SB 1031 will amend California Government Code to temporarily freeze cost of living adjustments (COLA) when a public retirement system investment fund drops below an 80% funded status.
COLA is a benefit paid to retirees which increases wages to match the rate of inflation.
Typically, this benefit begins the second calendar year of retirement, although the annual rate of inflation and retirement law could affect the onset of COLA payments. Under existing retirement law, retirees receive an annual COLA paid on May 1st of each year.
COLA rates are based on several factors including retirement year and the current rate of inflation. The funding status for each retirement system in CalPERS will be based off an existing code (GOV §7503) which requires that all state and local public retirement systems prepare an annual report in accordance with generally accepted accounting principles. CalPERS will have to disclose their systems’ funding statuses in the according annual report.
California Public Employees’ Pension System (CalPERS) recently decided to lower the discount rate from 7.5% to 7.0%. This still leaves CalPERS with a massive unfunded liability, especially when inflation drives costs of pension payments to current retirees higher. Effecting freezes on COLAs will help to curb accruing further unfunded pension liabilities. Per the 2016 CalPERS Comprehensive Annual Financial Report, total unfunded actuarial accrued liability has reached $142,053,672,000, and this number is expected to increase.
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