Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Control Section 3.60

This control section specifies the contribution rates for the various retirement classes of state employees in the Public Employees' Retirement System (PERS). The section also authorizes the Department of Finance to adjust any appropriation in the budget bill as required to conform with changes in these rates. In addition, the section requires the State Controller to offset these contributions with any surplus funds in the employer accounts of the retirement trust fund.

State Contribution Rates to PERS Expected to Increase

We withhold recommendation on 2001-02 state contribution rates for retirement benefits pending (1) final determination of the actual rates to be applied in the budget year and (2) receipt and review of information regarding the actuarial assumptions underlying the rates.

Under current law, PERS is responsible for developing employer contribution rates each year based on actuarial analyses. When this Analysis was prepared, a final determination of the 2001-02 rates had not been made. However, we believe the state's costs more than likely will increase in 2001-02 because of enhanced retirement benefits for all state employees that became effective January 1, 2000. Under the legislation that enhanced the benefits—Chapter 555, Statutes of 1999 (SB 400, Ortiz)—PERS was required to modify certain actuarial valuation methods in order to recognize excess assets more quickly. As a result, the state's costs for the new benefits were partially offset, and the budget year is the first year that PERS recognizes the increased liability in setting the state employer contribution rates. Based on the estimated state employee salary level, we estimate that each percentage point increase in the state's overall contribution rate increases General Fund retirement costs approximately $55 million.

Consequently, we withhold recommendation pending final determination of 2001-02 rates and receipt and review of information from PERS regarding the actuarial assumptions underlying the determined rates. This information is typically available in March or April.