitted to use the reserves against deficiencies in
interest earned, losses under investments, court-mandated
costs and specified actuarial losses.
g) added by Proposition 162 of 1992, requires that the
public retirement system boards of administration in
California have plenary authority to determine the rates
of contributions necessary to properly fund the
respective retirement systems.
2) This bill :
a) requires that CalPERS and the twenty '37 Act county
retirement systems establish TARP accounts for each
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participating employer.
b) specifies that the TARP accounts will be part of the
employer's account but will not be used when determining
the employer's contribution rate.
c) requires deposits into the TARP accounts to be made
from the employer's contributions when the actuarial
value of assets exceeds the accrued liability, as
determined by the actuary.
d) specifies that the assets in the TARP accounts will be
drawn upon to pay a portion of the employer contribution
when the employer contribution rate is greater than the
normal cost of benefits.
e) provides that once the assets in the TARP account
exceed 50% of the employer's assets, excluding the TARP
account assets, the employer contribution may be reduced
to an amount less than 100% of the normal cost, as
determined by the system actuary.
f) specifies that funds in the TARP account may be used
by employers to pay all or part of the employee
contribution, or for retiree health care, as specified.
g) specifies that the funds in the TARP accounts are to be
invested in the same manner as other funds in the
retirement system.
h) allows the retirement boards, pursuant to their
authority and fiduciary duty under the Constitution, to
refuse to receive additional contributions if doing so
would conflict with that fiduciary duty.
i) becomes operative on January 1, 2013.
3) What problem does the bill attempt to solve ?
In the late 1990's superior investment returns, when added to
employee contributions, were enough to significantly reduce,
and in some cases eliminate, employer pension contributions
because the retirement systems were approximately 100%
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funded.
Employers, in some cases, redirected pension monies to other
programs and costs. When the economy hit a downturn in 2001,
employer rates rose significantly in the following years at a
time when local and state budgets were negatively impacted
overall and least able to afford increases. A similar impact
occurred in 2008 and 2009 following significant investment
gains in prior years.
Had employers continued to make normal cost contributions
when the plans were fully funded, the excess contributions
could have been placed in reserve accounts to protect and
ease employer rates in the event of an economic downturn.
This bill creates reserve-or TARP-accounts and a requirement
to redirect employer normal cost contributions into the TARP
accounts when the pension plans are fully funded.
FISCAL :
CalPERS anticipates significant one-time implementation
costs-estimated as $500,000 in Assembly Appropriations-to
build this program into its automated systems.
In addition, it anticipates ongoing administrative costs to
track, account for, and report the TARP assets. No estimate
for the ongoing costs has been provided at this time.
COMMENTS :
1) Arguments in Support
According to the sponsor, the California Professional
Firefighters,
"When investment earnings on retirement system assets
are high, employer contribution rates can be reduced.
In some cases, such as during the upswing market periods
of the 1990's, employers were granted contribution
'holidays', wherein their contribution to the system was
$0.00. Conversely, when investment earnings are low,
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employer contribution rates are increased, and in a bad
economy, such as the latest Great Recession, employer
contributions to their retirement systems can increase
significantly.
"Despite their modest pensions and years of dedicated
public service, California public employees are doing
their fair share to help strengthen and stabilize our
state's public pension systems. Across California,
dozens of employee organizations have successfully
negotiated changes to their retirements, which improve
the sustainability of their funds. At the state level,
bargaining units have voluntarily limited future
retirement costs and agreed to contribute more of their
own money to the fund."
According to a recent study by Fitch Ratings,
"The main driver of the current level of pension funding
pressure is market losses in late 2008 and early 2009,
which represent a major setback toward prefunding of
retirement obligations." Consequently, the sponsor
believes there is a need to further help minimize the
impact of the market losses on the funding status of the
CalPERS and '37 Act county retirement plans,
specifically to help mitigate the volatility in the
employer contributions, as well as the average future
employer contribution going forward.
The sponsor concludes,
"AB 1320 requires that the employer contribution meets
or exceeds the normal cost of benefits (without
accounting for market losses or gains). So, when market
performance generates enough surplus in the TARP
account, the employer contribution rate is incrementally
reduced. Conversely, the funds in the TARP account will
be used when market declines require an employer
contribution that is greater than the normal cost. By
ensuring that CalPERS and the '37 Act county retirement
systems establish TARP accounts for each participating
employer, AB 1320 will ultimately safeguard against any
sudden increases in employer contribution rates, thereby
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providing budgeting stability and sustainability."
CalPERS states that there are some plans in the CalPERS
system that are fully or even super-funded and, in some
cases, closed to new employees, therefore not accruing
additional liabilities. In such cases, CalPERS believes
that it needs the flexibility to refuse to take additional
contributions if doing so would conflict with CalPERS'
fiduciary duty.
2) SUPPORT :
California Professional Firefighters (CPF), Sponsor
California Labor Federation (CLF)
California Public Defenders Association
Laborers' Locals 777 & 792
San Diego County Court Employees Association
3) OPPOSITION :
None to date
#####
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