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HomeMy WebLinkAbout0449.091, - October 3 , 1991 HONORABLE CITY COUNCIL Palo Alto, California El7ECTS or AB 7Q2 (PtRS REBATEl Members of the Council: Report in ~ This report is for information purposes only, and. requires no Council action. AB 702 (Chapter 83 , statutes of 1991J was passed by the State legislature and signed into la~ as part of the 1991-92 State budget. The major impact of the bill to cities in the Public Employee5 Retirement System (PERS) involves a one-time rebate to the employer accounts, as a credit against future PERS contribu­ tions~ The exact dollar im.pact of AB 702 on the City eof Palo Alto's budget is still not known, and the legality of the credit has been challengel1. Because there is a possibll1 ty that the ·credit-may be overturn~d, staff does not intend to beqin offsetting the credit against current PERS contributions at this time. Repeal/Replacement __ of Benefits AB 702 eliminates two accounts ... i thin PERS, the -Investment Dividend Disbursement Account W (IDOA) and the WExtraordinary Performance Dividend Account-(EPDA), which vere establishsd in 198~ to proviae non-vested supplemental year-to-year cost-ot-living adjust~ents rc~ PERS retirees. The hill specifies that the benefits previously provided by the IDDAJEPDA accounts wil.l be replaced with a permanently vested benefit, to be funded from interest on employee contributions I which may result in some long-term increases in employer contribu­ tion. Meanwhile, the accumulated funds in the IDDA and EPDA accounts ·shall be used to reduce employer contributions in fiscal CKR:449~91 . • ~ ........ < year 1991-92 and sUbsequent fiscal years until those amou~ts are depleteJ."lII There is a tot.al ot approxima,'tely $1.6 bjllion in the IDOAJEPO~ accounts as of June 30# 1991, of which approxi~ately $439 'Sill ion. is attributable to PERS member cities. Th~ plal". is to credit each member employer with the prorated share of the relative value of ttLe member assets in the. IOCA/EPDA accounts. Although PERS has stated that the amount available to each emploJrer cannot be determined until sometime in October( early estimates indicate that fur an average city~ the rebate will amount to approximately 10 months of e~ployer contriDutions~ For the City of Palo Alto, such an estimate would translate in~o an approxjmate $2.5 million General Fund savings and approximately $.5 million {or the Ente~prise Funds. Litigation The PERS Board of Administration nas been named as a respondent in a. la,,"suit challenging the constitutionality of AS 702. arguing that the use of PERS trust funds to pay employer contributions violates the trust provisions of the state constitution. Although PERS has told employer$ they may immediately begin offsetting current employer contributions against the AS 702 credits, the pendinq litigation implies that such savings are not assured. PERS ~dministration reco~ends that, should an employer wish to begin dra'Wing on the A5 70l rebate, {lJ the emplo:,rer should first request a waiver from PERS of any interest or penalties in the event that the litigation succeeds and drawn-down amounts are required to be ret""..lrned to PERS, and (2} the employer establish a reserve tor this same eventuality. If an e~ployer chooses to d~lay the offsetting of employer contributions until the legal challenge is deoided, the prorated funds will remain in the employer's account, and appropriate interest will also be credited on these funds to the employer's account. Due to the uncertain outcome of the litigation and the competitive interest rates normally achieved in the PERS accounts, tne City of Palo Alto does not pla~ to take action to reduce its regular employer contributions to PERS at this time. Change in PERS Actua~ certain other provisions of AS 702 ~ill also affect PERS employers and future contributions to .and benefits of the system. Most notably, the bill replaces the present PERS actuary; chosen by the FERS Board, 'With an actuary chosen by the Goverr.or. and subject to confirmation by both Houses of. the legislature. The actuary is to -assume the fiduciary opligations pertaining to actuarial determi­ nations previously held by ~embers of the board ••• • and is responsible for all actuari3.l valuations of the system. In addition, the actuary will determine the rate of interest being CXR:449:91 2 / • / earned. on the Retirement Fund. As a. result of setting up an -independent-actuary in AB 702, there is some confusion ~ithin PER.C; about "Who will o\'~rsee actuarial functions. The l<!l'Wsuit 'Which challenges the constitutionality of AS 702 includes a request to stay this transfer ot actuarial duties; the PERS Board promptly adopted a resolution to join in requestinq the stay. Copelusi.QA Until the complications of AS 702 are clarified and the litigation is resolved, the ultimate impact of the bill on the city's budget projections for retirement costs \,.;ill remain unknown. Staff will continue to monitor the litigation and further acti?ns by the PERS Board, the legislature and the Governor, and to Jceep Coun::::il apprised of any changes in the current situation. Respectfully sub~itted, (CUt-/.' AI t ~ CAROL F~~ CMR:449=91 J •