The Public Employees Retirement Law creates the Public Employees Retirement System (PERS), which provides a defined benefit to its members based on age at retirement, service credit, and final compensation. That law authorizes any public agency to make its employees members of PERS by contracting with the Board of Administration of PERS. Existing law provides for the termination of a contract, including requiring the board to enter, upon request, into a prescribed agreement with the terminating agency relating to the calculation of final compensation for employees and related necessary adjustments in the employers contribution.

This bill would state the intent of the Legislature to subsequently amend this bill to include provisions to allow the governing body of a public agency that contracts with PERS for employee retirement benefits to terminate its contract with the system in a manner that does not result in excessive costs or penalties to the agency, to allow a public agency terminating its contract to have the ability to withdraw its assets paid into the system with the same rote of return, and to ensure that a public agency that terminates its contract with the system shall remain responsible for any of its unfunded liabilities. require the Board of Administration of PERS to allow a contracting agency to terminate its contract with the system in a manner that does not result in excessive costs or penalties to the contracting agency, allows the contracting agency to withdraw its net assets paid into the system less payments made to its members and their beneficiaries, and ensures that the contracting agency remains responsible for its unfunded liabilities so that those liabilities are not shifted onto other PERS members or employers. Before a contracting agency would be eligible to terminate its contract, the bill would require a contract to have been in effect for at least 5 years and meet other notice and approval requirements. The bill also would require the agreement between the contracting agency and the board to contain provisions to protect the interests of the system, and would require a contracting agency, before terminating its contract, to determine how termination would affect the health care benefits of its members and also to determine the federal tax ramifications associated with its decision. The bill would contain related legislative findings.

The Public Employees Retirement Law creates the Public Employees Retirement System (PERS), which provides a defined benefit to its members based on age at retirement, service credit, and final compensation. That law authorizes any public agency to make its employees members of PERS by contracting with the Board of Administration of PERS. Existing law provides for the termination of a contract, including requiring the board to enter, upon request, into a prescribed agreement with the terminating agency relating to the calculation of final compensation for employees and related necessary adjustments in the employers contribution.

This bill would state the intent of the Legislature to subsequently amend this bill to include provisions to allow the governing body of a public agency that contracts with PERS for employee retirement benefits to terminate its contract with the system in a manner that does not result in excessive costs or penalties to the agency, to allow a public agency terminating its contract to have the ability to withdraw its assets paid into the system with the same rote of return, and to ensure that a public agency that terminates its contract with the system shall remain responsible for any of its unfunded liabilities.

SENATE COMMITTEE ON

PUBLIC EMPLOYMENT AND RETIREMENT

Dr. Richard Pan, Chair

2017 - 2018 Regular

Bill No: SB 681 Hearing Date: 1/8/18

Subject: Public employees’ retirement: contracting agencies: termination

SOURCE: Author

DIGEST: This bill provides an alternative procedure for a public agency seeking to terminate its retirement benefits contract with California Public Employees’ Retirement System (CalPERS) that would prevent CalPERS from collecting an actuarial determined amount sufficient to ensure payment of future retirement benefits for members from the agency.

ANALYSIS:

Existing law:

1. Allows a contracting agency to terminate its CalPERS retirement benefits contract by giving notice to CalPERS and by adoption of an ordinance or resolution, as specified, if the contract has been in effect for at least five years. If the contract was originally approved by the contracting agency’s electorate then the termination must also be approved by the contracting agency’s electorate.
2. Provides a method for CalPERS to declare an agency in default and terminate its contract.
3. Requires CalPERS to retain the terminated agency’s employer and employee contributions, as specified, including contingencies as determined by the actuary, for the benefit of the members who are credited with service rendered as employees of the agency and for the benefit of beneficiaries of this system who are entitled to receive benefits on account of that service.
4. Requires CalPERS to merge all plan assets and liabilities of terminated agencies into a single terminated agency pool to provide exclusively for the payment of benefits to members of these plans.
5. Obliges the terminating agency to contribute an amount equal to the difference between its accrued assets and liabilities, as specified, under terms established by CalPERS if the assets are less than the liabilities. That amount is subject to interest at the actuarial rate from the date of contract termination to the date the agency pays CalPERS.
6. Provides for the pro rata reduction of benefits accrued to members from the terminating agency if the agency fails to pay the amount outstanding, as specified.
7. Requires CalPERS to pay the contracting agency the surplus, as specified, plus interest if the agency’s accumulated assets exceed its liabilities.

This bill:

• 1. Authorizes a contracting agency to do the following:
     1. Terminate its contract with CalPERS in a manner that does not result in excessive costs or penalties;
     2. Withdraw its net assets paid into CalPERS less payments made to its members and beneficiaries; and
     3. Ensure that a terminating agency remain responsible for its employee retirement benefit unfunded liabilities so that those liabilities are not shifted onto other CalPERS participants.
  2. Requires that the contract be in effect for at least five years and be approved by an ordinance or resolution adopted by the governing body of the contracting agency before the agency is eligible to terminate it.
  3. Authorizes the agency’s governing body to terminate the contract by adopting a resolution giving notice of intention to terminate followed not less than one year thereafter by the affirmative vote of two-thirds of the members of the governing body, of an ordinance or resolution to terminate the contract effective on the date designated in the ordinance or resolution terminating the contract.
  4. Requires the termination agreement between the agency and CalPERS to contain provisions to protect the interests of the system, including provisions for determining the amount, time, and manner of transfer of cash or securities, or both, to be transferred to the contracting agency, representing the value of the contracting agency’s interests in the retirement fund and its employees’ interest based on accumulated contributions and accumulated rate of return, to be credited to the agency and its employees.

Background

Under existing law, when an agency terminates its contract with CalPERS, CalPERS calculates the amount necessary to reasonably ensure that CalPERS will have sufficient funds to pay the future retirement benefits of members employed by the terminating agency.

The actuarial assumptions used in the calculation reflect the change in the nature of the agency’s status. For example, CalPERS will generally utilize a lower discount rate because post-termination it has no recourse to the agency for additional contributions if investment assumptions are not realized. Also, other actuarial assumptions become more concrete or certain since factors in determining the funded status become fixed in time, i.e., the age, number, and pay of the agencies employees.

The bill appears to seek to allow a terminating agency to withdraw its net assets less payments made to its employees and beneficiaries and supposedly ensure that employees’ vested future retirement benefits will still be paid, but through some alternative provided by the agency rather than through CalPERS.

However, under current law, members employed by the agency have vested rights to their pensions based on the defined benefit formula in place when they began employment. If the terminating agency is unable or unwilling to pay those pensions in the future, the members would seek payment from CalPERS, which not having the funds, would have to reduce the pensions pro rata.

Related/Prior Legislation

None known.

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

SUPPORT:

City of Costa Mesa

OPPOSITION:

American Federation of State, County and Municipal Employees, AFL-CIO

Association of California State Supervisors

CAL FIRE Local 2881

California Association of Highway Patrolmen

California Association of Professional Scientists

California Professional Firefighters

California School Employees Association, AFL-CIO

California State Retirees

Peace Officers Research Association of California

Professional Engineers in California Government

Retired Public Employees Association

ARGUMENTS IN SUPPORT: According to the author, if contracting agencies “believe they can contract or run their own retirement system cheaper or more effectively, they should have the ability to leave CalPERS without being excessively penalized.”

ARGUMENTS IN OPPOSITION: According to CAL FIRE Local 2881, “If a local jurisdiction wants to opt-out of CalPERS, there is already a mechanism in place. However, it is the agency’s responsibility to ensure that the benefit accrued to existing members and retirees is paid for.”

SENATE COMMITTEE ON

PUBLIC EMPLOYMENT AND RETIREMENT

Dr. Richard Pan, Chair

2017 - 2018 Regular

Bill No: SB 681 Hearing Date: 4/24/17

Subject: Public employees’ retirement

SOURCE: Author

DIGEST: This bill provides an alternative procedure for a public agency seeking to terminate its retirement benefits contract with California Public Employees’ Retirement System (CalPERS) that would prevent CalPERS from collecting an actuarial determined amount sufficient to ensure payment of future retirement benefits for members from the agency.

ANALYSIS:

Existing law:

1. Allows a contracting agency to terminate its CalPERS retirement benefits contract by giving notice to CalPERS and by adoption of an ordinance or resolution, as specified, if the contract has been in effect for at least five years. If the contract was originally approved by the contracting agency’s electorate then the termination must also be approved by the contracting agency’s electorate.
2. Provides a method for CalPERS to declare an agency in default and terminate its contract.
3. Requires CalPERS to retain the terminated agency’s employer and employee contributions, as specified, including contingencies as determined by the actuary, for the benefit of the members who are credited with service rendered as employees of the agency and for the benefit of beneficiaries of this system who are entitled to receive benefits on account of that service.
4. Requires CalPERS to merge all plan assets and liabilities of terminated agencies into a single terminated agency pool to provide exclusively for the payment of benefits to members of these plans.
5. Obliges the terminating agency to contribute an amount equal to the difference between its accrued assets and liabilities, as specified, under terms established by CalPERS if the assets are less than the liabilities. That amount is subject to interest at the actuarial rate from the date of contract termination to the date the agency pays CalPERS.
6. Provides for the pro rata reduction of benefits accrued to members from the terminating agency if the agency fails to pay the amount outstanding, as specified.
7. Requires CalPERS to pay the contracting agency the surplus, as specified, plus interest if the agency’s accumulated assets exceed its liabilities.

This bill:

• 1. Authorizes a contracting agency to do the following:
     1. Terminate its contract with CalPERS in a manner that does not result in excessive costs or penalties;
     2. Withdraw its net assets paid into CalPERS less payments made to its members and beneficiaries; and
     3. Ensure that a terminating agency remain responsible for its employee retirement benefit unfunded liabilities so that those liabilities are not shifted onto other CalPERS participants.
  2. Requires that the contract be in effect for at least five years and be approved by an ordinance or resolution adopted by the governing body of the contracting agency before the agency is eligible to terminate it.
  3. Authorizes the agency’s governing body to terminate the contract by adopting a resolution giving notice of intention to terminate followed not less than one year thereafter by the affirmative vote of two-thirds of the members of the governing body, of an ordinance or resolution to terminate the contract effective on the date designated in the ordinance or resolution terminating the contract.
  4. Requires the termination agreement between the agency and CalPERS to contain provisions to protect the interests of the system, including provisions for determining the amount, time, and manner of transfer of cash or securities, or both, to be transferred to the contracting agency, representing the value of the contracting agency’s interests in the retirement fund and its employees’ interest based on accumulated contributions and accumulated rate of return, to be credited to the agency and its employees.

Background

Under existing law, when an agency terminates its contract with CalPERS, CalPERS calculates the amount necessary to reasonably ensure that CalPERS will have sufficient funds to pay the future retirement benefits of members employed by the terminating agency.

The actuarial assumptions used in the calculation reflect the change in the nature of the agency’s status. For example, CalPERS will generally utilize a lower discount rate because post-termination it has no recourse to the agency for additional contributions if investment assumptions are not realized. Also, other actuarial assumptions become more concrete or certain since factors in determining the funded status become fixed in time, i.e., the age, number, and pay of the agencies employees.

The bill appears to seek to allow a terminating agency to withdraw its net assets less payments made to its employees and beneficiaries and supposedly ensure that employees’ vested future retirement benefits will still be paid, but through some alternative provided by the agency rather than through CalPERS.

However, under current law, members employed by the agency have vested rights to their pensions based on the defined benefit formula in place when they began employment. If the terminating agency is unable or unwilling to pay those pensions in the future, the members would seek payment from CalPERS, which not having the funds, would have to reduce the pensions pro rata.

Related/Prior Legislation

None known.

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

SUPPORT:

City of Costa Mesa

OPPOSITION:

CAL FIRE Local 2881

California Association of Highway Patrolmen

California Association of Professional Scientists

Peace Officers Research Association of California

Professional Engineers in California Government

Retired Public Employees Association

ARGUMENTS IN SUPPORT: According to the author, if contracting agencies “believe they can contract or run their own retirement system cheaper or more effectively, they should have the ability to leave CalPERS without being excessively penalized.”

ARGUMENTS IN OPPOSITION: According to CAL FIRE Local 2881, “If a local jurisdiction wants to opt-out of CalPERS, there is already a mechanism in place. However, it is the agency’s responsibility to ensure that the benefit accrued to existing members and retirees is paid for.”