California Public Agency Labor and Employment Blog - Useful Information for Navigating Legal Challenges

This post was authored by Mary Dowell

On April 23rd our community college clients received a Legal Advisory from the State Chancellor’s Office which should be of concern to all public school and community college districts. It informed the community college Human Resources Officers about a decision by CalSTRS after an audit of City College of San Francisco (SFCCD). CalSTRS has determined that it will not allow persons in positions such as Director of Human Resources; Chief Financial Officer; Chief Information Technology Officer; Director of Payroll, Director of Building, Grounds, and Maintenance; or Police Chief to be enrolled in STRS. SFCCD had designated these positions as Educational Administrators. CalSTRS concluded that these administrators are not performing “creditable service” as that term is defined in Education Code section 22119.5.

CalSTRS took action to terminate CalSTRS employment benefits for current and retired employees of SFCCD who it determined should not have been enrolled, including persons who had occupied the positions listed above. The consequences included removal of employees and retirees from the system, a demand for collection of all “overpayments” from each member, former member, or beneficiaries, and adjustment to all impacted members’ creditable compensation. In effect, both the retirees and the still-employed administrators are to be excluded from the system.

SFCCD has administratively appealed this action and the affected retirees have sued CalSTRS.  However, CalSTRS has given no indication that it will change its position. Although this decision only applies to SFCCD at this point, all community college and school districts employing academic administrators (or certificated administrators for K-12 districts) in positions not directly involved in instruction should be aware of this development.

CalSTRS has also stated that it does not believe persons in other positions which are commonly designated as educational administrators are performing creditable service, and that they would be at risk for similar exclusion from the retirement system. These include: Legal Counsel, Vice Chancellor Research and Policy, Director of Administrative Services, Vice Chancellor Governmental Relations, and others.  It appears that almost any administrative position in Administrative Services or Human Resources which is designated as an educational administrator or as a certificated administrator would be at risk.

If there are positions in your district which have been designated as educational administrator or certificated administrator in the areas of human resources, business, governmental relations, legal counsel, or institutional research, you should consult with counsel to review how these positions have been utilized and how this case might affect them.  We believe there may be many such positions. It will be crucial to watch how the legal proceedings involving SFCCD unfold, but other solutions should be discussed as well.

Pension reform might still have a fighting chance.  As we mentioned in yesterday’s Special Bulletin, Governor Brown announced that he had reached an agreement with Legislative Democrats to move forward on pension reform with the California Public Employees’ Pension Reform Act of 2013 (”CPEPRA”).  

At the eleventh hour, the joint Conference Committee on Pension Reform introduced the CPEPRA in a rather rushed fashion.  LCW attorney, Gage Dungy, was in attendance at the committee hearing last night and noted:  “The hearing was packed and a little bit chaotic.  Even the Assembly Members and Senators on the committee readily acknowledged that they literally had just received the CPEPRA proposed language and had not yet read it.”  Copies of the revised legislation for CPEPRA (introduced as an amendment to Assembly Bill 340) were released to attendees at the hearing.  Even with the objections of those at the hearing that there had not been sufficient time to review this proposal, the Conference Committee voted to pass on the proposals to the State Assembly and Senate for a vote this coming Friday.  If the Legislature fails to pass the CPEPRA by a majority vote by midnight on August 31, 2012, the legislation will die.

The CPEPRA, if passed, will affect every public retirement system in the state in some fashion, including PERS, STRS, ’37 Act county systems, independent municipal retirement systems and other public employer sponsored retirement plans.  We will address how these changes will affect members of PERS and ’37 Act county systems, in a separate Special Bulletin which will post shortly. 

Here, we highlight how the CPEPRA, as proposed, will impact members of STRS as of January 1, 2013:

• Lower Benefit Formula. Section 24202.6 will be added to the Education Code to require that a STRS member who is first hired on or after January 1, 2013, will have a maximum benefit formula of anywhere from 2% at age 62 to 2.4% at age 65 with the usual incremental decrease for members retiring before the normal retirement age. Current employees will not have any changes in benefit formulas.
• Elimination of Non-STRS Supplemental Defined Benefit Plans.  Except for the STRS Defined Benefit Supplement Plan, employers may not offer a supplemental defined benefit plan to any employee that was not already participating in the employer’s supplemental plan prior to January 1, 2013.  This includes supplemental plans offered by a private provider.
• Limits on “Creditable Compensation.” For any person who is a “new member” of STRS, as defined, on or after January 1, 2013, creditable compensation shall not include, among other things: one-time or ad hoc payments to the member; severance or other payment made in anticipation of a separation from employment, payments for unused leave, including sick leave; payments for additional services rendered outside of normal working hours; employer contributions to deferred compensation or defined contribution plans; or any other form of compensation the STRS board determines should not be creditable compensation.
• Minimum, Early, and Normal Retirement Ages.  For any STRS member first hired on or after January 1, 2013, the minimum and early retirement age will be 55 years, and the normal retirement age will be 62 years.
• Increased Employee Contribution Rates.   It will be mandatory that all “new members” of STRS, as defined, and all new employees employed on and after January 1, 2013 who participate in the defined benefit plan, pay at least 50% of the normal cost rate for participation in STRS.  Employers are prohibited from picking-up the employee’s contribution rate.  Employees may pay more than 50% if agreed to in a collective bargaining agreement only.
• No More Purchase of “Air-Time.”  A public retirement system, including STRS, may not allow for the purchase of non-qualified service credit after December 31, 2012.
• Earnings Limitations on Post-Retirement Employment.  Section 24214 of the Education Code will be further amended; and section 22164.5 added, to allow retired STRS members to perform “retired member activities” without reinstatement to the system, if the pay is not less than the minimum, nor more than the maximum, paid by the employer to other employees performing comparable duties up to the maximum compensation limit in any one school year in an amount established by STRS each year.  “Retired member activities” will be defined as those activities listed in section 22119.5(a) and (b) and section 26113(a) and (b) regardless of whether the retiree is performing those activities as an employee of the STRS employer; as an independent contractor; or as an employee of a third party unless performing a limited term assignment, and the third-party does not participate in a California public pension system, and the activities performed are not normally performed by employees of a STRS employer.
  
  • These limitations will not apply to compensation paid a retired member for service who has returned to work, after the date of retirement, as a trustee, fiscal adviser, fiscal expert, receiver, or special trustee (but not an “administrator”) appointed by the Superintendent of Public Instruction, the State Board of Education, the Board of Governors of the California Community Colleges, or a county superintendent of schools to address academic or financial weaknesses in a school district pursuant to specified sections of the Education Code and with the specified documentation required.  However, this exception will not apply to a member who has not attained normal retirement age at the time the compensation is earned by the member; or who received a STRS golden handshake; or who received any financial inducement to retire in the previous six months by any public employer.  This section shall apply to compensation paid during the 2012-2013 and 2013-14 fiscal years and will become inoperative on July 1, 2014 and as of January 1, 2015 will be repealed unless a later enacted statute deletes or extends these dates.
• Waiting Period Before Post-Retirement Employment.  A STRS retiree may not receive postretirement compensation from a STRS employer during the first 180 days after the most recent service retirement of that member, nor during the first six consecutive months after the most recent service retirement if the member received a STRS golden handshake or other financial inducement to retire from a public employer.
  
  • This limitation shall not apply, though, if the STRS retiree has attained normal retirement age and has not received a STRS golden handshake or other financial inducement to retire from a public employer, and the retiree’s employment has been approved by the governing body of the employer in a public meeting, as reflected in a resolution adopted by the governing body prior to the performance of “retired member activities,” expressing the employer’s intent to seek an exemption to this limitation.  The resolution must include specific information and findings, including that the appointment is necessary to fill a critically needed position before 180 days has passed and that the termination of employment of the retired member with the employer is not the basis for the need to acquire the services of the member. Employers will be required to submit documentation to STRS showing the retiree’s eligibility for this exception before employment commences. Education Code section 24214, though, will continue to apply to the postretirement employment.
•  Forfeiture of Pension Allowance Upon Conviction Of  Certain Felonies.  If  a public employee, including a member of STRS, is convicted by a state or federal trial court of any felony under state or federal law for conduct arising out of, or in the performance of, his or her official duties, in pursuit of the office or appointment, or in connection with obtaining salary, retirement or other benefits, or for a felony committed against or involving a child who he or she has contact with as part of his or her official duties, shall forfeit all accrued rights and benefits in any public retirement system in which he or she is member from the earliest date of the commission of any felony to the “forfeiture date” (conviction date) and shall not accrue any further benefits in the retirement system.  The member’s contributions will be returned to the member, without interest, upon separation from employment, death, or retirement.  The public employer shall have certain obligations in notifying the retirement system (e.g. STRS) of a qualifying conviction.

Bear in mind this is only a highlight of the more significant portions of CPEPRA that will affect STRS employers.  Moreover, the Legislature may clarify the language of the bill, further, before it is voted upon on Friday.  Finally, there is no guarantee that the bill will pass; we can only wait and see what the Legislature will do before the end of this legislative session.  As always, we will keep you posted.

Does your public agency contract with, or a member of, CalPERS, STRS, or a ’37 Act system?  Have you exhausted all possible ways under those systems to reduce pension costs such as reducing benefits for new hires, eliminating or reducing employer paid member contributions, or reducing special compensation?  Do you want to achieve more cost saving measures now and in the long run, but not sure how?  Then, call your State Legislators because comprehensive pension reform for most cities, counties, and special districts can only be achieved at the State level.

There may be voices out there that want to place measures on local election ballots to institute substantial changes in public employment retirement benefits, such as those done by the Cities of San Diego and San Jose.  As we mentioned in our previous blog, this will not help PERS, STRS, and ’37 Act agencies. 

Calling your Legislators in the State Assembly and Senate, however, can help because:

1. They can change state law or they can help place a measure on the ballot for California voters to elect certain reforms.  Only changes in state law can provide you with more cost saving options than those that currently exist.
2. It saves the time, money and energy in passing ineffectual local ballot measures.
3. A local agency will not be sued for a change in state law made by the Legislature (or California voters as a whole).  The State may still face obstacles, but your local agency is not necessarily footing the bill.
4. If you aren’t talking to your Legislator about what your agency needs, then who is?

The question becomes whether the Legislature will answer the call.  The Legislature has had little to nearly no movement on a plethora of Assembly and Senate pension reform bills this year.  The Legislature was back in session on August 7th, but the session ends in just over two weeks until the new year. 

California Senator Mimi Walters, who serves as Vice-Chair of the Senate Committee on Public Employment and Retirement, was kind enough to lend us her time to comment.  Senator Walters, who previously served as a council member and mayor for the City of Laguna Niguel, stated the majority party in the Senate is  “not serious” about comprehensive pension reform at this time.  Although, the Senate President Pro-Tem has indicated that some pension reform measures will pass before the Senate breaks at the end of August, it is unlikely much of Governor Brown’s 12-point pension plan will come to fruition any time soon, if at all.  The Chair of the Senate Committee on Public Employment and Retirement has also been slow or unwilling to grant hearings on a number of key bills, delaying progress.  Senator Walters indicated that the Legislature may make “minor tweaks” such as passing measures to prevent pension spiking, purchase of air time, and double-dipping (working for a public employer while receiving a pension allowance).  However, while Senator Walters stated she is working to achieve immediate comprehensive pension reform, it is unlikely the Legislature as a whole will accomplish significant changes in the near future.  If the bills pending now do not pass, they will die.  It would then be incumbent on Legislators to re-draft and re-submit the bills in the new Legislative session next year.  Senator Walters explained that pension reform may appear easier to do at the local level because local governing bodies are typically non-partisan, but at the State level, it is much more political, much more partisan, and therefore, much harder to achieve significant change.

There are a few bills pending that would place a measure on the State ballot to ask California voters to approve Constitutional amendments effecting public retirement systems (SCA 13, 18, and ACA 22).  While those bills are still active, it appears the time has passed for any measure to make it on the November ballot.  Some bills are contingent on the approval of those Constitutional amendments, and therefore, will likely die this Legislative session, as well (see AB 2224 and SB 1176).  For the remainder of the bills that are still active, many have had no action on them in months.  One topic that has spawned a number of bills, forfeiture of retirement benefits for felony conviction of conduct arising out of performance of official duties or in seeking wages or retirement benefits, may still have a chance (see AB 169, AB 1653, AB 1681, SB 1057).  Two bills propose to place a maximum amount on the retirement allowance that may be received by an annuitant which will depend on whether Social Security was earned on the public service and the compensation limits set by the IRS (see AB 1633 and 1639).  Two other bills propose to prohibit a person first elected to a local office after January 1, 2013 from attaining membership, or acquiring service credit in, a public retirement system, as well as earning other benefits such as retiree medical, health insurance, or car/office allowances  (see AB 2428 and AB 2429).

While local agencies are being asked to initiate local ballot measures like those in San Jose and San Diego, the reality is, if the agency belongs to PERS, STRS, or a ’37 Act system, any real effective change must happen at the State level.