(1)Existing law requires a local agency, if it maintains an Internet Web site and is required to report specific financial information to the Controller, to post, in a conspicuous location on its Internet Web site, information on the annual compensation of its elected officials, officers, and employees. Existing law authorizes a local agency to meet this requirement by posting a link to the Controllers Government Compensation in California Internet Web site in a conspicuous location on its Internet Web site.

This bill would establish the California Financial Transparency Act of 2016 and would require ____ [an entity of state government] the Legislative Analyst to create and maintain a dedicated Internet Web page, page that is hyperlinked to the homepage of its the Internet Web site, site of the Legislative Analysts Office that lists specific state financial obligations.

(2)The Political Reform Act of 1974 and the Elections Code each require the Secretary of State to prepare a ballot pamphlet that contains specific information.

This bill would require the Secretary of State to include in a ballot pamphlet a copy of all the information posted on a the dedicated Internet Web page, page that is hyperlinked to the homepage of the Internet Web site of an unspecified entity in state government, the Legislative Analysts Office pursuant to the California Financial Transparency Act of 2016.

(3)The Political Reform Act of 1974, an initiative measure, provides that the Legislature may amend the act to further the acts purposes with a ²/₃ vote of each house and compliance with specified procedural requirements.

The act also provides that, notwithstanding this vote requirement, the Legislature may amend specified provisions to add to the ballot pamphlet information regarding candidates or other information.

This bill, which would require additional information to be included in the ballot pamphlet, without making other changes to the act, would therefore require a majority vote.

(1)Existing law requires a local agency, if it maintains an Internet Web site and is required to report specific financial information to the Controller, to post, in a conspicuous location on its Internet Web site, information on the annual compensation of its elected officials, officers, and employees. Existing law authorizes a local agency to meet this requirement by posting a link to the Controllers Government Compensation in California Internet Web site in a conspicuous location on its Internet Web site.

This bill would establish the California Financial Transparency Act of 2016 and would require ____ [an entity of state government] to create and maintain a dedicated Web page, hyperlinked to the homepage of its Internet Web site, that lists specific state financial obligations.

(2)The Political Reform Act of 1974 and the Elections Code each require the Secretary of State to prepare a ballot pamphlet that contains specific information.

This bill would require the Secretary of State to include in a ballot pamphlet a copy of all the information posted on a dedicated Web page, hyperlinked to the homepage of the Internet Web site of an unspecified entity in state government, pursuant to the California Financial Transparency Act of 2016.

(3)The Political Reform Act of 1974, an initiative measure, provides that the Legislature may amend the act to further the acts purposes with a ²/₃ vote of each house and compliance with specified procedural requirements.

The act also provides that, notwithstanding this vote requirement, the Legislature may amend specified provisions to add to the ballot pamphlet information regarding candidates or other information.

This bill, which would require additional information to be included in the ballot pamphlet, without making other changes to the act, would therefore require a majority vote.

SENATE COMMITTEE ON

PUBLIC EMPLOYMENT AND RETIREMENT

Dr. Richard Pan, Chair

2015 - 2016 Regular

Bill No: SB 1251 Hearing Date: 4/11/16

Subject: Publication of state financial obligations: Internet Web site and ballot pamphlet

SOURCE: Author

DIGEST: This bill establishes the California Financial Transparency Act of 2016 and requires the Office of the Legislative Analyst (LAO) to create and maintain a web page listing specific state financial obligations that shall also be included by the Secretary of State in voter ballot pamphlets, including unfunded pension liability and unfunded state retiree medical benefit liability.

This analysis will focus on requirements in the bill to include unfunded pension liability and unfunded state retiree medical benefit liability in the state ballot pamphlet.

ANALYSIS:

Existing law:

1. Establishes the Office of the Secretary State, and defines his or her duties.
2. States that the Secretary of State is the elections officer of the state, and shall administer the provisions of the Elections Code, including the preparation of a state ballot pamphlet.
3. Defines the information that shall be included in ballot pamphlets, including the following:
   1. A complete copy of each state measure.
   2. A copy of any constitutional or statutory provision that a measure would repeal or revise.
   3. Arguments and rebuttals for and against each measure.
   4. An analysis of each state measure.
   5. Tables of content, indexes, art work, and other materials deemed necessary by the Secretary of State to make the pamphlet easier to understand.
   6. A notice relative to obtaining additional copies of the pamphlet upon request.
   7. A written explanation of the judicial retention procedure.
   8. The Voter Bill of Rights.
   9. Information regarding candidates included in the ballot, as specified.
   10. A written explanation of the appropriate election procedures for elective offices, as specified.
   11. A written explanation of the top 10 contributor lists required by statute and a description of the Internet Web site where those lists may be found.
4. Establishes the California Public Employees’ Retirement System (CalPERS), which administers the retirement, death, disability, and health benefits for state employees; the retirement, death, and disability benefits for school classified employees; and retirement, death, disability, and health benefits for local public employers that contract with CalPERS to provide employee benefits.
5. Requires CalPERS to administer 4 defined benefit retirement plans: the Public Employees’ Retirement System (PERS), which covers state and school classified employees and local employees of public agencies that contract with CalPERS for employee benefits; the Judges’ Retirement System (JRS), a closed fund covering judges elected and appointed prior to November 9, 1994; the Judges’ Retirement System II (JRSII), covering judges elected and appointed after November 9, 1994; and the Legislators’ Retirement System (LRS), a closed fund covering state legislators who were entitled to retirement benefits prior to term limits, constitutional officers, and legislative statutory officers (after January 1, 2013, new members who would have been in LRS are in PERS and subject to the benefits in that system).
6. In the PERS program, defines a number of member classes, including state miscellaneous, industrial, safety, peace officer/firefighter, and patrol classes, and school and local miscellaneous and safety classes. Each of these groups and employers have different rates and different individual annual actuarial asset and liability calculations.
7. Requires CalPERS to administer the Public Employees’ Medical and Hospital Care Act (PEMHCA), which provides health care coverage for state employees and retirees and their dependents, and health care for the employees and retirees of local public agencies that contact with CalPERS for PEMHCA coverage.
8. Allows, since 2005, public employers and the state to prefund their retiree health care obligations by contributing to a fund for that purpose administered by CalPERS.
9. Requires, as the result of collective bargaining agreements and subsequent statutory changes, state bargaining units 6 (Highway Patrol), 9 (Engineers), and 10 (Scientists) members and related excluded employees to contribute to prefund their retiree health care costs.
10. Establishes the California State Teachers’ Retirement System (CalSTRS), which provides retirement, death, and disability benefits for teachers and specified school personnel. CalSTRS administers four retirement programs: the defined benefit program (the primary benefit plan), the defined benefit supplement program, the cash balance benefit program, and the replacement benefit program. Each of these plans has separate actuarial accounting and differing levels of assets and liabilities.
11. Requires the retirement system boards to administer the retirement funds, including preparing annual actuarial reports, which are available on the systems’ Internet Web sites.
12. Establishes the Office of the Legislative Analyst, which estimates the fiscal effect on state and local government of all proposed initiatives (prior to circulation) and prepares analyses of all measures that qualify for the statewide ballot.

This bill:

1. Creates the California Financial Transparency Act of 2016.
2. Requires that the Office of the LAO post all of the following current total amounts on a dedicated Internet Web page that is hyperlinked to the home page of the LAO:
   1. State revenues.
   2. State expenditures.
   3. Unfunded pension liability.
   4. Unfunded state retiree medical benefit liability.
   5. Unfunded infrastructure needs.
   6. Bond debt.
   7. Unrestricted net position from the most recent Comprehensive Financial Report (CAFR).
3. Requires that the LAO update the required information twice per year before January 1 and July 1.
4. Requires that a copy of all information posted on the LAO’s internet web page pursuant to the California Financial Transparency Act be included in the ballot pamphlet.

Background

The two state retirement systems

CalPERS is one of the largest public pension systems in the world, providing retirement, death, and disability benefits for approximately 1.8 million active and retired members and their beneficiaries, and health care benefits for approximately 1.4 million members and their dependents. CalSTRS is the world’s largest educators’ pension fund in the world, providing retirement, death, and disability benefits for approximately 880,000 members and their beneficiaries. CalPERS has been in existence for over 80 years, CalSTRS for over 100 years.

Based on guidelines of the Governmental Accounting Standards Board, both systems produce and publish CAFRs. These reports, which are many pages in length, thoroughly define the systems’ various benefit plans and plan assets and liabilities, including unfunded liability. In addition, they provide detailed history and information on the plans’ funded status; employer and employee contributions; how the actuarial discount rate and actuarial assumptions are determined and their impact on employer rates; differences among the different benefit plans (e.g., safety vs. miscellaneous plans); investment returns and a discussion of the long-term expected rate of return; discussions of changes in net pension liability from year to year; an explanation of rate smoothing; and other important information relative to the actuarial administration of the systems and employer rate setting.

In general, pension systems are funded from three sources: employees, who make contributions as a set percentage of pay; employer contributions, which are calculated as a percentage of pay, paid monthly to the retirement systems, and considered to be part of the total compensation of employees; and investment returns, which, on average, pay approximately 2/3 of total pension benefit costs.

CalPERS annually sets employer rates based on a variety of factors, including the benefit structure of the plan; smoothed investment gains and losses; actuarial assumptions about mortality, anticipated compensation, and other factors; expected average and actual return rates on pension investments; and employee contribution amounts. CalPERS’ most recent CAFR states that CalPERS was funded at 76.3% as of June 30, 2014. However, this number is an average number. When plans are separated out, funding levels vary. For example, the state plans are funded as follows: miscellaneous—74%; industrial—84%; safety—84%; peace officer/firefighter—72%; patrol—66%. JRSII and LRS are super funded at levels over 100%. JRS is a pay-as-you-go system.

CalSTRS uses statutory contribution rates that do not fluctuate or that only fluctuate slightly from year to year. CalSTRS’ most recent CAFR (June 30, 2015) states a funding level of 69% funded.

Because the statutory contribution rates for CalSTRS were not adequate, in 2014, the legislature passed a funding plan to bring CalSTRS to full funding within 30 years (AB 1469, Bonta, Chapter 47, Statutes of 2014).

Retiree health benefits

CalPERS administers PEMHCA for approximately 1.4 million employees, retirees and their dependents. In the early 2000’s, policy makers, after a number of years of rising health care costs, became concerned with the prefunding of retiree healthcare obligations, which historically had been pay-as-you-go. In 2004, legislation authorized CalPERS to offer healthcare prefunding accounts for employers (SB 626, Senate Public Employment and Retirement Committee, Chapter 69, Statutes of 2004).

In 2009, state patrol members became the first state employee group to commit employee contributions to prefunding retiree health care. State engineers and scientists followed in 2015, and this year, the Legislature will be asked to ratify the agreement of state correctional officers who will also begin contributing toward their retiree health care costs. It is likely that other state bargaining units will be asked by the Governor to make similar agreements.

Concerns that requiring liability numbers without context is unlikely to improve transparency

Requiring the printing of unfunded liability numbers in the ballot pamphlet without the added context provided by a thorough actuarial analysis of the numbers is unlikely to increase transparency. Unfunded pension liability numbers are frequently published with little background information, creating significant confusion as to what the numbers mean. Sometimes, the implication is that the total future pension liability will become due imminently at taxpayer expense. Many people do not know that investment returns pay approximately 2/3 of all pension costs, that public employees personally pay a significant portion of pension debt, or that pensions are funded over many decades and that liability fluctuates based on investment returns. Pension liability numbers without any explanation or context are of little value in understanding how pensions are funded or what real costs to employers are expected to be.

Thorough transparency would require a discussion of how pensions are funded, how costs are determined and employer rates are set, smoothing and the actuarial discount rate, the role of investment earnings and employee contributions in paying benefit costs, and some historical context to the rise and fall of rates and liability. An accurate description of unfunded liability should include the information that 75% is expected to be paid for by investment returns and the employees themselves and the remainder will be paid in installments over decades. The state Controller produces an annual CAFR that includes approximately 40 pages summarizing actuarial information relative to the two state retirement systems. The document is publicly available and may be found on the Controller’s website at http://www.sco.ca.gov/ard_state_cafr.html.

Including a transparent discussion of state pension funding in the ballot along the lines of what the Controller provides in the CAFR would likely run to 30 or more pages. The information would not be specifically relevant to ballot measures, which contain their own cost analysis if appropriate. Including an adequate discussion of pension funding in the ballot pamphlet would tend to burden the ballot pamphlet with a significant amount of extraneous information unrelated to specific measures on the ballot.

The committee recommends that SB 1251 be amended to remove the requirement to print pension and retiree health care unfunded liability numbers in the ballot pamphlet. The annual contribution of the state for state employee and retiree benefits and health care would already be included in the state’s annual expenditure number required by this bill, and thorough actuarial reports on pension funding, including unfunded liability, are already easily available to the public.

Related/Prior Legislation

SB 99 (Senate Budget Committee, Chapter 322, Statutes of 2015) required contributions to prefund retiree health care from state bargaining units 9 and 10 members and related excluded employees.

AB 1469 (Bonta, Chapter 47, Statutes of 2014) created a funding plan for employer and employee contributions to make CalSTRS fully funded in approximately 30 years.

SB 519 (Ashburn, Chapter 188, Statutes of 2009) established employee contributions to prefund retiree health care from state bargaining unit 5 members and related excluded employees.

SB 626 (Senate Public Employment and Retirement Committee, Chapter 69, Statutes of 2004) gave CalPERS the ability to set up employer accounts to prefund retiree health care obligations.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

SUPPORT:

Howard Jarvis Taxpayers Association

OPPOSITION:

California Professional Firefighters

California School Employees Association, AFL-CIO

California State Council of the Service Employees International Union

Los Angeles County Professional Peace Officers Association

Organization of SMUD Employees

Professional Engineers in California Government

San Diego County Court Employees Association

San Luis Obispo County Employees Association

ARGUMENTS IN SUPPORT:

According to the author:

Over the past two decades Californians have been asked to make decisions regarding billions in spending and bond measures, as well as decide on candidates who have differing viewpoints regarding fiscal issues. These decisions impact the state’s finances for decades, yet in the midst of election frenzy, most voters find it difficult to access basic reliable non-partisan financial information before making their ballot choices.

SB 1251 provides that the Legislative Analyst compile and report to the Secretary of State, prior to each statewide election, select data measures regarding the state’s fiscal health.

ARGUMENTS IN OPPOSITION:

California School Employees Association states the following concerns, which are shared by other opponents:

SB 1251 fails to provide a reasonable relationship between the additional superfluous information added to the voter guide and the measures on each ballot. There will be many measures in future California statewide elections, many of which will not have any relationship to revenues, bond debt, or retiree medical benefit levels. The additional information proposed by SB 1251 would add confusion to voters, who already are provided nonpartisan analyses by the Legislative Analyst's Office.

Additional information added to the ballot pamphlet should not be determined by any individual's assessment of what is important and should not be included in order to shape voters' decisions. Why would the Legislature decide to include pension liabilities, but not include the cost of corporate tax loopholes or any other expenditure? This bill moves down a dangerous path of allowing individuals to influence the electorate by skewing the data provided to voters.

SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION

Senator Isadore Hall, III

Chair

2015 - 2016 Regular

Bill No: SB Hearing Date: 4/12/2016

SUBJECT:

DIGEST: This bill establishes the California Financial Transparency Act (CFTA) of 2016 and requires the Legislative Analyst’s Office (LAO) to create and maintain separate and dedicated Internet Web sites that list specific state financial obligations. This bill also requires the Secretary of State to print the requisite material in the ballot pamphlet.

ANALYSIS:

Existing law:

1. Requires a local agency, if it maintains an Internet Web site and is required to report specific financial information to the Controller, to post, in a conspicuous location on its Internet Web site, information on the annual compensation of its elected officials, officers, and employees.
   
2. Authorizes a local agency to meet this requirement by posting a link to the Controller’s Government Compensation in California Internet Web site in a conspicuous location on its Internet Web site.
   
3. Requires the Secretary of State to prepare a ballot pamphlet that contains specific information per the Political Reform Act of 1974 and Elections Code Section 9084.

This bill:

1. Enacts the California Financial Transparency Act (CFTA) of 2016 and requires the Legislative Analyst to post all of the following current total amounts on a dedicated Internet Web page that is hyperlinked to the homepage site of the LAO:
   
   1. State Revenues and State expenditures.
      
   2. Unfunded state pension liability and unfunded state retiree medical benefit liability.
      
   3. Unfunded infrastructure needs and bond debt.
      
   4. Unrestricted net position.
      
2. Requires the LAO, on or before January 1 and July 1 of each year, to update the information on its Web site.
   
3. Requires the Secretary of State to include in a ballot pamphlet a copy of all the information posted on the dedicated Internet Web site pursuant to CFTA.

Background

Purpose of SB 1251. The author’s office states that voters should have easy and simplified access to important governmental financial statements which often are complex and not digestible to the layman. The author’s office claims that this bill will help remedy the fact that voters are often asked to make important decisions on critical fiscal matters relating to the state without having access to all the consequential information. This bill is intended to fill the gap by providing an easier source for residents to find information specific to California’s fiscal status. The author’s office claims that the items that are to be included on the ballot and Web page are relatively easy to procure for the LAO, and maintaining the dedicated Web page will not be a burden on their staff.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

SUPPORT:

Howard Jarvis Taxpayers Association

OPPOSITION:

American Federation of State, County and Municipal Employees (AFSCME)

California School Employees Association

California State Council of the Service Employees International Union (SEIU)

Professional Engineers in California Government

ARGUMENTS IN SUPPORT: Proponents state, “Providing voters access to this information would give them the full picture of just how much debt the state is carrying. Between bond debt and unfunded pension liabilities, the wall of debt in California remains tall, at least $500 billion by some accounts. Both items, as well as unfunded transportation infrastructure needs, would now be included in the pamphlet.”

Additionally, proponents argue that “the added transparency that this information brings will force voters to ask important questions regarding whether they want yet more statewide tax increases and General Obligation bond debt. Informed decisions can only be made through accurate data. For years, state and local governments failed to report the full scope of hundreds of billions of dollars of unfunded pension and healthcare liabilities. With new Governmental Accounting Standards Board (CASB) regulations now shedding light on this issue, voters deserve to see just how serious this problem is in as many mediums as possible.”

ARGUMENTS IN OPPOSITION: Opponents note that existing law provides every voter with a voter guide that contains pertinent information for voters regarding candidates for elective office and various measures that are on the ballot. These guides include the official title and summary of each measure and an analysis by the nonpartisan LAO, which includes background information, the proposed legislation, fiscal effects, as well as sourced arguments for and against each measure.

Opponents claim that this bill “will alter the information provided to voters and ignore the current nonpartisan analysis already included in the voter guide that provides relevant information to voters.” Also, opponents contend that the proposed additional information is “unnecessary and superfluous and creates yet another potential impediment to any Californians actually studying and then turning out to vote on the issues that appear on the ballot.” Additionally, opponents believe this bill “moves down a dangerous path of allowing individuals to influence the electorate by skewing the data provided to voters.”

DUAL REFERRAL: Senate Elections and Constitutional Amendments Committee