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Summary of LAO Findings and Recommendations on the 2010-11 Budget

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 Go Back  Contributions to the Judges' Retirement Funds Contributions to the Judges' Retirement System (JRS) II. Recommend that the Legislature modify Control Section 3.60 of the budget act to reflect the 24.041 percent required employer contribution for JRS II in 2010-11. The administration will need to score additional non-budget-act General Fund spending of $7.87 million in the JRS line item related to the JRS II contribution rates. 5-20-10

Detailed Narrative

Judges' Retirement System (JRS) Provisions of Budget Bill Need to Be Revised. Due to timing issues, the administration was unable to incorporate the 2010-11 employer contribution rates developed by California Public Employees' Retirement System (CalPERS) actuaries into its May Revision proposals. Accordingly, we recommend that the Legislature amend Control Section 3.60 of the budget bill to reflect actual 2010-11 pension contribution rates, including the rate for JRS II (the part of JRS that enrolls judges appointed or elected since November 1994). Instead of the JRS II rate holding steady in 2010-11 at 20.358 percent of payroll (the figure noted in the administration's January budget proposal), it is instead to be 24.041 percent. The Board of Administration of CalPERS adopted the JRS II employer contribution rate on May 19, 2010. (As noted in our separate analysis covering the rest of Control Section 3.60, the CalPERS board delayed action on setting other most state pension contribution rates for 2010-11.)

Reasons for the JRS II Rate Increase. As described in CalPERS' recent actuarial valuation of this pension fund, the increased JRS II contribution rates for 2010-11 reflect updated life expectancy assumptions, adoption of a funding method more suited for JRS II's increasing membership and maturity, and an updated payroll growth assumption. Moreover, even as estimated JRS II liabilities expanded 23 percent (due in part to the new assumptions described above) since last year's actuarial valuation, the market value of JRS II assets dropped 3 percent. These changes resulted in JRS II having assets with a market value equal to 70 percent of accrued system liabilities as of June 30, 2009. This appears to be the lowest funding ratio in JRS II's relatively short history.

Rate Increase Results In $7.9 Million Increase in Item 0390 Spending Requirements. The Governor's January budget package reflected $209.6 million of 2010-11 General Fund contributions to JRS I (the system for pre-1994 judges) and JRS II. This total includes both budget act and statutory appropriations. (As noted in the 2010-11 Governor's Budget documents, General Fund payments to JRS II effectively are appropriated by Section 75600.5 of the Government Code, in conjunction with budget Control Section 3.60 described above.) Based on the final adopted employer contribution rates for JRS II, CalPERS estimates that an additional $7,870,000 of General Fund contributions will be required in 2010-11. We believe this estimate is reasonable. Accordingly, based on the Legislature's action to modify Control Section 3.60, the administration will need to score an additional $7.87 million of non-budget-act, General Fund spending related to JRS II employer contributions.

We also inquired about whether there were any changed assumptions since January concerning JRS I--an actuarially unsound, "pay-as-you-go" pension system budgeted to have a two-month reserve on hand (which is a minimal reserve for a pension trust fund). CalPERS reported no significant changes in JRS I expenditure requirements. Therefore, we recommend no changes to the Governor's proposed appropriations to that system.