Existing law creates the Public Employees Retirement System, which provides defined retirement benefits to employees of the state and to employees of other public agencies contracting with the Board of Administration of the Public Employees Retirement System for this purpose. The benefits provided by the system are funded by employer and employee contributions and investment returns.

This bill would enact the California Employers Pension Prefunding Trust Program and establish the California Employers Pension Prefunding Trust Fund to allow state and local public agency employers that provide a defined benefit pension plan to their employees to prefund their required pension contributions.

The bill would authorize an employer, upon terms and conditions set by the board, to elect to participate in the prefunding plan, and would require the governing body of that employer to enter into a contract with the board relative to the prefunding plan. The bill would require the board to offer participating employers, as defined, specified cost-effective, diversified investment portfolios. The bill would require each participating employer to pay an amount, determined by the board, for administrative and asset management costs of the prefunding plan to the fund and would grant the board the sole and exclusive control of the administration and investment of the fund. The bill would also set the terms under which a prefunding plan contract could be terminated or transferred. The bill would specify that all moneys in the fund would be continuously appropriated to the board for the purposes of these provisions.

The bill would also authorize the board to adopt emergency regulations for the purposes of these provisions and would appropriate the sum of $695,140 from the General Fund to the Board of Administration of the Public Employees Retirement System for expenditure in the 201920 fiscal year to develop the program.

Existing law creates the Public Employees Retirement System, which provides defined retirement benefits to employees of the state and to employees of other public agencies contracting with the Board of Administration of the Public Employees Retirement System for this purpose. The benefits provided by the system are funded by employer and employee contributions and investment returns.

This bill would enact the California Employers Pension Prefunding Trust Program and establish the California Employers Pension Prefunding Trust Fund to allow state and local public agency employers that provide a defined benefit pension plan to their employees to prefund their required pension contributions.

The bill would authorize an employer, upon terms and conditions set by the board, to elect to participate in the prefunding plan, and would require the governing body of that employer to enter into a contract with the board relative to the prefunding plan. The bill would require the board to offer participating employers, as defined, specified cost-effective, diversified investment portfolios. The bill would require each participating employer to pay an amount, determined by the board, for administrative and asset management costs of the prefunding plan to the fund and would grant the board the sole and exclusive control of the administration and investment of the fund. The bill would also set the terms under which a prefunding plan contract could be terminated or transferred. The bill would specify that all moneys in the fund would be continuously appropriated to the board for the purposes of these provisions.

The bill would also authorize the board to adopt emergency regulations for the purposes of these provisions and would appropriate the sum of $695,140 from the General Fund to the Board of Administration of the Public Employees Retirement System for expenditure in the 201920 fiscal year to develop the program.

Existing law creates the Public Employees Retirement System, which provides defined retirement benefits to employees of the state and to employees of other public agencies contracting with the Board of Administration of the Public Employees Retirement System for this purpose. The benefits provided by the system are funded by employer and employee contributions and investment returns.

This bill would enact the California Employers Pension Prefunding Trust Program and establish the California Employers Pension Prefunding Trust Fund to allow state and local public agency employers that provide a defined benefit pension plan to their employees to prefund their required pension contributions.

The bill would authorize an employer, upon terms and conditions set by the board, to elect to participate in the prefunding plan, and would require the governing body of that employer to enter into a contract with the board relative to the prefunding plan. The bill would require the board to offer participating employers, as defined, 4 specified investment options. specified cost-effective, diversified investment portfolios. The bill would require each participating employer to pay an amount, determined by the board, for administrative and asset management costs of the prefunding plan to the fund and would grant the board the sole and exclusive control of the administration and investment of the fund. The bill would also set the terms under which a prefunding plan contract could be terminated or transferred. The bill would specify that all moneys in the fund would be continuously appropriated to the board for the purposes of these provisions.

The bill would also authorize the board to adopt emergency regulations for the purposes of these provisions and would appropriate the sum of $695,140 from the General Fund to the Board of Administration of the Public Employees Retirement System for expenditure in the 201920 fiscal year to develop the program.

Existing law creates the Public Employees Retirement System, which provides defined retirement benefits to employees of the state and to employees of other public agencies contracting with the Board of Administration of the Public Employees Employees Retirement System for this purpose. The benefits provided by the system are funded by employer and employee contributions and investment returns.

This bill would enact the California Employers Pension Prefunding Trust Program and establish the California Employers Pension Prefunding Trust Fund to allow state and local public agency employers that provide a defined benefit pension plan to their employees to prefund their required pension contributions.

The bill would authorize an employer, upon terms and conditions set by the board, to elect to participate in the prefunding plan, and would require the governing body of that employer to enter into a contract with the board relative to the prefunding plan. The bill would require the board to offer participating employers, as defined, 4 specified investment options. The bill would require each participating employer to pay an amount, determined by the board, for administrative and asset management costs of the prefunding plan to the fund and would grant the board the sole and exclusive control of the administration and investment of the fund. The bill would also set the terms under which a prefunding plan contract could be terminated or transferred. The bill would specify that all moneys in the fund would be continuously appropriated to the board for the purposes of these provisions.

The bill would also authorize the board to adopt emergency regulations for the purposes of these provisions and would make an appropriation appropriate the sum of $695,140 from the General Fund to the Board of Administration of the Public Employees Retirement System for expenditure in fiscal years 201920 the 201920 fiscal year to develop the program.

Existing law creates the Public Employees Retirement System, which provides defined retirement benefits to employees of the state and to employees of other public agencies contracting with the Board of Administration of the Public Employees Retirement System for this purpose. The benefits provided by the system are funded by employer and employee contributions and investment returns.

This bill would enact the California Employers Pension Prefunding Trust Program and establish the California Employers Pension Prefunding Trust Fund to allow state and local public agency employers that provide a defined benefit pension plan to their employees to prefund their required pension contributions.

The bill would authorize an employer, upon terms and conditions set by the board, to elect to participate in the prefunding plan, and would require the governing body of that employer to enter into a contract with the board relative to the prefunding plan. The bill would require the board to offer participating employers, as defined, 4 specified investment options. The bill would require each participating employer, as defined, employer to pay an amount, determined by the board, for administrative and asset management costs of the prefunding plan to the fund and would grant the board the sole and exclusive control of the administration and investment of the fund. The bill would also set the terms under which a prefunding plan contract could be terminated or transferred. The bill would specify that all moneys in the fund would be continuously appropriated to the board for the purposes of these provisions.

The bill would also authorize the board to adopt emergency regulations for the purposes of these provisions and would make an appropriation from the General Fund to the Board of Administration of the Public Employees Retirement System for expenditure in fiscal years 201920 to develop the program.

The California Public Employees Pension Reform Act of 2013 (PEPRA) generally requires a public retirement system, as defined, to modify its plan or plans to comply with the act. PEPRA explicitly requires public employers and public retirement systems to offer specified defined benefit plans to new members, as defined.

This bill would make nonsubstantive changes to these provisions.

 UNFINISHED BUSINESS  

Bill No: SB 1413

Author:

:

Vote:

SENATE PUBLIC EMP. & RET. COMMITTEE: 4-0, 4/23/18

AYES: Pan, Leyva, Moorlach, Portantino

NO VOTE RECORDED: Morrell

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/25/18

AYES: Lara, Bates, Beall, Bradford, Hill, Nielsen, Wiener

SENATE FLOOR: 38-0, 5/30/18

AYES: Allen, Anderson, Atkins, Bates, Beall, Berryhill, Bradford, Cannella, Dodd, Fuller, Gaines, Galgiani, Glazer, Hernandez, Hertzberg, Hill, Hueso, Jackson, Lara, Leyva, McGuire, Mitchell, Monning, Moorlach, Morrell, Newman, Nguyen, Nielsen, Pan, Portantino, Roth, Skinner, Stern, Stone, Vidak, Wieckowski, Wiener, Wilk

NO VOTE RECORDED: De León

ASSEMBLY FLOOR: Not available

SUBJECT:

SOURCE: California Special Districts Association

DIGEST:

This bill establishes the California Employers’ Pension Prefunding Trust Fund (CEPPTF) for the purpose of allowing state and local public agency employers that provide a defined benefit pension plan to prefund their required pension contributions.

Assembly Amendments

require the California Public Employees’ Retirement System to offer participating employers investment options for the CEPPTF consisting of cost-effective, diversified investment portfolios that do not exceed the risk and return profiles of the investment options available for the investment of funds in the Annuitants’ Health Care Coverage Fund, also referred to as the California Employers’ Retiree Benefit Trust Fund (CERBT). Previously, the bill limited the investment options to four options, as specified.

ANALYSIS:

Existing law:

1. Provides a defined benefit (DB) retirement plan for state and public school employees administered through the California Public Employees’ Retirement System (CalPERS) and provides that local public employers can contract, as specified, with CalPERS to provide retirement benefits for their local public employees.
2. Establishes the Public Employees’ Pension Reform Act of 2013 (PEPRA) which made substantial changes to public retirement benefits provided to new members, including defining the categories of pensionable compensation that can be used to calculate a public retirement allowance.
3. Establishes within the State Treasury the Annuitants’ Health Care Coverage Fund for the prefunding of retirees’ health care coverage.

This bill:

1. Establishes the California Employers’ Pension Prefunding Trust Fund (“prefunding plan”) as a special trust fund in the State Treasury for the purpose of allowing state and local public agency employers that provide a DB pension plan to prefund their required pension contributions, as defined.
2. Defines “required pension contributions” to mean future required contributions to a defined benefit pension as defined in Statement 68 of the Governmental Accounting Standards Board, as specified.
3. Permits an employer to elect to participate in the California Employers’ Pension Prefunding Trust Fund.
4. Defines “participating employer” as an employer that is authorized and has elected to participate in the prefunding plan.
5. Provides that each participating employer shall pay an amount, not to exceed the reasonable administrative costs, as determined by CalPERS, for administrative and asset management of the California Employers’ Pension Prefunding Trust Fund. All amounts received for administrative and asset management costs shall be credited to the prefunding plan.
6. Vests sole and exclusive control of the administration and investment of the California Employers’ Pension Prefunding Trust Fund with CalPERS.
7. Stipulates that all moneys, as specified, in the California Employers’ Pension Prefunding Trust Fund are continuously appropriated without regard to fiscal years, consistent with CalPERS’ fiduciary duty.
8. States that income earned on the California Employers’ Pension Prefunding Trust Fund shall be credited to the Fund.
9. Requires CalPERS to offer participating employers investment options for funds in the California Employers’ Pension Prefunding Trust Fund consisting of cost-effective, diversified investment portfolios that do not exceed the risk and return profiles of the investment options available for the investment of funds in the Annuitants’ Health Care Coverage Fund, administratively referred to as the California Employers’ Retiree Benefit Trust Fund, as specified.
10. Provides that the governing body of a participating employer shall enter into a contract with CalPERS, setting forth the terms and conditions of the employer’s participation in the prefunding plan, as specified.
11. Permits CalPERS to terminate the participation of any employer if:
    1. The employer ceases to elect to participate in the prefunding plan.
    2. CalPERS finds the employer has failed to satisfy the terms and conditions required by law, board rules or regulations, or by the contract between the governing body of the participating employer and CalPERS.
    3. CalPERS terminates the prefunding plan.
12. Authorizes an employer, at CalPERS’ discretion, to transfer assets into or out of the prefunding plan, provided that:
    1. The transfer satisfies the terms of the contract between the governing body of that participating employer and the board.
    2. The transfer satisfies the requirement under the applicable rules of the Governmental Accounting Standards Board.
    3. The transfer satisfies the requirement of a trust established under Section 115 of the Internal Revenue Code (IRC).
13. States that if CalPERS terminates the participation of an employer in the prefunding plan, as specified, the assets attributable to the contributions by that employer shall remain in the prefunding plan, for the continued payment of required pension contributions and the costs of administration, pursuant to the terms of conditions of participation agreed to by the employer and CalPERS.
14. Provides that the board may adopt regulations, including emergency regulations, as specified, to implement the California Employers’ Pension Prefunding Trust Fund.
15. Appropriates $695,140 from the General Fund to CalPERS for the 2019-2020 fiscal year to develop the California Employers’ Pension Prefunding Trust Fund.

Background

Section 115 Trusts

An IRC Section 115 irrevocable trust performs an “essential government function,” and income from such trusts may be excluded from taxation, provided the income is derived from the exercise of governmental function that accrues to entities exempt from taxation.

The California Employers Benefit Trust

The CERBT Fund is a Section 115 trust fund dedicated to prefunding Other Post-Employment Benefits (OPEB) for all eligible California public agencies. Even those not contracted with CalPERS for healthcare can prefund future retiree benefits such as health, vision, dental, and life insurance. By joining CERBT, public agencies can help finance future costs in large part from investment earnings provided by CalPERS. Since its launch in 2007, more than 500 California public employers have opted to utilize CERBT as their OPEB trust fund.

Related/Prior Legislation

AB 2456 (Cooley, 2016), held in the Assembly Public Employees, Retirement, and Social Security Committee, would have required CalPERS to develop, establish, and administer the California Employers’ Pension Prefunding Trust Program to encourage state and local public employers that provide a DB pension plan to effectively manage their pension contributions.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Assembly Appropriations Committee, this bill has one-time implementation costs of $690,140 for CalPERS to develop the CEPPTF program. These costs would be covered by a one-time General Fund appropriation, as required by this bill. Future administrative costs for CalPERS would be covered by a fee charged to participating agencies.

SUPPORT: (Verified 8/31/18)

California Special Districts Association (source)

California State Association of Counties

Rural County Representatives of California

School Employers Association of California

Small School Districts’ Association

OPPOSITION: (Verified 8/31/18)

None received

ARGUMENTS IN SUPPORT: The California State Association of Counties and the California Special Districts Association write, “Public agencies that utilize the 115 Trust…would receive the benefits of being able to offset their unfunded pension obligations by an amount equal to their balance in the trust, the ability to smooth annual CalPERS rate adjustments by drawing on the trust, increase the diversity of their investments beyond general fund investments, and potentially improve their bond ratings…public agencies have been seeking additional financial tools that would assist them with greater financial stability and predictability.”

Prepared by:

8/31/18 14:38:37

**** END ****

SENATE THIRD READING

STR Bill Id:SB 1413

Author:(Nielsen)

As Amended Ver:June 21, 2018

2/3 vote

SENATE VOTE: 38-0

SUMMARY: Establishes the California Employers' Pension Prefunding Trust Fund (CEPPTF) prefunding for the purpose of allowing state and local public agency employers that provide a defined benefit pension plan to prefund their required pension contributions. Specifically, this bill:

1. Establishes the CEPPTF as a special trust fund in the State Treasury for the purpose of allowing state and local public agency employers that provide a defined benefit (DB) pension plan to their employees to prefund their required pension contributions.
2. Provides the Board of Administration of the California Public Employees' Retirement System (CalPERS) sole and exclusive control of the administration and investment of the CEPPTF, and authority to makes investments, as specified.
3. Provides that income, regardless of the nature, earned on the CEPPTF, must be credited to the fund.
4. Requires CalPERS to offer participating employers investment options in the CEPPTF consisting of cost-effective, diversified investment portfolios that do not exceed the risk and return profiles of the investment options available for the investment of funds in the Annuitants' Health Care Coverage Fund, also referred to as the California Employers' Retiree Benefit Trust Fund (CERBT).
5. Requires participating employers to pay an amount not to exceed reasonable administrative costs, as determined by CalPERS, for administrative and asset management of the prefunding plan, and requires CalPERS to deposit all amounts received for administrative and management costs to the credit of the CEPPTF.
6. Permits an employer to elect to participate in the Pension Prefunding Trust Fund.
7. Provides that the governing body of a participating employer must enter into a contract with CalPERS, setting forth the terms and conditions of the employer's participation in the prefunding plan.
8. Permits CalPERS to terminate the participation of any employer, if: a) the employer ceases to elect to participate in the prefunding plan, b) CalPERS finds the employer has failed to satisfy the terms and conditions required by law, board rules or regulations, or by the contract between the governing body of the participating employer and CalPERS, or, c) CalPERS terminates the prefunding plan.
9. Authorizes an employer, at CalPERS' discretion, to transfer assets into or out of the CEPPTF, provided that: a) the transfer satisfies the terms of the contract between the governing body of that participating employer and the board, b) the transfer satisfies the requirements under the applicable rules of the Government Accounting Standards Board, and, c) the transfer satisfies the requirement of a trust established under Section 115 of the Internal Revenue Code.
10. Provides that if CalPERS terminates the participation of an employer in the prefunding plan, the assets attributable to the contributions by that employer must remain in the prefunding plan for the continued payment of required pension contributions and the costs of administration, pursuant to the terms of conditions of participation agreed to by the employer and CalPERS.

EXISTING LAW:

1. Provides a defined benefit (DB) retirement plan for state and public school employees administered by CalPERS and provides that local public employers can contract with CalPERS to provide retirement benefits for their local public employees.
2. Establishes the Public Employees' Pension Reform Act of 2013 which made substantial changes to public retirement benefits provided to new members, including defining the categories of pensionable compensation that can be used to calculate a public retirement allowance.
3. Establishes within the State Treasury the Annuitants' Health Care Coverage Fund for the prefunding of retirees' health care coverage.

FISCAL EFFECT: According to the Assembly Appropriations Committee, this bill would result in "[o]ne-time implementation costs of $690,140 for CalPERS to develop the CEPPTF program. These costs would be covered by a one-time General Fund appropriation, as required by this bill. Future administrative costs for CalPERS would be covered by a fee charged to participating agencies."

COMMENTS: According to the author, "[this bill] provides CalPERS the authority to establish a Section 115 trust that would provide public agencies with an investment vehicle that will give them the ability to manage their payments toward their Actuarial Required Contribution. The trust will also be limited to cost-effective, diversified investment portfolios that do not exceed the risk and return profiles of the investment.

Please see the policy committee analysis for a full discussion of this bill.

Analysis Prepared by: Michael Bolden / P.E.,R., & S.S. / (916) 319-3957 FN: 0004091

Date of Hearing: August 8, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

SBPCA Bill Id:SB 1413

Author:(Nielsen) – As Amended Ver:June 21, 2018

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill establishes the California Employers’ Pension Prefunding Trust Fund (CEPPTF) within the State Treasury to allow state and local public agency employers that provide a defined benefit to prefund their required pension contributions. The California Public Employees’ Retirement System (CalPERS) will manage the administration and investment of moneys in the CEPPTF.

FISCAL EFFECT:

One-time implementation costs of $690,140 for CalPERS to develop the CEPPTF program. These costs would be covered by a one-time General Fund appropriation, as required by this bill. Future administrative costs for CalPERS would be covered by a fee charged to participating agencies.

COMMENTS:

1. Background and purpose. A “Section 115 Trust” is authorized by Section 115 of the Internal Revenue Code and allows public agencies to establish an irrevocable trust to perform an essential government function. The income from these trusts may be excluded from taxation, provided that the income is derived from the exercise of governmental function that accrues to entities exempt from taxation.

According to the author, SB 1413 will provide public agencies with an investment vehicle that will allow them to manage their payments toward their retirement contribution obligations. The author notes the bill does this through a Section 115 trust established for the sole purpose of prefunding pension contributions.

1. How would the CEPPTF work? The CEEPTF would operate similarly to the California Employers’ Retirement Benefit Trust, which is a trust fund dedicated to prefunding other post-employment benefits (OPEB) such as health, vision, dental, and life insurance benefits. Participating employers make contributions to the trust fund, and the fund’s investment earnings provided by CalPERS will go toward paying future OPEB costs. In exchange for CalPERS managing investments and financial reporting, participating employers pay an annual fee rate. SB 1413 creates a similar trust fund to which state and local employers will contribute to future pension contributions.
2. Which employers will participate? As the Assembly Committee on Public Employees, Retirement, and Social Security notes in its analysis of SB 1413, the CEPPTF may not benefit public agencies contracting with CalPERS that do not have budgetary savings available to set aside for future pension contributions. In effect, while the CEPPTF will serve as a useful tool to some employers, it may not benefit those employers who may need assistance the most.
3. Recent legislation. AB 2456 (Cooley), of the 2015-16 Legislative Session, would have required CalPERS to administer the California Employers’ Pension Prefunding Trust Program for public employers to manage their pension contributions. AB 2456 died in the Assembly Public Employees, Retirement, and Social Security Committee.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: June 20, 2018

ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT, AND SOCIAL SECURITY

Freddie Rodriguez, Chair

SBPCA Bill Id:SB 1413

Author:(Nielsen) – As Amended Ver:May 25, 2018

SENATE VOTE: 38-0

SUBJECT: Public employees’ retirement: pension prefunding

SUMMARY: Establishes the California Employers’ Pension Prefunding Trust Fund (CEPPTF) prefunding for the purpose of allowing state and local public agency employers that provide a defined benefit pension plan to prefund their required pension contributions. Specifically, this bill:

1. Establishes the CEPPTF as a special trust fund in the State Treasury for the purpose of allowing state and local public agency employers that provide a defined benefit (DB) pension plan to their employees to prefund their required pension contributions.
2. Defines the following terms:
   1. “Participating employer” to mean an employer that is authorized and has elected to participate in the prefunding plan.
   2. “Prefunding plan” to mean the CEPPTF, a trust fund administered by the board, for the purpose of investing employer payments towards their required pension contributions to a DB pension plan and that is intended to meet the requirements of Section 115 of the Internal Revenue Code (IRC).
   3. “Required pension contributions” to mean future required contributions to a DB pension as defined in Statement 68 of the Government Accounting Standards Board, as it may be amended from time to time.
3. Provides the Board of Administration of the California Public Employees’ Retirement System (CalPERS) sole and exclusive control of the administration and investment of the CEPPTF, and authority to makes investments, as specified.
4. Provides that income, regardless of the nature, earned on the CEPPTF, must be credited to the fund.
5. Requires CalPERS to offer participating employers four investment options for funds in the CEPPTF. Three options must be substantially similar to the asset allocation of the three investment strategy options available for the investment of funds in the Annuitants’ Health Care Coverage Fund, also known as the California Employers’ Retiree Benefit Trust Fund (CERBT), as specified. The fourth fund shall be substantially similar to the asset allocation of the investment portfolio of the Public Employees’ Retirement Fund.
6. Requires participating employers to pay an amount, not to exceed reasonable administrative costs, as determined by CalPERS, for administrative and asset management of the prefunding plan, and requires CalPERS to deposit the credit of the CEPPTF all amounts received by the board for those administrative and asset management costs.
7. Permits an employer to elect to participate in the Pension Prefunding Trust Fund.
8. Provides that the governing body of a participating employer must enter into a contract with CalPERS, setting forth the terms and conditions of the employer’s participation in the prefunding plan, as specified.
9. Permits CalPERS to terminate the participation of any employer, if any of the following apply:
   1. The employer ceases to elect to participate in the prefunding plan.
   2. CalPERS finds the employer has failed to satisfy the terms and conditions required by law, board rules or regulations, or by the contract between the governing body of the participating employer and CalPERS.
   3. CalPERS terminates the prefunding plan.
10. Authorizes an employer, at CalPERS’ discretion, to transfer assets into or out of the CEPPTF, provided that:
    1. The transfer satisfies the terms of the contract between the governing body of that participating employer and the board.
    2. The transfer satisfies the requirements under the applicable rules of the Government Accounting Standards Board.
    3. The transfer satisfies the requirement of a trust established under Section 115 of the IRC.
11. Provides that if CalPERS terminates the participation of an employer in the prefunding plan, as specified, the assets attributable to the contributions by that employer must remain in the prefunding plan, for the continued payment of required pension contributions and the costs of administration, pursuant to the terms of conditions of participation agreed to by the employer and CalPERS.
12. Provides that the board may adopt regulations, including emergency regulations, to implement the CEPPTF.
13. Appropriates $695,140 from the General Fund to CalPERS for the 2019-2020 Fiscal Year to develop the CEPPTF.

EXISTING LAW:

1. Provides a defined benefit (DB) retirement plan for state and public school employees administered through the California Public Employees’ Retirement System (CalPERS) and provides that local public employers can contract, as specified, with CalPERS to provide retirement benefits for their local public employees.
2. Establishes the Public Employees’ Pension Reform Act of 2013 (PEPRA) which made substantial changes to public retirement benefits provided to new members, including defining the categories of pensionable compensation that can be used to calculate a public retirement allowance.
3. Establishes within the State Treasury the Annuitants’ Health Care Coverage Fund for the prefunding of retirees’ health care coverage.

FISCAL EFFECT: According to the Senate Appropriations Committee, this bill appropriates $695,140 from the General Fund to the board in 2019-20 to develop the California Employers’ Pension Prefunding Trust Program. These moneys would fund CalPERS’ first-year startup costs, for information technology system setup, legal support, recordkeeping by a third-party, and five staff positions. Ongoing costs would depend upon the extent to which public agencies utilize the Trust Fund, and are still being estimated by CalPERS; however, they would be reimbursable. Specifically, this bill provides that each participating employer pay a portion of the Trust Fund’s administrative costs, as specified.

COMMENTS: According to the author, “[this bill] provides CalPERS the authority to establish a Section 115 trust that would provide public agencies with an investment vehicle that will give them the ability to manage their payments toward their Actuarial Required Contribution (ARC). The trust will also be limited to cost-effective, diversified investment portfolios that do not exceed the risk and return profiles of the investment.

‘An irrevocable Section 115 trust established for the sole purpose of prefunding employer pension contributions would provide employers a mechanism and ability to reduce their pension liabilities for reporting purposes under GASB Statement 68.”

1) Section 115 Trust

Section 115 is a Section of the IRC in which public agencies may establish an irrevocable trust to perform an “essential government function.” Income from such trusts may be excluded from taxation, provided the income is derived from the exercise of governmental function that accrues to entities exempt from taxation.

2) Prefunding Other Postemployment Benefits: The California Employers Benefit Trust

The CERBT is a Section 115 trust fund dedicated to prefunding Other Post-Employment Benefits (OPEB) for all eligible California public agencies. Even those not contracted with CalPERS for healthcare can prefund future retiree benefits such as health, vision, dental, and life insurance. By joining CERBT, public agencies can help finance future costs in large part from investment earnings provided by CalPERS. Since its launch in 2007, more than 500 California public employers have opted to utilize CERBT as their OPEB trust fund.

3) Comments by Committee Staff:

During the Governor’s press conference introducing and discussing the May Budget Revision, when asked about additional funds to pay down public pension fund liability to assist local governments, the Governor clearly stated that public employee pension systems were not receiving additional funds for these purposes; that local governments negotiated the retirement benefits with their employees and it is their responsibility to deal with those costs; and, that local governments have tools available to address pension cost concerns at the local level, including through collective bargaining.

In providing another option to public agencies to pay unfunded retirement liability, the goals of this measure are laudable. However, it is unknown whether this bill will provide assistance to public agencies contracting with CalPERS that might not have budgetary savings available to set aside for this purpose.

4) Proposed Author’s Amendments

The author has proposed the following amendment based on communications with CalPERS:

• Page 3, in lines 21 through 30, inclusive, will be amended to read:

(d) Notwithstanding subdivision (b), the board shall offer participating employers four investment options for funds in the CEPPTF consisting of cost-effective, diversified investment portfolios that do not exceed the risk and return profiles of the investment . Three options shall be substantially similar to the asset allocation of the three investment strategy options available for the investment of funds in the Annuitants’ Health Care Coverage Fund, also known as the California Employers’ Retiree Benefit Trust Fund, established pursuant to Section 22940, and the fourth option shall be substantially similar to the asset allocation of the investment portfolio of the Public Employees’ Retirement Fund.

Committee staff agrees with the proposed author’s amendment.

5) Prior/Related Legislation

Assembly Bill 2456 (Cooley, 2016) would have required CalPERS to develop, establish, and administer the California Employers’ Pension Prefunding Trust Program to encourage state and local public employers that provide a defined benefit pension plan to effectively manage their pension contributions. This bill was held in the Assembly Public Employees, Retirement, and Social Security Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

California Special Districts Association

California State Association of Counties

California Public Employees’ Retirement System (if amended)

League of California Cities

Rural County Representatives of California

School Employers Association of California

Small School Districts’ Association

Opposition

None on file.

Analysis Prepared by: Michael Bolden / P.E.,R., & S.S. / (916) 319-3957

 THIRD READING  

Bill No: SB 1413

Author:

Amended: 5/25/18

Vote:

SENATE PUBLIC EMP. & RET. COMMITTEE: 4-0, 4/23/18

AYES: Pan, Leyva, Moorlach, Portantino

NO VOTE RECORDED: Morrell

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/25/18

AYES: Lara, Bates, Beall, Bradford, Hill, Nielsen, Wiener

SUBJECT:

SOURCE: California Special Districts Association

DIGEST:

This bill establishes the California Employers’ Pension Prefunding Trust Fund for the purpose of allowing state and local public agency employers that provide a defined benefit pension plan to prefund their required pension contributions.

ANALYSIS:

Existing law:

1. Provides a defined benefit (DB) retirement plan for state and public school employees administered through the California Public Employees’ Retirement System (CalPERS) and provides that local public employers can contract, as specified, with CalPERS to provide retirement benefits for their local public employees.
2. Establishes the Public Employees’ Pension Reform Act of 2013 (PEPRA) which made substantial changes to public retirement benefits provided to new members, including defining the categories of pensionable compensation that can be used to calculate a public retirement allowance.
3. Establishes within the State Treasury the Annuitants’ Health Care Coverage Fund for the prefunding of retirees’ health care coverage.

This bill:

1. Establishes the California Employers’ Pension Prefunding Trust Fund (“prefunding plan”) as a special trust fund in the State Treasury for the purpose of allowing state and local public agency employers that provide a DB pension plan to prefund their required pension contributions, as defined.
2. Permits an employer to elect to participate in the California Employers’ Pension Prefunding Trust Fund.
3. Provides that each participating employer shall pay an amount, not to exceed the reasonable administrative costs, as determined by CalPERS, for administrative and asset management of the California Employers’ Pension Prefunding Trust Fund. All amounts received for administrative and asset management costs shall be credited to the prefunding plan.
4. Vests sole and exclusive control of the administration and investment of the California Employers’ Pension Prefunding Trust Fund with CalPERS.
5. Stipulates that all moneys, as specified, in the California Employers’ Pension Prefunding Trust Fund are continuously appropriated without regard to fiscal years, consistent with CalPERS’ fiduciary duty.
6. States that income earned on the California Employers’ Pension Prefunding Trust Fund shall be credited to the Fund.
7. States that the CalPERS Board of Administration (board) shall offer participating employers four investment options for funds in the California Employers’ Pension Prefunding Trust Fund. Three options shall be substantially similar to the asset allocation of the three investment strategy options available for the investment of funds in the Annuitants’ Health Care Coverage Fund, also known as the California Employers’ Retiree Benefit Trust Fund, as specified. The fourth fund shall be substantially similar to the asset allocation of the investment portfolio of the Public Employees’ Retirement Fund.
8. Provides that the governing body of a participating employer shall enter into a contract with CalPERS, setting forth the terms and conditions of the employer’s participation in the prefunding plan, as specified.
9. Permits CalPERS to terminate the participation of any employer if:
   1. The employer ceases to elect to participate in the prefunding plan.
   2. CalPERS finds the employer has failed to satisfy the terms and conditions required by law, board rules or regulations, or by the contract between the governing body of the participating employer and CalPERS.
   3. CalPERS terminates the prefunding plan.
10. Authorizes an employer, at CalPERS’ discretion, to transfer assets into or out of the California Employers’ Pension Prefunding Trust Fund, as specified.
11. States that if CalPERS terminates the participation of an employer in the prefunding plan, as specified, the assets attributable to the contributions by that employer shall remain in the prefunding plan, for the continued payment of required pension contributions and the costs of administration, pursuant to the terms of conditions of participation agreed to by the employer and CalPERS.
12. Provides that the board may adopt regulations, including emergency regulations, to implement the California Employers’ Pension Prefunding Trust Fund.
13. Appropriates $695,140 from the General Fund to CalPERS for the 2019-2020 fiscal year to develop the California Employers’ Pension Prefunding Trust Fund.

Background

Section 115 Trusts

An Internal Revenue Code (IRC) Section 115 irrevocable trust performs an “essential government function,” and income from such trusts may be excluded from taxation, provided the income is derived from the exercise of governmental function that accrues to entities exempt from taxation.

The California Employers Benefit Trust

The California Employers' Retiree Benefit Trust (CERBT) Fund is a Section 115 trust fund dedicated to prefunding Other Post-Employment Benefits (OPEB) for all eligible California public agencies. Even those not contracted with CalPERS for healthcare can prefund future retiree benefits such as health, vision, dental, and life insurance. By joining CERBT, public agencies can help finance future costs in large part from investment earnings provided by CalPERS. Since its launch in 2007, more than 500 California public employers have opted to utilize CERBT as their OPEB trust fund.

Related/Prior Legislation

AB 2456 (Cooley, 2016), held in the Assembly Public Employees, Retirement, and Social Security Committee, would have required CalPERS to develop, establish, and administer the California Employers’ Pension Prefunding Trust Program to encourage state and local public employers that provide a DB pension plan to effectively manage their pension contributions.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee, this bill appropriates $695,140 from the General Fund to the board in 2019-20 to develop the California Employers’ Pension Prefunding Trust Program. These moneys would fund CalPERS’ first-year startup costs, for information technology system setup, legal support, recordkeeping by a third-party, and five staff positions. Ongoing costs would depend upon the extent to which public agencies utilize the Trust Fund, and are still being estimated by CalPERS; however, they would be reimbursable. Specifically, this bill provides that each participating employer pay a portion of the Trust Fund’s administrative costs, as specified.

SUPPORT: (Verified 5/25/18)

California Special Districts Association (source)

California State Association of Counties

School Employers Association of California

Small School Districts’ Association

OPPOSITION: (Verified 5/25/18)

None received

ARGUMENTS IN SUPPORT: The California State Association of Counties and the California Special Districts Association write, “Public agencies that utilize the 115 Trust…would receive the benefits of being able to offset their unfunded pension obligations by an amount equal to their balance in the trust, the ability to smooth annual CalPERS rate adjustments by drawing on the trust, increase the diversity of their investments beyond general fund investments, and potentially improve their bond ratings…public agencies have been seeking additional financial tools that would assist them with greater financial stability and predictability.”

Prepared by:

5/29/18 9:08:31

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 1413 (Nielsen) - Public employees’ retirement: pension prefunding

Bill Summary:

SB 1413 would establish the California Employers’ Pension Prefunding Trust Fund for the purpose of allowing state and local public agency employers that provide a defined benefit (DB) pension plan to prefund their required pension contributions.

*********** ANALYSIS ADDENDUM – SUSPENSE FILE ***********

The following information is revised to reflect amendments

adopted by the committee on May 25, 2018

Fiscal Impact:

The bill would appropriate $695,140 from the General Fund to the Board of Administration of the California Public Employee Retirement System (CalPERS) in 2019-20 to develop the California Employers’ Pension Prefunding Trust Program. These moneys would fund CalPERS’ first-year startup costs, for information technology system setup, legal support, recordkeeping by a third-party, and five staff positions. Ongoing costs would depend upon the extent to which public agencies utilize the Trust Fund, and are still being estimated by CalPERS; however, they would be reimbursable. Specifically, the bill would provide that each participating employer pay a portion of the Trust Fund’s administrative costs, as specified.

Author Amendments:

Specify that the appropriation amount is $695,140.

-- END --

SENATE COMMITTEE ON

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 1413 (Nielsen) - Public employees’ retirement: pension prefunding

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 1413 would establish the California Employers’ Pension Prefunding Trust Fund for the purpose of allowing state and local public agency employers that provide a defined benefit (DB) pension plan to prefund their required pension contributions.

Fiscal Impact:

The bill would appropriate an unspecified amount of money from the General Fund to the Board of Administration of the California Public Employee Retirement System (CalPERS) in 2019-20 to develop the California Employers’ Pension Prefunding Trust Program. These moneys would fund CalPERS’ first-year startup costs, which the agency indicates would be $695,000 for information technology system setup, legal support, recordkeeping by a third-party, and five staff positions. Ongoing costs would depend upon the extent to which public agencies utilize the Trust Fund, and are still being estimated by CalPERS; however, they would be reimbursable. Specifically, the bill would provide that each participating employer pay a portion of the Trust Fund’s administrative costs, as specified.

Background:

Current law provides (1) a DB retirement plan for state and public school employees administered through CalPERS, and (2) that local public employers can contract, as specified, with CalPERS to provide retirement benefits for their local public employees. Under a DB program, an employee receives a set pension amount based on a formula that includes age, salary at retirement and the number of years of service. These benefits are guaranteed lifetime annuities in that the retiree receives benefits until death.

Public safety employees—primarily police and firefighters—have richer defined benefit formulas than nonsafety employees. That is, they generally receive a higher percent of salary for each year of service, and they can retire at a younger age with similar benefits. This reflects an expectation that public safety employees have shorter careers due to the hazards of the job. In addition, public safety employees do not participate in the federal Social Security program, unlike most nonsafety employees. Thus, public pensions have been structured to provide more income in retirement for safety than nonsafety employees.

DB plans have three sources of funding—employee contributions, employer contributions, and returns on invested assets, with investment returns accounting for the biggest component of defined benefit funding. These contributions—and the earnings on them—are intended to pay for future retirement benefits as they are earned. Employee contributions are usually fixed (in terms of percentage of income), while employer contributions vary from one year to the next. Investment returns depend heavily on the financial markets. When returns are greater than expected, fewer contributions are needed. When investment returns are less than assumed, larger contributions are needed. With a fixed employee contribution, employers tend to reap any benefit of extra investment income through lower contributions. Conversely, employers pay for lagging investment income through higher contributions.

Chapter 296 of 2012 (AB 340,Furutani), referred to as the Public Employees’ Pension Reform Act of 2013 (PEPRA), made significant changes to governmental employee pension benefits. The law applies to employees of most governmental employers but does not apply to some, notably the University of California and retirement systems established under city or county charters. PEPRA made substantial changes to public retirement benefits provided to new members, including defining the categories of pensionable compensation that can be used to calculate a public retirement allowance.

Under the law, a PEPRA member is someone who either has (1) never been a member of any public retirement system prior to January 1, 2013 or (2) moved between retirement systems or governmental employers with more than a six month break in service. The law provides PEPRA members less generous pension plans from what was provided to employees hired before the law. As a result, the total normal cost to prefund benefits for PEPRA members generally is lower than that of classic (pre-PEPRA) members. Specifically, pension formulas that existed prior to the law are closed to PEPRA members. This means that while PEPRA members may not earn benefits based on one of the old pension formulas, classic members continue to accrue pension benefits based on the more generous benefit design of the prior formula. Accordingly, a PEPRA member must work a few more years to earn a pension comparable to that provided to a classic member. Additionally, contrary to classic members, PEPRA members are required to pay at least half of the amount of money that actuaries estimate as the normal cost to prefund the pension plan. Finally, the law limits the amount of a new member’s salary that applies to his or her pension benefit. In 2018, this limit is $121,388 for employees who participate in Social Security or 120 percent of that limit if they do not participate in Social Security; for comparison purposes, the cap for classic members is currently $275,000.

An Internal Revenue Code (IRC) Section 115 irrevocable trust performs an “essential government function,” and income from such trusts may be excluded from taxation, provided the income is derived from the exercise of governmental function that accrues to entities exempt from taxation. An example of such a Section 115 trust is the California Employers' Retiree Benefit Trust (CERBT) Fund . CERBT is dedicated to prefunding Other Post-Employment Benefits (OPEB) for all eligible California public agencies. Even those not contracted with CalPERS for healthcare can prefund future retiree benefits such as health, vision, dental, and life insurance. By joining CERBT, public agencies can help finance future costs in large part from investment earnings provided by CalPERS. Since its launch in 2007, more than 500 California public employers have opted to utilize CERBT as their OPEB trust fund.

Proposed Law:

This bill would, among other things, would do the following:

• Establish the California Employers’ Pension Prefunding Trust Fund (“prefunding plan”) as a special trust fund in the State Treasury for the purpose of allowing state and local public agency employers that provide a defined benefit (DB) pension plan to prefund their required pension contributions, as defined.
• Permit an employer to elect to participate in the California Employers’ Pension Prefunding Trust Fund.
• Provide that each participating employer shall pay an amount, not to exceed the reasonable administrative costs, as determined by CalPERS, for administrative and asset management of the California Employers’ Pension Prefunding Trust Fund. All amounts received for administrative and asset management costs shall be credited to the prefunding plan.
• Vest sole and exclusive control of the administration and investment of the California Employers’ Pension Prefunding Trust Fund with CalPERS.
• Stipulate that all moneys, as specified, in the California Employers’ Pension Prefunding Trust Fund are continuously appropriated without regard to fiscal years, consistent with CalPERS’ fiduciary duty.
• State that income earned on the California Employers’ Pension Prefunding Trust Fund shall be credited to the fund.
• Provide that the governing body of a participating employer shall enter into a contract with CalPERS, setting forth the terms and conditions of the employer’s participation in the prefunding plan, as specified.
• Permit CalPERS to terminate the participation of any employer under specified conditions.
• Authorize an employer, at CalPERS’ discretion, to transfer assets into or out of the California Employers’ Pension Prefunding Trust Fund, as specified.
• State that if CalPERS terminates the participation of an employer in the prefunding plan, as specified, the assets attributable to the contributions by that employer shall remain in the prefunding plan, for the continued payment of required pension contributions and the costs of administration, pursuant to the terms of conditions of participation agreed to by the employer and CalPERS.
• Provide that the board may adopt regulations, including emergency regulations, to implement the California Employers’ Pension Prefunding Trust Fund.
• Appropriate an unspecified sum from the General Fund to CalPERS for fiscal year 2019-20 to develop the California Employers’ Pension Prefunding Trust Fund.

Related Legislation:

AB 2456 (Cooley, 2016), would have required CalPERS to develop, establish, and administer the California Employers’ Pension Prefunding Trust Program to encourage state and local public employers that provide a defined benefit pension plan to effectively manage their pension contributions. The bill was held in Assembly Public Employees, Retirement, and Social Security Committee.

Staff Comments:

As noted above, this bill would allow CalPERS to establish, in accordance with Section 115 of the Internal Revenue Code (IRC), an irrevocable trust (115 Trust) through which eligible California public agency employers may prefund their future annual pension contributions. The Trust Fund would provide an option for employers to pay down their unfunded liability as part of a defined benefit plan. Participants would be able to smooth annual CalPERS rate adjustments by drawing on the trust.

-- END --

SENATE COMMITTEE ON

PUBLIC EMPLOYMENT AND RETIREMENT

Dr. Richard Pan, Chair

2017 - 2018 Regular

Bill No: SB 1413 Hearing Date: 4/23/18

Subject: Public employees’ retirement: pension prefunding.

SOURCE: California Special Districts Association

DIGEST: This bill establishes the California Employers’ Pension Prefunding Trust Fund for the purpose of allowing state and local public agency employers that provide a defined benefit (DB) pension plan to prefund their required pension contributions.

ANALYSIS:

Existing law:

1. Provides a defined benefit retirement plan for state and public school employees administered through the California Public Employees’ Retirement System (CalPERS) and provides that local public employers can contract, as specified, with CalPERS to provide retirement benefits for their local public employees.
2. Establishes the Public Employees’ Pension Reform Act of 2013 (PEPRA) which made substantial changes to public retirement benefits provided to new members, including defining the categories of pensionable compensation that can be used to calculate a public retirement allowance.

This bill:

1. Establishes the California Employers’ Pension Prefunding Trust Fund (“prefunding plan”) as a special trust fund in the State Treasury for the purpose of allowing state and local public agency employers that provide a defined benefit (DB) pension plan to prefund their required pension contributions, as defined.
2. Permits an employer to elect to participate in the California Employers’ Pension Prefunding Trust Fund.
3. Provides that each participating employer shall pay an amount, not to exceed the reasonable administrative costs, as determined by CalPERS, for administrative and asset management of the California Employers’ Pension Prefunding Trust Fund. All amounts received for administrative and asset management costs shall be credited to the prefunding plan.
4. Vests sole and exclusive control of the administration and investment of the California Employers’ Pension Prefunding Trust Fund with CalPERS.
5. Stipulates that all moneys, as specified, in the California Employers’ Pension Prefunding Trust Fund are continuously appropriated without regard to fiscal years, consistent with CalPERS’ fiduciary duty.
6. States that income earned on the California Employers’ Pension Prefunding Trust Fund shall be credited to the fund.
7. Provides that the governing body of a participating employer shall enter into a contract with CalPERS, setting forth the terms and conditions of the employer’s participation in the prefunding plan, as specified.
8. Permits CalPERS to terminate the participation of any employer if:
   1. The employer ceases to elect to participate in the prefunding plan.
   2. CalPERS finds the employer has failed to satisfy the terms and conditions required by law, board rules or regulations, or by the contract between the governing body of the participating employer and CalPERS.
   3. CalPERS terminates the prefunding plan.
9. Authorizes an employer, at CalPERS’ discretion, to transfer assets into or out of the California Employers’ Pension Prefunding Trust Fund, as specified.
10. States that if CalPERS terminates the participation of an employer in the prefunding plan, as specified, the assets attributable to the contributions by that employer shall remain in the prefunding plan, for the continued payment of required pension contributions and the costs of administration, pursuant to the terms of conditions of participation agreed to by the employer and CalPERS.
11. Provides that the board may adopt regulations, including emergency regulations, to implement the California Employers’ Pension Prefunding Trust Fund.
12. Appropriates an unspecified sum from the General Fund to CalPERS for fiscal year 2019-2020 to develop the California Employers’ Pension Prefunding Trust Fund.

Background

Section 115 Trusts

An Internal Revenue Code (IRC) Section 115 irrevocable trust performs an “essential government function,” and income from such trusts may be excluded from taxation, provided the income is derived from the exercise of governmental function that accrues to entities exempt from taxation.

The California Employers Benefit Trust

The California Employers' Retiree Benefit Trust (CERBT) Fund is a Section 115 trust fund dedicated to prefunding Other Post-Employment Benefits (OPEB) for all eligible California public agencies. Even those not contracted with CalPERS for healthcare can prefund future retiree benefits such as health, vision, dental, and life insurance. By joining CERBT, public agencies can help finance future costs in large part from investment earnings provided by CalPERS. Since its launch in 2007, more than 500 California public employers have opted to utilize CERBT as

their OPEB trust fund.

Committee Comments

The committee recommends amendments limiting the investment options of the Pension Prefunding Trust Fund to parallel those available under the CERBT program for prefunding OPEB, and to an option that tracks the asset allocation of the Public Employees’ Retirement Fund investment portfolio.

Related/Prior Legislation

AB 2456 (Cooley, 2016), held in Assembly Public Employees, Retirement, and Social Security Committee, would have required CalPERS to develop, establish, and administer the California Employers’ Pension Prefunding Trust Program to encourage state and local public employers that provide a defined benefit pension plan to effectively manage their pension contributions.

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

SUPPORT:

California Special Districts Association (source)

California State Association of Counties

OPPOSITION:

None received.

ARGUMENTS IN SUPPORT:

The California State Association of Counties and the California Special Districts Association write, “Public agencies that utilize the 115 Trust…would receive the benefits of being able to offset their unfunded pension obligations by an amount equal to their balance in the trust, the ability to smooth annual CalPERS rate adjustments by drawing on the trust, increase the diversity of their investments beyond general fund investments, and potentially improve their bond ratings…public agencies have been seeking additional financial tools that would assist them with greater financial stability and predictability.”