On May 2, 2013, CalPERS released a new employer bulletin addressing “Employer Shared Responsibility Regarding Health Coverage.”  CalPERS Circular Letter #600-016-13 (www.calpers.ca.gov/eip-docs/employer/cir-ltrs/2013/600-016-13.pdf) summarizes existing Affordable Care Act (“ACA”) requirements and their impact on CalPERS contracting agencies.  Among other things, the Circular Letter #600-016-13 addresses the following topics:

Assessable Payment – The Circular reminds large employers (those with 50 or more full-time or full-time equivalent employees) that they will be subject to a penalty if they do not offer affordable health coverage that provides minimum value to their full-time employees and their dependent children.

Affordability – A plan is affordable if the employee’s contribution to the lowest cost self-only plan is less than 9.5% of the employee’s household income.  The Circular reminds employers that, because public agency employers often offer different employee premium contribution amounts based on bargaining group resolutions and other factors, agencies will need to assess the impact of the affordability requirement using their agency’s specific contribution levels. 

Adoption of the “Look-Back Measurement Period” Safe Harbor – If an employer does not adopt this safe harbor, the IRS will assess penalties on a monthly basis based on those employees who are considered “full-time” for any given month.  An employer who adopts this safe harbor can determine an employee’s status as a full-time employee by looking back at the employee’s average hours during a measurement period, and rely on that determination without IRS penalties during the corresponding stability period.  The periods under this safe harbor have specific legal restrictions as to their timing and length.

An Employee Qualifying As Full-Time Pursuant to a Measurement Period Is Eligible To Enroll Outside of an Enrollment Period - The Circular answers an important question by confirming that new or ongoing variable-hour employees determined to be working full-time under ACA will be eligible to enroll in a CalPERS plan, even if the employee becomes eligible outside a regular open enrollment period.  The Circular states that “CalPERS considers employees meeting health benefit eligibility requirements over the measurement period a permitting event outside of open enrollment.”

60 Day Waiting Period – The Circular reminds employers that, independent of ACA, new full-time employees, as well as variable-hour employees determined to be working full-time under ACA, are eligible for the CalPERS health benefits program in accordance with California Code of Regulations Section 599.502(b)(3).  Initial enrollment must occur within 60 days of an employee’s eligibility for health benefits.  NOTE: this is more stringent than ACA’s prohibition on waiting periods in excess of 90 days.

Additional Information - additional information and resources can be found on the CalPERS Employer web site under Health FAQs.  Employers may find further information at the following link: www.calpers.ca.gov/index.jsp?bc=/employer/faqs/health/home.xml. 

On May 8, 2013, the Department of Labor (DOL) issued guidance setting an October 1, 2013 deadline for employers to provide notice of the exchange (now called the Health Insurance Marketplace) to all employees.  The notice to employees must:

1. Inform employees of the existence of the Marketplace, including a description of the services provided by the Marketplace, and the manner in which employees may contact the Marketplace to request assistance;
2. Inform employees that if the employer plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs, they may be eligible for a premium tax credit under section 36B of the Internal Revenue Code if the employee purchases a qualified health plan through the Marketplace; and
3. Inform employees that if they purchase a qualified health plan through the Marketplace, they may lose the employer contribution (if any) to any health benefits plan offered by the employer and that all or a portion of such contribution may be excludable from income for Federal income tax purposes.

Who Must Provide Notice?
The requirement applies to all employers who are subject to the Fair Labor Standards Act.   See www.dol.gov/elaws/esa/flsa/scope/screen24.asp.  Unlike the Affordable Care Act’s shared responsibility provision, this notice requirement is not limited to large employers who employed an average of 50 or more full-time employees during the previous calendar year. 

When Must Employer Provide Notice?
An employer must provide the Notice to current employees before October 1, 2013.  Beginning October 1, 2013, the employer must provide this Notice to new employees at the time of hiring (i.e. within 14 days of an employee’s start date).

Is A Model Notice Available?
Yes.  The DOL also released three model notices (1) one for employers who offer a health plan to some or all employees, (2) one for employers who do not offer a health plan, and (3) a COBRA model election notice.  The model notices are available on the DOL’s Patient Protection and Affordable Care Act web page at the following link: http://www.dol.gov/ebsa/healthreform/index.html.

Where Can An Employer Find Additional Information?
The DOL updated its web page with information on the notice to employees of coverage options.  Employers may find further information at the following link: http://www.dol.gov/ebsa/newsroom/tr13-02.html.  

This post was authored by Heather DeBlanc

The Affordable Care Act (ACA) will require large employers (i.e. those with over 50 full time equivalent employees) to offer "substantially all" of their full-time employees (and their dependents) the opportunity to enroll in affordable health coverage.  A full-time employee is one who averages 30 hours or more of service per week in any given month.  Employers who fail to comply, risk incurring penalties anytime a full-time employee obtains subsidized coverage through California’s Health Benefit Exchange.

The ACA provides for an optional Look Back Measurement Method Safe Harbor, which allows employers to determine whether an employee is full-time or part-time for purposes of the "assessable payment" (the "penalty").  The benefit of this safe harbor is that it allows an employer to average an employee’s hours of service over a longer period of time called a “measurement period” (e.g. up to one year).  Without the safe harbor, the Internal Revenue Service (“IRS”) will make the penalty determination on a monthly basis.  Large Employers with numerous seasonal employees who average over 30 hours of service per week in any given month will also benefit from this safe harbor. 

According to this safe harbor, employers are required to establish a standard measurement period and stability period for ongoing employees.  The safe harbor also requires that an employer establish an initial measurement period and stability period for new variable hour employees.  The IRS will consider employees who average 30 hours or more of service per week over a measurement period to be full-time during the associated stability period.  Likewise, the IRS will consider employees who average less than 30 hours of service per week over a measurement period not to be full-time during the associated stability period. 

Employers may also establish optional administrative periods.  The administrative period allows an employer time to evaluate which employees qualified as full-time during a measurement period, determine who will be offered coverage during the stability period and address any administrative plan requirements for enrollment. 

There are specific legal restrictions regarding the timing and length of the periods an employer may establish under this safe harbor. 

Employers with calendar year plans who intend to adopt this safe harbor for determining full-time status will need to start tracking (or "measuring") employee hours of service by July 1, 2013, at the latest, assuming they do not adopt an administrative period.  Employers with calendar year plans who plan to adopt an administrative period of 30 days will need to start measuring employees' hours of service on June 1, 2013. 

Employers should start planning now by assessing their current workforce and potential penalties, determining the best plan of action and taking steps to implement any safe harbors they wish to use to minimize penalties. 

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.

This guest post was authored by 

As you know, the Affordable Care Act (ACA) will require large employers to provide “substantially all” of its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage at an affordable rate.  Employers who fail to provide this will be assessed penalties.  The ACA provides for “safe harbor” provisions including the optional Look Back Measurement Method Safe Harbor, which allows employers to determine whether an employee is full-time or part-time for purposes of the “assessable payment” (aka “penalty”).  Large Employers with numerous seasonal employees who average over 30 hours of service per week in any given month will likely benefit from the Look Back Measurement Method Safe Harbor.  Employers with calendar year plans who intend to adopt the Look Back Measurement Method Safe Harbor for determining full-time status will need to start tracking (or “measuring”) employee hours of service by July 1, 2013 at the latest, assuming they do not adopt an administrative period. Employers with calendar year plans who plan to adopt an administrative period of 90 days (the maximum) will need to start measuring employees’ hours of service on April 2, 2013.  Employers with fiscal year plans may need to start measuring employees’ hours of service even earlier than July 1, 2013. 

While the Look Back Measurement Method Safe Harbor provides rules for both ongoing employees and new variable hour employees, it appears that the IRS intends for all of these rules to operate in conjunction with one another.  In other words, an employer cannot select portions of the safe harbor to use while disregarding others.

Starting January 1, 2014, ACA will subject large employers (i.e. over 50 full time equivalents) to a monthly penalty under two circumstances: 

(1) the large employer fails to provide “substantially all” of its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage and any full-time employee is certified to the employer as having received a subsidy for coverage through the exchange (“no-coverage penalty”); or

(2) the large employer offers coverage to “substantially all” of its full-time employees (and their dependents) that is “unaffordable” or does not provide “minimum value” and a full time employee is certified to the employer as having received a subsidy for coverage through the exchange (“unaffordable coverage penalty”). 

We recommend that large employers start assessing their current workforce, determine possible penalties they could face, and explore safe harbors that might minimize those penalties.  In addition to the Look Back Measurement Method Safe Harbor, the IRS has also issued proposed regulations regarding various affordability safe harbors. 

In connection with this law, the IRS has also proposed an appeal process for employers to challenge the exchange’s determination that an employee receive subsidized coverage.  The IRS has expressed an intent to implement a process for employers to challenge the actual penalty as well.  Employers should have evidence (i.e. written documentation) relating to the adoption and implementation of any safe harbor in order to effectively appeal these determinations.

Employers should start planning now by assessing potential penalties, determining the best plan of action and taking steps to formally adopt and implement any safe harbors they wish to use. 

Liebert Cassidy Whitmore is offering a webinar on this topic on Wednesday, March 27 at 10 AM. To register for this presentation, please visit our website: http://www.lcwlegal.com/ACA-Webinar.

The Affordable Care Act requires an applicable employer to provide all employees with written notice of the exchange.  On January 24, 2013, the Department of Labor (DOL) issued an update of Frequently Asked Questions stating that the March 1, 2013 deadline for employers to provide notice of the exchange will be delayed. The DOL expects the new deadline will likely be in the late summer or fall of 2013 to coordinate with the open enrollment period for the Exchanges. We expect the DOL will continue to issue guidance with regard to the notice requirement to provide adequate time for employers to comply.  Employers may find further information about the delay at the following link: www.dol.gov/ebsa/faqs/faq-aca11.html.

What Is An Impairment Of A Memorandum of Understanding (“MOU”)?

The Public Employees’ Pension Reform Act  (“PEPRA”) prohibits employers from paying any portion of a “new member’s” member contribution rate.  New member contribution is 50% of total normal cost.  CalPERS recently released new actuarial reports to employers reflecting what the member contribution rate will be for new members of your agency.  However, the PEPRA states that, “If the terms of a contract, including a memorandum of understanding, between a public employer and its public employees, that is in effect on January 1, 2013, would be impaired by any provision of this section, that provision shall not apply to the public employer and public employees subject to that contract until the expiration of that contract. A renewal, amendment, or any other extension of that contract shall be subject to the requirements of this section.”

This leaves employers wondering, “when would a memorandum of understanding (“MOU”) be ‘impaired’”? 

According to a recent CalPERS Circular Letter, CalPERS suggests that it means a contradiction between an existing MOU and the PEPRA with respect to either or both employer paid member contributions (“EPMC”) and/or cost sharing.  It means that by requiring new members to pay 50% of total normal cost as required by PEPRA, it would directly conflict with an existing MOU which provides that employees covered by that MOU would pay something other than their full member contributions.  If the employer identifies an impairment of an existing MOU, the employer is required to complete and submit to CalPERS a “Certification of Memorandum of Understanding (MOU) Impairment.”

This all boils down to contract interpretation.  What does the contract say and does it directly conflict with the PEPRA.  Here are some examples of when there may or may not be an impairment of a memorandum of understanding or contract:

• “During the term of this memorandum of understanding, employees will pay their own member contributions” or “During the term of this memorandum of understanding, the employer will not pay for any part of the employees’ member contributions.” 
  • This would not constitute an impairment of the MOU because there is not a direct conflict between the PEPRA and the MOU.  New members will pay 50% of total normal cost immediately upon hire.
• “The employer agrees to pay 4% of the employees’ member contributions to PERS.”
  • This would constitute an impairment of the MOU because there is a direct conflict between the PEPRA and the MOU.  The PEPRA prohibits employers from paying any portion of new member contributions, but the MOU states the employer will pay a portion of member contributions.  In this case, the employer will pay 4% of the new member’s contribution rate and the new member will pay the remainder of his/her new member contribution rate.
• “The employer agrees to pay the full amount of member contributions up to a maximum of 8%.”
  • This would constitute an impairment of the MOU because there is a direct conflict between the PEPRA and the MOU. In this case, the employer will pay the “full amount” of the new member contribution rate, but no more than 8%.

There are many different variations in language and nuances which can make it difficult to know if there is an impairment, what that impairment is, and how much in contributions are to be paid by the employer and by the new member.  One thing is for sure, CalPERS requires that the sum total of all new member and employer contributions must be paid when due, whether by the employer or the member.  Thus, whatever is arrived at in determining the employer and member contribution rate for an impaired MOU, PERS expects and requires that the total amount of contributions be paid.

Employers are advised to seek legal counsel if it is unsure about whether there is an impairment of an MOU or about the amount new members should pay in contributions during the current term of an MOU which was entered into before January 1, 2013.  Employers are reminded that once the existing MOU expires, is renewed, or amended, new members must immediately begin paying 50% of total normal cost and employers are prohibited from picking up any portion of new member contributions.

When Do You Know If a “Break In Service Of More Than Six Months” Means Your New Hire Is a “New Member”?

By now, California public employers know that most of the PEPRA applies only to “new members.” “New members” is strictly defined under the PEPRA as anyone who meets any of the following:

• An individual who becomes a member of any public retirement system for the first time on or after January 1, 2013, and who was not a member of any other public retirement system prior to that date.
• An individual who becomes a member of a public retirement system for the first time on or after January 1, 2013, and who was a member of another public retirement system prior to that date, but that public retirement system does not have reciprocity with the new employer’s public retirement system.
• An individual who was an active member in a retirement system and who, after a break in service of more than six months, returned to active membership in that system with a new employer. 

It is this last category of “new member” that will become critically important to members of CalPERS.  With the majority of cities and special districts in California participating in CalPERS, as well as some counties, it is a common occurrence for an employee of one CalPERS agency to leave employment and go to work for another CalPERS employer.  If that employee has a “break in service” of more than six months, that employee is a “new member” and is subject to the provisions of PEPRA including the new defined benefit formulas (i.e. 2% at 62 for miscellaneous members or one of the three new safety formulas), and the prohibition on employer paid member contributions.

This begs the question, “what is a ‘break in service’?”  Is it a break in PERSable service credit?  Is it a break in actual employment between the two employers?  Or is it something else?

If a “break in service” is to mean a break in PERSable service credit, this could have ramifications for employees who take extended unpaid leaves of absence before they are separated from employment as the unpaid leave of absence would not generate any PERSable service credit.

However, a recent CalPERS Circular Letter suggests that PERS does not view “break in service” to mean a break in PERSable service credit.  The CalPERS Circular Letter states that a “break in service” means the time between the “permanent separation” date to the date of a new appointment with a new CalPERS employer.  The issue becomes, then, what is a permanent separation date?

The CalPERS guidance states that permanent separation date is “often the day after the last day on payroll,” suggesting there could be instances of when permanent separation date will not be the day after the last day on payroll. 

CalPERS uses the term “appointment” to refer to “a continuous block of employment with a single employer from the hire date, regardless of whether the employee is qualified for membership on that date, until the permanent separation date.”  A permanent separation is not required, however, when an employee begins a leave of absence.  The beginning to the end of a leave of absence is a change in appointment, but not a permanent separation. 

Accordingly, it is understood that for purposes of determining a “break in service of over six months” in establishing whether a new hire is a “new member,” the measure will be from the “permanent separation” date as reported by the first employer to the date of a new appointment as reported by the second employer. CalPERS employers should keep in mind that the determination of a “new member” will be automatically generated by CalPERS based on the former employer’s reporting of “permanent separation” date and the new employer’s reporting of “new appointment.”  If a new hire is established by CalPERS to be a new member, you may not treat that employee as a classic employee.    If the new employee disputes his or her status as a new member, the employee’s recourse is to inquire with CalPERS and his or her former employer to determine if there was an error in the reporting of the permanent separation date.

Public sector pension reform has been a hot topic for months. But despite the public focus on the Governor’s 12-Point Pension Reform Plan, voter initiatives, charter amendments, litigation and bankruptcies fueled by unfunded pension liabilities, time seemed to be running out for pension reform during the current legislative term.  The Legislature adjourns at midnight on Friday, August 31, 2012.

That changed on Tuesday, when Governor Brown and Democrats issued a press release announcing they had reached an agreement on public employee pension reform at the state level.  At an eleventh-hour hearing of the joint Conference Committee on Pension Reform at the State Capitol on Tuesday evening, the Conference Committee introduced the California Public Employees’ Pension Reform Act of 2013 (“CPEPRA”).

Copies of the CPEPRA, which was introduced as an amendment to AB 340, were released to attendees at the hearing.  The Conference Committee approved the proposed legislation to be voted on by the State Assembly and Senate on Friday.

LCW attorney Gage Dungy, who was in attendance at the hearing on Tuesday evening, observed:  “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.”  

The CPEPRA addresses most of the points raised in the Governor’s 12-point plan, but does not provide for a “hybrid” plan with a 401(k) component, or address the reduction in retiree health costs for State employees sought by the Governor. 

If approved, CPEPRA will take effect on January 1, 2013.  In a Special Bulletin issued yesterday, we discussed the impact of the CPEPRA on public school and community college district participants in the State Teachers Retirement System (CalSTRS).  Highlights of the proposed legislation for public agencies are outlined below:

• Broad Coverage: The CPEPRA is intended to apply to all public agencies with the exception of the University of California and charter cities and counties that have their own independent retirement systems. 
  
  Aside from these exceptions, the CPEPRA covers all state and local public retirement systems including the California Public Employees’ Retirement System (CalPERS), retirement plans governed by County Employees Retirement Law of 1937 (the ‘37 Act), CalSTERS, the Legislators’ Retirement System and the Judges’ Retirement Systems I and II, as well as individual retirement plans offered by public employers and defined benefit governmental plans under Section 401(a) of the Internal Revenue Code. 
  
  Most of the provisions of the CPEPRA apply to public employees defined as “new members” – i.e., individuals hired after January 1, 2013, who have never been members of a public retirement system; individuals who move between retirement systems with more than a six-month break in service; and individuals who move between public employers within the same retirement system after a six-month break in service.  Certain provisions of the CPERA apply to both current and new members.
• Reduced Benefit Formulas for New Members: The available retirement formulas for “new members” hired after January 1, 2013, will be limited.  CPEPRA establishes a single defined benefit formula for new nonsafety (miscellaneous) members and three defined benefit formulas for new safety members. 
  
  The retirement formula for nonsafety members, with the exception of teachers, is 2% at 62. 
  
  The three formulas for safety members are: the Basic Safety Plan (2% at 57); the Safety Option Plan I (2.5% at 57); and the Safety Option Plan II (2.7% at 57).  Employers must offer new safety members the formula that is closest to and provides a lower benefit at 55 years of age than the formula provided to members in the same retirement classification offered by the employer on December 31, 2012.
  
  Employers will be prohibited from providing new members with a supplemental defined benefit plan.
• Increased Retirement Ages for New Members: The retirement age for full retirement benefits will be raised to 67 for nonsafety members and to 57 for safety members.
  
  
• No Retroactive Enhancements to Benefit Formulas:  Enhancements to a benefit formula that are adopted or apply to a member on or after January 1, 2013, may only be applied to the member’s future service.
  
  
• Requires Equal Sharing of Normal Costs:  New employees are required to pay least 50 percent of annual normal costs.  Employers are precluded from paying any part of the required employee contribution.  Normal cost is defined as the portion of the present value of projected benefits under the defined benefit plan attributable to the current year of service, as determined by the public retirement system’s most recent actuarial valuation. 
  
  Unfortunately, the steep increases in most public employer’s employer contribution rate in recent years has been due to the increase in unfunded liability, not annual normal cost.  
  
  Employee contributions may be more than one-half of the normal cost rate, but only if the increase has been agreed to through the collective bargaining process.  Employers may not use the impasse process to increase an employee contribution rate about the 50 percent equal sharing standard.  Nor may employers contribute at a greater rate to the plan for nonrepresented, managerial or supervisory employees than for represented employees.   
  
  The CPEPRA includes a grandfather clause when the terms of a contract or MOU between a public employer and its employees in effect on January 1, 2013, would be impaired by the requirement that normal costs be equally shared.  In that case, the requirement will not apply to the parties until the expiration of the contract.  However, any renewal, amendment or other extension of the contract will be subject to the equal sharing requirement.  
  
  
• Caps Pensionable Compensation for New Members: The amount of compensation used to calculate pension benefits for new members is limited to no more than the Social Security wage index limit ($110,100) for employees who participate in Social Security, and 120% of that amount ($132,120) for those employees who do not.  Retirement systems must adjust the cap each year based on changes in the Consumer Price Index (CPI) for all Urban Consumers.  The Legislature may make prospective changes to the annual CPI adjustments as long as the change does not result in a decrease in an employee’s accrued benefits. 
  
  
• Pensionable Compensation: For “new members,” pensionable compensation means the normal monthly rate of pay or base pay of the member.  Pensionable compensation does not include payments made for the purpose of increasing a member's retirement benefit; in-kind compensation; one-time or ad hoc payments; severance or other payment made in anticipation of a separation from employment; payments for unused vacation, annual leave, personal leave, sick leave, or compensatory time off; payments for additional services rendered outside of normal working hours; any employer-provided allowance such as one made for housing, vehicle, or uniforms; compensation for overtime work, other than as defined in Section 207(k) of Title 29 of the United States Code; employer contributions to deferred compensation or defined contribution plans; any bonus paid; or any other form of compensation a public retirement board determines should not be pensionable compensation.
  
  
• 36-Month Final Compensation Period: To end the practice of “spiking,” which can occur when compensation is increased in the final 12-months of service to increase the retirement benefit owed, final compensation for new members will be determined based on the highest average annual pensionable compensation earned over a consecutive 36-month period.  Effective January 1, 2013, employers cannot modify benefit plans to permit calculation of compensation on the basis of less than a consecutive 36-month period for existing employees.
  
  
• Employers May Continue to Offer Defined Contribution Plans And Certain Defined Benefit Plans:  If an employer offers a retirement plan consisting solely of a defined contribution plan that was in place before January 1, 2013, the employer may continue to offer that plan instead of the defined benefit plan required by CPEPRA.    
  
  Employers may continue to offer defined benefit plans that provide lower defined benefit formulas, and result in a lower normal cost, than required by the CPEPRA.  Effective January 1, 2013, new defined benefit plans or formulas must either conform to CPEPRA or be certified as having no greater risk or cost than the defined benefit formula required by CPEPRA, and must be approved by the Legislature. 
  
  
• Cost Sharing Agreements for CalPERS Agencies: CalPERS agencies that reach agreements with employee organizations to share some portion of the employer contribution under Government Code section 20516.  Such cost sharing agreements must be applied to related nonrepresented employees as approved in a resolution passed by the contracting agency.   
  
  CPEPRA adds Section 20516.5 to the Government Code, prohibiting CalPERS agencies from utilizing impasse procedures to impose cost sharing arrangements that require employees to contribute in excess of the amount required by law for the first five years after CPEPRA goes into effect.
  
  Beginning in January 2018, employers may require employees to pay at least 50 percent of normal costs after meeting and conferring in good faith and exhausting impasse procedures.  However, the employee contribution may not exceed specified percentages of pay for the various retirement categories. 
  
  CPEPRA caps employer contributions to any public retirement plan.  For new members, employers are prohibited from making contributions on any amounts of compensation that exceed the limit established by Internal Revenue Service Code (IRC) Section 401(a)(17).  For tax year 2012, that limit is $250,000.
• No More Purchase of “Air-Time”: CPEPRA prohibits the purchase of non-qualified permissive service credit (“air time”) on and after January 1, 2013. This category includes service credit for periods for which there is no performance of service and may include service credited in order to provide an increased benefit under the plan.
  
  
• Securing Retirement Systems for the Future: CPEPRA would prohibit employers from suspending employer and/or employee contributions necessary to fund the annual normal cost rate of the pension.
  
  
• Limitations on Post-Retirement Employment: CPEPRA forbids post-retirement employment, without reinstatement, for a period of 180 days after the employee’s date of retirement from the public retirement system with certain exceptions.  A retiree is limited to performing a cumulative 960 hours of work in a 12-month period for all employers in the same public retirement system.  If a retiree has received any unemployment compensation, he or she is prohibited from working for the next 12-month period for any public employer.  CPEPRA incorporates the requirement established for CalPERS agencies under AB 1028 that a retiree’s rate of compensation may not to exceed the maximum paid to current employees performing comparable duties.  Retirees would be ineligible for another reappointment under the section for the 12-month period following the end of the first appointment.
  
  
• Forfeiture of Pension Allowance Upon Conviction Of a Felony: The law proposes a strict standard for public officials and public employees convicted of a felony while performing official duties, while running for elected office or seeking appointment, or if the felony involves an attempt to wrongfully obtain salary or pension benefits: the convicted felon would forfeit pension and retirement-related benefits.

This Special Bulletin highlights some of the more significant portions of CPEPRA at this time.  There may be further changes to the language of the proposed legislation before the vote on Friday, and 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.

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.

This guest post was authored by Steve M. Berliner

Governor Brown issued a press release today indicating that an agreement was reached with legislative Democrats on public employee pension reform at the state level to take effect on January 1, 2013.  Details are sketchy at this point but it does appear that most of the reforms in the Governor's previously proposed 12 point plan are contained in the deal.  Most of the changes appear to only affect future employees and will not address current obligations to existing employees or retirees.  While we do not have actual legislative language to share with you at this time, and full legislative approval may not happen for a few days, if at all, here are some highlights of what will likely be in the final package if passed:

• No hybrid pension plans;
• Capping compensation for future hires for pension purposes at $110,000 per year (for those in social security) and $130,000 per year for everyone else;
• New employees will pay half their normal pension costs, while existing employees can pay more than they do now, but only through the meet and confer process;
• Retirement age for full benefits will be raised to 67 for miscellaneous employees and 57 for safety employees;
• 3 year average for final compensation, eliminating the single highest year option for new employees;
• Service credit purchases eliminated;
• Felons will lose their benefits; and
• No retroactive enhancements to pensions.

It is not clear yet whether any of these changes will apply to existing employees. We will put out another Special Bulletin as soon more information is available.  We will also be announcing a webinar to address all these changes as soon as the details of the final reform package are released.

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.

This guest post was authored by Alison Neufeld

The San Diego Superior Court has denied the Public Employment Relations Board’s request for a preliminary injunction preventing the City of San Diego from implementing Proposition B, also known as the Comprehensive Pension Reform Initiative (CPRI).  This local ballot measure was passed by a significant majority of voters at the election on June 5, 2012.  The CPRI provides that most new hires will receive a defined contribution plan, akin to a 401(k) plan, rather than the defined benefit plan employees currently receive.

As reported in our previous Blog Post, on July 10, 2012, San Diego Superior Court Judge Luis Vargas issued a temporary restraining order (TRO) requiring a “temporary delay” in the implementation of the CPRI following the issuance of the Court of Appeal’s published decision in San Diego Municipal Employees Assn. v. Superior Court (2012) 206 Cal.App.4th 1447.  That decision held that PERB has exclusive initial jurisdiction to determine whether the City violated the MMBA by placing the CPRI on the ballot before meeting and conferring with the San Diego Municipal Employees Association (MEA).

In the Order issued yesterday, Judge Vargas stated that the parties had demonstrated sufficient progress in meeting and conferring over “priority implementation of time sensitive issues of the CPRI.”  Specifically, the City has proposed that an Interim Defined Contribution Plan be implemented and the MEA has had an opportunity to respond.  In addition, the PERB hearing has been held and the parties are awaiting the decision.

Judge Vargas stated that while PERB has initial jurisdiction to determine the unfair practice charge filed by the MEA, the Superior Court retains jurisdiction regarding implementation of the CPRI.  In evaluating a request for injunctive relief brought by PERB, courts determine whether there is “reasonable cause to believe an unfair labor practice has been committed and the relief sought is just and proper.”  Judge Vargas indicated that the preliminary injunction requested by PERB would not be “just and proper” and that “traditional equitable considerations now weigh in favor of the voters, the City of San Diego and of a proper and orderly implementation of the CPRI.”

This guest post was authored by Oliver Yee

Withholding of Medicare Tax

Generally, all state and local government employees hired in the last 25 or so years are required to pay Medicare taxes.  (See 26 U.S.C. § 3101 [placing the tax on the wages earned with respect to employment on “every individual”]; see also 29 U.S.C. § 3121(u) [expressly stating that all local government employees are subject to Medicare/Hospital tax]).  There is no exemption for employees who are members of a qualified retirement plan such as PERS.  Accordingly, rehired PERS retirees are considered regular employees of the public agency for the purposes of Medicare contributions and the public agency is required to withhold their Medicare taxes.  This rule also applies to ’37 Act agencies (i.e. agencies that are under pension systems established under the County Employees Retirement Law of 1937) that hire PERS retirees, and to ’37 Act and PERS agencies that hire retirees who retired from ’37 Act agencies.

Withholding of Social Security Tax

Many public agencies terminated their participation in Social Security on or before April 20, 1983.  On April 20, 1983, a public agency’s right to terminate participation in Social Security was rescinded by Congress.  For those public agencies that continue to participate in Social Security, the question of whether or not Social Security taxes for PERS retirees should be withheld can be complex.  The Internal Revenue Service (IRS) provides guidance on this issue.  The general rule is that a public agency retiree who is rehired by his/her employer or another employer that participates in the same retirement system (e.g. PERS) as the former employer is considered a “rehired annuitant” and is excluded from mandatory social security coverage (i.e. social security taxes are not withheld).  (See IRS Publication 963 – Federal-State Reference Guide at 6-9.) 

There is an exception to the above referenced general rule.  Social Security taxes for a rehired annuitant (i.e. public agency retiree who is rehired by his/her employer or another employer that participates in the same retirement system as the former employer) are withheld if the retiree’s new position is covered for Social Security under a “Section 218 Agreement.”  A Section 218 Agreement is a voluntary agreement between states and the Social Security Administration to provide Social Security and Medicare Hospital Insurance (HI) or Medicare HI-only coverage for state and local government employees. These agreements are called "Section 218 Agreements" because they are authorized by Section 218 of the Social Security Act.  Public agencies (i.e. political subdivisions of the state) may enter into a Section 218 Agreement with the Social Security Administration to extend Social Security coverage to their employees.  Under the Social Security Act, certain positions are mandatorily excluded from Social Security coverage.  Therefore, if a public agency hires a rehired annuitant, the agency must determine whether the position which the rehired annuitant now occupies is covered by a Section 218 Agreement.  If yes, then Social Security taxes are withheld.  For Section 218 coverage questions, consult the Social Security Administrator for Region VII which covers California. (See http://www.ncsssa.org/ssaregoffice.html)

The following examples help illustrate the above concepts related to withholding of Social Security taxes.

Example A:

A groundskeeper retires from City A where he was a member of PERS.  Two years later, he is hired by City B as a custodian.  City B participates in PERS.  However, the custodian position is not covered under PERS for City B.  The custodian position is not covered by a Section 218 Agreement.  Must City B withhold Social Security tax?  No.  The retiree is a rehired annuitant.  Although the custodian position is not covered under PERS, City B still “participates” in PERS.  Therefore, because the retiree is a rehired annuitant (City B participates in the same retirement system as City A), and the custodian position is not covered by a Section 218 Agreement, the City should not withhold Social Security tax from the earnings of this retiree.

Example B:

An administrative analyst retires from City X where she was a member of PERS.  Two years later, she is hired by City Y as a front desk clerk.  City Y participates in PERS.  However, the front desk clerk position is not covered under it.  The front desk clerk position is covered by a Section 218 Agreement.  Must City Y withhold the retiree’s Social Security tax?  Yes.  Although the retiree is a rehired annuitant, because the custodian position is covered by a Section 218 Agreement, the City must withhold the retiree’s Social Security tax.

Example C:

An engineer retires from District X where he was a member of PERS.  Two years later, he is hired by District Y as an office clerk.  District X participates in PERS.  District Y is a 1937 Act agency and does not participate in PERS.  District Y does not have a Section 218 Agreement that covers the office clerk position.  Must District Y withhold the retiree’s Social Security tax?  Yes.  The retiree is not a rehired annuitant because District X does not participate in the same retirement system as District Y.  In addition, the position the retiree now occupies is not covered by a Section 218 Agreement.

In summary, generally a public agency is required to withhold Medicare taxes for PERS retirees it employs.  A public agency should not withhold Social Security taxes where: (1) the retiree is a rehired annuitant (i.e. a public agency retiree who is rehired by his/her employer or another employer that participates in the same retirement system as the former employer), and (2) the position the retiree now occupies is not covered by a Section 218 Agreement.

For the second time in a month, the San Diego Union-Tribune’s Watchdog tattled on a CalPERS retiree working for a CalPERS employer post-retirement.  The first incident the Watchdog tapped CalPERS to look into resulted in a finding of illegal post-retirement employment. CalPERS has not yet reached a finding in the second incident which involves the use of a CalPERS retiree as an “independent contractor.” 

Employers must beware when employing CalPERS retirees. As we mentioned in our blog last week, the Legislature amended three of the laws affecting post-retirement employment of CalPERS retirees for the second time in less than six months.

What employers must be cautious of is that some of these legislative changes are not as significant as you may think.  The danger presented by last week’s SB 1021 is that employers may slip back into relaxed employment practices when it comes to CalPERS retirees. 

At the end of it all, here are the Top 5 Mistakes CalPERS agencies should avoid:

• A CalPERS retiree can work year-after-year so long as he/she never exceeds 960 hours in a fiscal year.  No, not exactly.  It is true that a CalPERS retiree employed under Government Code section 21224 is not per se prohibited from working for more than one year for a CalPERS employer.  It is also true that no matter what, the retiree may not exceed 960 hours in any fiscal year (July 1 – June 30).

However, section 21224 permit employment of a CalPERS retiree in only two circumstances:

• When the retiree is simply employed because he/she has specialized skills needed in performing work of limited duration; or
• When the retiree is either appointed by the governing board, or simply employed during an emergency to prevent the stoppage of public business.

The length of the appointment/employment matters. Don’t be fooled.

• There is no limit to a CalPERS retiree’s service to a CalPERS agency because the retiree says they are an “independent contractor.”  Sounds good in theory, but it’s reality that is the problem.  It is true that if a CalPERS retiree is truly working for a CalPERS employer as an independent contractor, then the limits normally applied to retirees employed by a CalPERS agency do not apply.

However, the California Supreme Court held that when it comes to CalPERS, the common law definition of “employee” applies.  The label of “independent contractor” matters little.  We look at the totality of circumstances surrounding the working relationship and whether it appears to be one of employer-employee.  The most important factor is if the employer has the authority to exercise complete control over the manner and means of accomplishing the job. If so, the retiree is not an independent contractor.  There are also eight other factors looked at including:

• Who supplies the retiree with the tools and instrumentalities for work?
• Is the retiree engaged in an occupation commonly performed by a specialist? (Hint: a police chief is not an independent contractor).
• Is the retiree engaged in a stand-alone occupation or business?
• Does the job require a high degree of skill?
• Is the retiree retained for a finite project or duration?
• Is the method of payment more typical of an employer-employee relationship?
• Is the work performed part of the employer’s regular business?
• What do the parties think their relationship is?

In fact, CalPERS actually requires CalPERS agencies to have an independent contractor agreement involving a CalPERS retiree approved by CalPERS before the work commences.

• Bob retired on Friday and on Monday he can come back to work to help us while we train the new guy.  Maybe.  Bob might be okay if he satisfies the work limitations set by statute, but under any of the statutes if Bob is under the “normal retirement age” he has to have a bona fide separation from service, first.

A bona fide separation from service means that before a CalPERS retiree under the “normal retirement age” can work for a CalPERS employer there must be: (1) a separation in service of at least 60 calendar days between the date of retirement and the first day of post-retirement work; and (2) no predetermined agreement between the employer and retiree prior to retirement that the retiree would return to work for the employer after retirement.

• Good news!  Bob is a miscellaneous employee who just turned 50 which is the minimum service retirement age under CalPERS so he does not need that bona fide separation from service.  Wrong.  A bona fide separation from service is required if the CalPERS retiree is under the “normal retirement age,” not the minimum service retirement age.  “Normal retirement age” is a technical term coined by the Internal Revenue Service in implementing rules against in-service distributions from qualifying pension plans.  It means the highest age that will be used to any retirement benefit formula that applies to the retiree.  If Bob worked for a CalPERS employer at 2% at 60, and part of his benefits will be calculated at 2% at 60 then works for and retires from your agency at 2.5% at 55, Bob’s “normal retirement age” is 60.

By the way, the IRS issued a Notice of Proposed Rule Making to amend the guidelines on normal retirement age for governmental pension plans.  These guidelines, which could be adopted in 2013, may affect these rules regarding bona fide separation from service for CalPERS retirees, including public safety employees, so stay tuned.

• There is no limitation to a CalPERS retiree working for our agency as a “volunteer.”  Maybe.  Did you know that CalPERS does not have a definition of volunteer?  CalPERS in fact does not speak to volunteers at all.  Instead, CalPERS uses the common law definition of employee.  If that CalPERS retiree receives any form of compensation for their “volunteer” service to a CalPERS agency, chances are, those limits on post-retirement employment may very well apply.

Employers are cautioned not to fall prey to relaxed employment practices when it comes to CalPERS retirees.  When in doubt, ask legal counsel for an opinion before the work commences. 

This guest post was authored by Alison Neufeld

The City of San Diego has been ordered to delay implementation of the pension reform initiative that was approved by an overwhelming majority of voters at the election on June 5, 2012.  In our previous blog dated June 12, 2012, we described how Proposition B – also known as the Comprehensive Pension Reform Initiative (CPRI) – modifies employee pension benefits under the San Diego City Charter. 

This week, San Diego Superior Court Judge Luis Vargas issued a temporary restraining order (TRO) prohibiting the City from taking action to implement the CPRI.  Judge Vargas was following the directive handed down by the Court of Appeal in a published decision on June 19, 2012. 

This controversial case has been closely watched as charter cities throughout California struggle to address budget gaps due in large part to pension obligations.  The drama began on September 30, 2011, when three citizens submitted a petition to place the CPRI on the ballot for the June 5, 2012, election.  On January 30, 2012, the City Council adopted an ordinance to place the CPRI on the voter ballot for the election on June 5, 2012.

Members of the San Diego Municipal Employees Association (MEA) claimed that the voter initiative was a “sham” because City officials had allegedly co-authored, promoted and funded the initiative.  MEA filed an unfair practice charge and requested that PERB seek an injunction order preventing the City from placing the CPRI on the ballot.  PERB issued an unfair practice complaint and, on February 14, 2012, filed an application for a TRO.

On February 21, 2012, PERB sought a temporary restraining order (TRO) from the San Diego Superior Court.  The Superior Court denied PERB’s request a week later.  Within days, PERB ordered that a hearing be held on the UPC.  The hearing was scheduled to begin on April 2, 2012.

The City filed motions in the Superior Court seeking to stay the PERB hearing.  The City argued that PERB’s application for injunctive relief demonstrated that it had already decided the City had violated the MMBA, and that PERB lacked jurisdiction to resolve issues involving a voter initiative.  PERB and MEA claimed that PERB has exclusive initial jurisdiction over an unfair practice charge, and that the request for a temporary injunction was necessary to preserve the status quo pending the administrative proceedings.

On March 27, 2012, Judge Luis Vargas ruled in favor of the City and stayed the PERB proceeding.  MEA challenged the order in the Court of Appeal. 

At the election on June 5, 2012, the CPRI was approved by a two-thirds majority.

On June 19, 2012, the Court of Appeal issued its decision holding that PERB has the exclusive initial jurisdiction to determine whether the City violated the MMBA by placing the CPRI on the ballot before meeting and conferring with MEA.  The Court rejected the City's argument that PERB's action in seeking injunctive relief demonstrated that it would be futile for the City to appear before PERB.  The Court also rejected the argument that PERB lacks the authority to hear the matter, since the MEA claimed that the City had actually been behind the voter initiative.  In addition the Court found that  participating in the PERB administrative process would not have interfered with the City’s ability to present the CPRI to the voters, because the trial court had rejected PERB’s motion for a preliminary injunction.  (San Diego Municipal Employees Assn. v. Superior Court, 206 Cal.App.4th 1447, --- Cal.Rptr.3d ----, 2012 WL 2308142, Cal.App. 4 Dist., 2012.)

On July 10, 2012, the San Diego Superior Court issued a temporary restraining order but “purposefully taper[ed] the TRO to be effective until July 27, 2012.” Judge Vargas’ Order reads, in part:

“Preservation of the status quo pending negotiations contemplated by the language of Proposition B requires a temporary delay in implementing the CPRI. The Court underscores that the voters of the City of San Diego have overwhelmingly approved the local ballot measure CPRI, and only grants this application amid assurances by both the City and PERB to timely meet and confer regarding priority implementation of time sensitive issues of the CPRI. Both parties represent the imposition of the TRO will not halt meet and confer efforts.”

The Order also states that the July 27 deadline will allow the parties to continue meet and confer efforts, and to attend the PERB hearing on the CPRI.  In any event, the CPRI cannot take effect until the election results are filed by the Secretary of State’s Office. This should occur in late July or early August.

San Diego is not alone.  On June 11, 2012, the California Attorney General gave the Bakersfield Police Officers Association leave to bring a quo warranto action against the  City of Bakersfield to determine whether the City met its meet and confer obligations before placing an initiative measure on the November 2010 ballot that resulted in the enactment of ordinances that set a new and different pension benefit calculation formula and contribution level for City public safety officers hired on or after January 1, 2011, and provided that the new benefit formula and contribution level may be amended or repealed only by a vote of the electorate.  The Attorney General is also considering a similar request for leave to sue by the San Jose Police Officers over its initiative measure modifying pension rights and benefits.

In two of our previous blog posts, we commented on Assembly Bill 1028 which took effect on January 1, 2012, as well as a PERS’ circular letter providing guidance on the same.  AB 1028 was not so much “new law” as a clarification of the long standing rules against receiving a PERS retirement allowance while employed by a PERS employer.  In particular, AB 1028 emphasized that a PERS annuitant appointed by the governing body of a PERS agency to a high-ranking position (e.g. interim City Manager, Police Chief, etc.) under Government Code section 21221(h) could not, under any circumstances, work for more than one year.  The same annuitant could also not work more than 960 hours in a fiscal year unless an application was made to PERS to exceed 960 hours.  AB 1028 also added the word “temporary” to Government Code sections 21224 and 21229 to emphasize that employment of a PERS retiree is intended to be for a short period of time, although the statutes had long stated that retirees appointed pursuant to these sections must perform work of “limited duration.” 

Now comes SB 1021, a comprehensive bill that made a plethora of changes to statutes ranging from public safety, Department of Corrections, sentencing guidelines, and mental health.  Buried within the bill come further changes to Government Code sections 21221(h), 21224, and 21229.  One of the most significant changes made to all three of these statutes is that the compensation received by the PERS retiree from employment with a PERS employer may not exceed the maximum monthly base salary paid to other employees performing comparable duties as listed on a publicly available pay schedule for the vacant position divided by 173.333 to equal an hourly rate.  The PERS retiree also may not receive any benefits, incentives, compensation in lieu of benefits, or any other forms of compensation in addition to the hourly rate.

SB 1021 also makes substantial changes to Government Code section 21221(h) which governs PERS retirees appointed by the governing body of a PERS agency to high level positions during recruitment for a permanent appointment to that position.  In particular, while it continues to state that the PERS annuitant may not work more than 960 hours in a fiscal year for all PERS employers combined, it eliminates that employer’s ability to request an extension of those 960 hours from PERS.  In addition, it eliminates the requirement that any appointment pursuant to section 21221(h) must not exceed one year.   Therefore, while section 21221(h) still requires that appointments pursuant to this section are to be on an “interim” basis while the agency is actively recruiting to permanently fill the vacant position, the appointment may exceed one year, but in no event shall it exceed 960 hours in each fiscal year.

SB 1021 makes no other changes to Government Code sections 21224 and 21229 except to eliminate the word “temporary” from the sentence that reads, “A retired person  may serve without reinstatement from retirement or loss or interruption of benefits provided by this system upon temporary appointment…”  The word “temporary” first appeared only six months ago in AB 1028 and by elimination only six months later, “temporary” was apparently only temporary. But elimination of this word should not be read to indicate any change to the law.  Both before and after AB 1028, and even after SB 1021, the statue still reads that employment of a PERS retiree by a PERS employer pursuant to sections 21224 and 21229 must be either: (1) during an emergency to prevent stoppage of public business; or (2) because the retired person has specialized skills needed in performing work of limited duration.  Thus, removal of “temporary” is no monumental shift in what we have long understood to mean that a PERS annuitant cannot be employed to fill a regular full-time, part-time, seasonal, or intermittent position and work year-after-year even when not exceeding 960 hours in a fiscal year.  PERS annuitants must still only be used for emergencies or to perform work of limited duration.

It is not clear when or if PERS will issue a new Circular Letter modifying its position that retirees appointed under sections 21224 or 21229 may only perform “extra help” work.  PERS identified this work as “elimination of backlog, special projects, work in excess of what the employer’s regular employees can do, etc.”  While we are not expecting PERS to change its position, we will let you know as soon as any new guidance is issued.

These statutes are not to be taken lightly.  These limits on post-retirement employment are not crafted arbitrarily, but stem, in part, from the Internal Revenue Code and Regulations against “in-service distributions” from a qualifying pension plan.  PERS employers and PERS annuitants alike are cautioned to limit post-retirement employment and not to fall into the trap of thinking that the post-retirement employment is permissible so long as the annuitant does not exceed 960 hours in a fiscal year.  PERS annuitants and employers have seen the repercussions of this fallacy both before and after AB 1028 and will continue to do so even after SB 1021.  When in doubt, seek legal advice on post-retirement employment.

Some employers have their own pension investment fund or system, some contribute to a much larger fund or system maintained by a larger entity and in which other employers participate, and/or some pool their funds with other employers called “risk pools.”  The City of San Diego and the City of San Jose, for example, are employers that have their own pension system established and governed by city charter, as well as city ordinances.  Other entities have elected to be a part of those pension systems, as well.  For example, the San Diego Unified Port District, while a separate entity from the City, participates in the City’s pension system, but it is the City’s Charter that governs the system.

Many cities, counties and special districts in California are contracted with the California Public Employees’ Retirement System (“CalPERS”).   CalPERS is the largest public pension system in the country.  Originally established by the State to provide for pensions of State employees, other public employers in the State may also contract with CalPERS to handle contributions, investments, and retirement allowances for their employees.  However, it is the State, not the individual public employers, that decide who will be CalPERS members, how contributions will be made, how investments will be handled, and the terms and conditions for retirement benefits.  This leaves public employers contracting with CalPERS with little control. 

The State Teachers’ Retirement System (“STRS”) is the second largest defined benefit pension system in the country and is a mandatory pension system for, among others, all eligible public K-12 and community college certificated or academic employees in the State. There are also several other defined benefit pension systems in the State including for superior court judges, State legislators, and employees of the University of California.

Just over half of all counties in the State that have their own pension system, but the law that governs their system is established by State legislation known as the County Employees Retirement Law of 1937 (“ ’37 Act”).   While each ’37 Act county maintains its own system, the administration of that system is governed by State law.   Cities and special districts that are situated within these ’37 Act counties may opt to contract with the county’s retirement system, as well.

There are very few public employers in the State that do not have defined benefit pensions.  This has to do with an evolution of laws both at the state and federal level.  Thus, there may be a few public entities that only offer 401(k) type plans.  In addition, federal law does not require public employers to participate in Social Security unless the public employer chooses to opt-in, or previously opted-in and did not withdraw before 1983.  

Because the Cities of San Diego and San Jose maintain their own pension systems governed by their own charters, ballot measures like Measure B and Proposition B passed last week, cannot be done by CalPERS, STRS, and ’37 Act employers, at least not at the local level.  CalPERS employers are heavily restricted to the changes that can be made to save on pension costs by State law, such as Government Code sections 20474 and 20475.  Because CalPERS is governed by the California Constitution and ensuing State legislation, any change to the governing law must be made only through State legislation implemented by State legislators. STRS employers have even less flexibility and again, any change in the governing system must be made at the State level.  Similarly, ’37 Act systems are also governed by State law and substantial changes to any individual ’37 Act system would require legislation at the State level.

However, Governor Jerry Brown unveiled his 12-Point Pension Reform Plan last October which will apply to, among other systems, CalPERS, ’37 Act, and STRS.  Some commentators believe that the ballot measures passed in San Diego and San Jose will act to hasten and embolden the Governor’s 12-Point Pension Reform Plan, but this remains to be seen.

A Side-By-Side Comparison of San Diego, San Jose, and the Governor’s Plans

The San Diego and San Jose ballot measures passed last week proposed to amend each of the Cities’ Charters.  Those Charter amendments are intricate and lengthy.  Similarly, the Governor’s 12-Point Plan while appearing simple in theory, if implemented, would require substantial legislative changes.  Here, we provide you with a simplified and abbreviated, though not all inclusive, comparison of each plan.

San Diego and San Jose Ballot Measures Will Face Legal Challenges

The San Diego and San Jose ballot measures, while approved by voters, are not without their opponents, particularly labor unions.   Prior to the June 5th vote, the Public Employment Relations Board (“PERB”), on behalf of one City labor organization, filed suit against the City of San Diego alleging the City failed to meet and confer with labor unions before placing the matter on the ballot.  The superior court rejected attempts to prevent the measure from being placed on the ballot, but will allow the parties to litigate the issue after voter approval.  Further lawsuits are anticipated, as well.

In San Jose, at least three lawsuits were filed before all ballots were completely counted.   The City filed a preemptive complaint for declaratory relief on June 5th to find that Measure B does not violate the Contracts Clauses of the U.S. and State Constitutions, or constitutional rights of due process or promissory estoppels and for a judicial declaration that the City may implement Measure B as enacted by voters.  Meanwhile, the San Jose Police Officers’ Association and active and retired members of the San Jose Police and Fire Department Retirement Plan filed complaints for declaratory and injunctive relief on June 6th.  The respective plaintiffs allege Measure B impairs vested retirement benefits, violates the Contracts Clause and Takings Clause of the U.S. and California Constitutions, violates constitutional principles of due process and right to petition, as well as separation of powers.   The Police Officers’ Association also alleges other violations of State law including the Meyers-Milias-Brown Act and the California Pension Protection Act.

Thus, while these pension reform measures are designed to control the spiraling pension costs and unfunded liabilities, the measures may be held hostage in costly litigation.  The fate of these measures has yet to be seen.

In sum, public employers will anxiously watch as the San Diego and San Jose pension reform measures unfold.  In the meantime, California has a long road ahead to effectively reform public pensions for all local and State employers.

The San Diego City Employees’ Retirement System (SDCERS) operates the defined benefit pension system for the City, the San Diego Unified Port District, and the San Diego Regional Airport Authority. SDCERS is a qualified public pension plan under Internal Revenue Code section 401(a).  In 2007, the IRS issued a compliance statement under a voluntary audit of SDCERS which stated that two aspects of SDCERS did not comply with IRC section 401(a). 

First, by a 2002 resolution, as well as a separate agreement with an employee, the City agreed to an “incumbent president program” which allowed three incumbent union presidents’ retirement allowances to be based on the highest one-year combined salaries from both City employment and union employment. The IRS held this was not permitted under a qualified plan and that the retirement allowance may only be based on salary from City employment.

Second, the City had entered into a memorandum of understanding (“MOU”) in 2002 with the City’s fire fighters union which permitted employees to convert their annual leave cash equivalent to retirement service credit on a pre-tax basis.  Pursuant to City Charter, an election of the SDCERS membership voted to approve the annual leave conversion and it was later adopted by City ordinance.  This, too, the IRS held violated section 401(a) as an impermissible cash or deferred arrangement in a qualified plan.

The City and SDCERS signed an agreement with the IRS promising to remove the infracting provisions retroactively within 150 days. The IRS in return would not pursue the sanction of disqualification of the SDCERS.  The City passed ordinances retroactively terminating the incumbent president program and repealing the prior ordinance permitting the annual leave conversion.

The union and individual plaintiffs impacted by the retroactive repeals filed lawsuits against the City and the SDCERS Board asserting claims including breach of contract, unconstitutional impairment of contractual rights, negligence, declaratory relief and promissory estoppel, as well as petitioning for writs of mandate.  The cases were consolidated and the superior court sustained demurrers filed by the City and SDCERS on all causes of action without leave to amend and dismissed the lawsuits.  The plaintiffs appealed and the Court of Appeal affirmed on all counts.

First, the Court held that there was no valid contract requiring the City or SDCERS to base the incumbent union presidents’ retirement allowance on both their salaries from the City and union employment.  The City Charter stated that changes and amendments to the SDCERS could only be made by: (1) a majority vote of the SDCERS membership; and (2) by a subsequent ordinance of the City Council.  The incumbent president program was implemented merely by City Council resolution. No vote of the SDCERS membership was held, nor was an ordinance enacted.   The resolution of the City Council was therefore void.

The enactment of the annual leave conversion, however, complied with the City Charter. Nonetheless, the Court held that the annual leave conversion provision was “suspended and superseded” by federal law.  The MOU that promised the benefit contained a “savings clause” which provided that the MOU was subject to all current and future applicable federal, state and local laws, regulations and the City Charter.  If any part or provision of the MOU was found in conflict or inconsistent with the law, that provision would be suspended and superseded by that applicable law or regulation with the remainder of the MOU preserved. 

As the annual leave program violated section 401(a) it was “suspended and superseded” by operation of the savings clause in the applicable MOU.  As the ensuing ordinance and municipal code section were part and parcel of the same transaction as the MOU provision, the savings clause similarly applied to void the ordinance and municipal code section, as well. 

Therefore, no valid and enforceable contract existed pertaining to the annual leave conversion.

Second, the doctrine of promissory estoppel could not act to impose a contractual right to either the incumbent president program or the annual leave conversion.  Promissory estoppel is an equitable doctrine that acts to bar a promisor from refusing to give a promised for exchange due to the lack of a valid contract where the other party has already acted in reliance on that promise, the promisor should have known the action would occur, and where denying the promised for exchange would now be unjust.  The Court held that:  

‘“[N]either the doctrine of estoppel nor any other equitable principle may be invoked against a governmental body where it would operate to defeat the effective operation of a policy adopted to protect the public.’”

Here, the policy adopted was that of the City Charter that required any changes or amendments to the SDCERS be made by both a majority vote of the membership and then by ordinance.  Promissory estoppel, therefore, could not be used to require the City to continue the incumbent president program because to do so would run afoul of the mandate in the City Charter. 

Similarly, promissory estoppel failed as a matter of law as to the annual leave conversion because the City did not promise plaintiffs they could participate in the annual leave conversion if that program was found to be noncompliant with the law.  The MOU’s savings clause of the MOU expressly provided that it was subject to all current and future applicable laws and regulations and that if any provision of the MOU was found to be in conflict with or be inconsistent with applicable law, the provision would be suspended and superseded.

Justice Irion dissented from the majority decision, however, opining, in part, that because the annual leave conversion program was adopted in the appropriate manner under the City Charter, it gave rise to contractual obligations that could only be modified if the modifications were reasonable to preserve the integrity of the pension system and any resulting disadvantages to affected employees were accompanied by comparable new advantages. (Betts v. Board of Administration)

This case may have implications for all public employers providing benefits through a defined benefit pension system, not only for those that maintain their own pension system, but in some cases for those who provide benefits under the County Employees’ Retirement Law (“ ’37 Act”), PERS or STRS.  This decision also has implications for any employer that provides other defined post-employment benefits, such as retiree health insurance.  Public employers are cautioned to ensure that any changes or modifications in pension benefits comply not only with the requisite retirement law (e.g. ’37 Act, PERL, etc.), but also with the employer’s own charter, municipal code or other governing laws. Public employers are also encouraged to include savings clauses in MOUs in the event any provision of the MOU is held to be unlawful.

Pension benefits and other post-employment benefits often involve vested rights that may not be impaired except in limited circumstances and any modifications that may be made will always depend on the circumstances of the individual employer, governing documents, and applicable pension system laws.  Employers are advised to seek legal counsel before making any changes to pension or other post-employment benefits.

Last week, the CalPERS Board approved a plan to phase - in the impact on employer contributions. Under the plan , employers will see about half of the projected rate increase in the first year and the rest of the increase in the second year. This means employers will have an increase in employer contribution rates in the first year, but not as significant as would have otherwise resulted without the phase-in.  A recent CalPERS press release explained:

“A sample public agency miscellaneous plan, without phase in, was expected to see an increase in their employer contribution rate of 1.24 percent of payroll over the next 20 years as a result of the lower discount rate. Under the phase in approach adopted by the Board, the employer contribution rate for that sample public agency miscellaneous plan will go up by 0.65 percent of payroll in the first year of the amortization period, followed by an additional increase of 0.64 percent of payroll for a total increase of 1.29 percent of payroll over the two year period.”

Employers with non-pooled plans may choose to opt out of the phase-in plan and apply a uniform increase to all 20 years. However, employers with plans in a risk pool, must phase in the rate increase in order to maintain equity amongst all participating employers in the pool.

If you have any questions regarding the phase-in process, or what it will mean for your organization, please contact any of our attorneys.

In addition, the new discount rate will apply to all service credit purchases and estimate requests postmarked, delivered or faxed on or after March 15, 2012.  Costs will also increase between 5% to 13% depending on the individual circumstances of the CalPERS member.  Retirement applications that have a retirement date of March 15, 2012 or later will be calculated with the new discount rate.  CalPERS members who choose an optional benefit at retirement, such as an optional settlement benefit or leaving a portion of the benefit to a beneficiary at death, may have an approximate 2% increase in cost for the benefit.

At the CalPERS Board meeting on March 14, 2012, Board members requested that staff examine phasing-in the increase on employer contribution rates over a two-year period.  However, it is unclear at this time whether such a phase-in will occur.

Employers may be wondering how this lowered discount rate occurred and why now.  CalPERS considered lowering the discount rate last year, but opted not to do so at that time.  This set CalPERS apart from other public pension systems, such as the California State Teachers Retirement System (“STRS”), which chose to lower their discount rate earlier.  However, CalPERS’ decision in 2011 was also contingent upon a reassessment this year.

This reassessment of the discount rate was conducted by the Pension & Health Benefits Committee of CalPERS which retained the services of an independent auditor to perform an analysis of the factors that underlie the discount rate assumption.  In performing this assessment, actuaries recommended: (1) that the price inflation assumption (the progressive increase in the general level of prices measured by annual increases in the Consumer Price Index) should be lowered from the current 3% to 2.75% because historically, there has been a steady decline in price inflation; and (2)  that a margin for adverse deviation (a “cushion” against poor investment return rates) should be 28 basis points (.28%) to maintain the margin that has historically been maintained.  This recommendation resulted in a recommended discount rate of 7.25%.

However, given the major impact a 7.25% discount rate would have on the State and other CalPERS employers, the CalPERS Board voted to lower the discount rate to only 7.5%.   The median investment return net of administrative expenses is currently 7.53%.  This means that the margin for adverse deviation or that “cushion” against poor investment returns for any given year is only 3 basis points (.03%), as opposed to the 28 basis points (.28%) that was recommended by the Pension & Health Benefits Committee.

What does this mean for CalPERS contracting agencies going forward?  Nothing immediate.  Rate increases resulting from this change will begin in fiscal year 2013-2014 for contracting agencies, and 2012-2013 for State agencies and school employers. CalPERS employers should keep in mind the following: 

• If employers are currently in negotiations over multi-year collective bargaining agreements, employers have to be cognizant that their contribution rates will increase and the exact amount of that increase is not entirely clear at this time.  However, the estimates CalPERS provided should provide a basis for negotiation with employee associations.
• There were no changes made to the wage inflation assumption, but it will be reviewed in two years.  There is a likelihood the assumption will be modified which may contribute to further increased contribution rates for employers at that time.
• CalPERS chose to only lower the rate to 7.5%, rather than 7.25% as recommended by the actuaries.  This means there is less of a cushion to soften the blow if there is a rather poor investment return in any given year.  Should we see several years of poor investment returns, this may cause a further reduction to the discount rate and higher contribution rates for employers.
• The lowered discount rate will impact member calculations for things such as a purchase of service credit or optional benefits at retirement.  This may result in employees delaying retirement.
• The impact on the State as a whole may add fuel to Governor Brown’s pension reform initiatives.

Employers are urged to work closely with their actuaries, labor negotiators, attorneys and administrators to deal with the long and short term impact of the increased discount rate.