CalPERS Reduces Employer Impact by Phasing-In Change in Contribution Rates

Posted by Frances Rogers on April 23, 2012

On March 14, 2012, our Blog Post examined CalPERS’ decision to lower the discount rate from 7.75 percent to 7.5 percent in its assumption when determining employer contribution rates.  At a meeting of the CalPERS Board of Administration, staff were asked to study the possibility of phasing-in the increased employer contribution rates over a two year period.

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.

CalPERS Approves Lowering The Discount Rate to 7.5%; CalPERS Employers Will Be Paying Higher Contributions

Posted by Frances Rogers on March 14, 2012

Retirement2.pngOn March 14, 2012, the Board of  Administration of the California Public Employees’ Retirement System (“CalPERS”) approved lowering the “discount rate” or “rate of investment return” from 7.75% to 7.5% in its assumptions when it determines employer contribution rates.  This means that employers who contract with CalPERS for pension benefits will see their employer contribution rates increase. For school employers, contributions will likely increase by 1.2% to 1.6% for miscellaneous plans and 2.2% to 2.4% for safety plans beginning fiscal year 2012-2013.  For public non-school agencies, contributions will likely increase by 1% to 2% for miscellaneous plans and 2% to 3% for safety plans beginning fiscal year 2013-2014.

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.

CalPERS Issues Circular Letter Clarifying Uncertainties Raised By AB 1028 On Post-Retirement Employment And Raising New Ones

Posted by Guest Author on January 31, 2012

This guest post was authored by Steve Berliner 

Retirement.jpgAssembly Bill 1028, which took effect on January 1, 2012,  amended certain provisions of the Public Employees’ Retirement Law (“PERL”)  pertaining to the limits on post-retirement employment.  Just recently, the California Public Employees’ Retirement System (“CalPERS”) issued Circular Letter No. 200-002-12 clarifying the importance of AB 1028 on CalPERS employers and retirees.  While the Circular Letter discusses the intended impact AB 1028 was to have on post-retirement work under Government Code sections 21221(h), 21224 and 21229, it is most significant to the majority of our clients because it interprets the meaning of the addition of the words “temporary” to “appointment” and “specialized” to “skills” under sections 21224 and 21229.  AB 1028’s addition of these words to the existing statutes caused considerable confusion among public agencies that contract with CalPERS.  This Special Bulletin will focus exclusively on these two sections.  Links to the Circular Letter and our blog post on AB 1028 are provided for their discussion of section 21221(h). 

Section 21224 applies to post-retirement employment with a CalPERS contracting agency and section 21229 applies to post-retirement employment with a CalPERS school employer.  These sections do not require appointment by the governing body.  Instead the retiree can simply be employed by administration.  The hours worked by the retiree may not exceed 960 hours in a fiscal year. 

The Circular Letter indicates that AB 1028 amended sections 21224 and 21229 “to include the word ‘temporary’ to clarify that these sections apply to retirees employed as temporary ‘extra help’ appointments – during an emergency to prevent stoppage of business or to perform work of limited duration…”  The examples CalPERS gives for “extra help” appointments are “elimination of backlog, special projects, work in excess of what permanent employees can do, etc.” 

However, and most importantly, CalPERS stresses that “Retires should not be appointed to vacant permanent part-time, permanent intermittent, or permanent full-time positions, even if the hours worked will not exceed 960 hours per fiscal year…”  If agencies are employing CalPERS retirees in these vacant permanent positions, even if keeping hours worked below 960 in a fiscal year, the retirees “will be subject to mandatory reinstatement from retirement.” 

The Circular Letter also states that retirees are not limited to working during only one fiscal year.  It does not, however, state how long the retiree may work.  Presumably, if the “extra help” project that the retiree is appointed to work on extends over multiple fiscal years, CalPERS will not object.  What remains unclear is at what point the temporary “extra help” appointment appears to be a permanent assignment.  Given that the Circular Letter states that the retiree may not be appointed to a permanent vacancy, there should never be a situation requiring that analysis.  Nonetheless, public agencies will need to carefully monitor “extra help” appointments that span several fiscal years to ensure that the retiree is not in reality simply filling a vacancy of a permanent position and that the work remains within what CalPERS considers an extra help appointment.  This is in addition to monitoring the number of hours worked each fiscal year. 

AB 1028 further adds the word “specialized” to clarify that retirees hired as temporary extra help under sections 21224 and 21229 must have “specialized skills” required to perform the job. CalPERS states that the employer generally determines what specialized skills are required.  Presumably, any reasonable claim that a retiree has the requisite specialized skills will suffice.  

Employers are reminded that where a retiree works for more than one CalPERS employer during a fiscal year, the total hours worked for all CalPERS employers are included within the 960 hours-per-fiscal-year maximum.  The retiree’s rate of pay (as set forth on the published, publicly available pay schedule) must be comparable to that paid to other employees performing comparable duties. 

AB 1028 and the CalPERS Circular Letter serve to clarify and impress upon CalPERS employers and retirees alike that the general rule is that post-retirement employment for a CalPERS employer is not permitted without reinstatement to the system.  In order for a CalPERS retiree to work for a CalPERS employer, the employment or work must squarely fit within a statutory exception.  It is anticipated that with AB 1028 and this Circular Letter, CalPERS will be cracking down on retirees and employers who are abusing the statutory exceptions to post-retirement employment, particularly now with the recent requirement that employers report hours worked by CalPERS retirees.

You Say "Termination;" I Say, "Retirement." Is It Just Semantics Or Are They Mutually Exclusive?

Posted by Frances Rogers on January 10, 2012

Employee-Termination.jpgFor every death certificate filed, there is one “manner” and one or more “cause(s)” of  death.  The manner is essentially whether it was accidental, natural, suicide, homicide or undetermined, but there can be only one.  The cause, though, is more specific, such as exsanguination or a cardiopulmonary embolism and often times there is more than one.

This is similar to the end of an employment relationship.  The end of an employment relationship can essentially be broken down into one of three “manners”: termination, resignation, or death.  However, there can be numerous causes and several may contribute, such as failure to pass probation, misconduct, finding another job, boredom, sickness, and even…retirement.

In 2011, there were no less than three published decisions about whether “retirement” can be the manner, if you will, for the end of the employment relationship.  What I learned from these three cases, in my opinion, is that “retirement” is like a cause, but not necessarily a manner for which the employment relationship ends.

In Service Employees International Union, Local 1021 v. San Joaquin County, an employee terminated for misconduct requested an appeal.  Pending the appeal hearing, the employee applied for a service retirement from the County retirement association.  The Court held the employee’s service retirement did not waive the employee’s right to be heard on the appeal of his termination.  “It was his termination by the County that separated him from employment so that he became eligible to collect retirement benefits.”

In Hall-Villareal v. City of Fresno, after an employee was terminated for misconduct, she applied for service retirement from the City’s pension trust.  She then filed an appeal of her termination with the City’s civil service commission. The court held the employee’s receipt of a service retirement did not divest the commission of jurisdiction to hear her appeal under the City charter and municipal code.  The employment was severed by a termination, not by the service retirement.

In Riverside Sheriffs’ Assoc. (Sanchez) v. County of Riverside,  a public safety officer was placed on involuntary unpaid leave because the County found that she was unable to perform the essential functions of her job with or without reasonable accommodation. The officer disagreed. The County applied for disability retirement with CalPERS and later approved the retirement over the objections of the officer. The officer requested an appeal hearing under the terms of the MOU which the County denied. The Court held that the officer was entitled to an appeal hearing both under the MOU and the Public Safety Officers Procedural Bill of Rights Act (“POBRA”) for the County’s “disciplinary actions” in denying the officer “wages and other benefits of her employment” when it forcibly placed her on unpaid leave. 

These 2011 cases build upon previous cases including:

County of Los Angeles Dept. of Health Services v. Civil Service Commission (2009):  An employee’s service retirement after a termination for cause has no “transformative effect” on the discharge to the extent that, if the discharge was unlawful, the employee’s retirement does not cure any unlawfulness.

Riverside Sheriffs’ Association v. County of Riverside (2009):    When an employer terminates a local safety officer for physical or mental unfitness for duty before the employer applies for and approves a disability retirement from CalPERS, the officer remains entitled to appeal the termination under the employer’s rules unless or until there is a final determination upholding the involuntary disability retirement under the Public Employees’ Retirement Law (“PERL”).

Zuniga v. Los Angeles County Civil Service Commn. (2006):  A voluntary service retirement by the employee during employment is akin to a “resignation.”

With these cases in mind, here are some thoughts on what we can glean from the cases mentioned above:

  • If an employee voluntarily takes a service retirement or disability retirement, the employee has essentially resigned. Make it clear to the employee that the employer “accepts” the resignation and that if the employee decides he or she wants to come back, the agency does not necessarily have to take the employee back.   Employers with a ’37 Act system, however, are cautioned about Government Code section 31725 which provides that an employee who applies for disability retirement, but whose application is denied by the county retirement board, is entitled to reinstatement. 
  • If any employee facing termination for cause before receiving a final notice of termination files for a service or disability retirement, the employer should complete the termination proceedings, including noticing the employee of the right to appeal the decision.  If you do not, institutional memory may fade and you would not want that employee rehired years later because newer management had no record of a termination. In addition, in cases of disability retirement, a termination for cause can sometimes cut off the employee’s right to a disability retirement in certain circumstances.
  • If the sole reason for an employee’s separation from employment is because the employee qualifies for a disability retirement (i.e. the employee is substantially incapacitated from performing the essential functions of the job with or without a reasonable accommodation for a permanent or extended and uncertain duration), the employer should not separate the employee from employment until the effective date of the employee’s disability retirement.  
  • If the employee is involuntarily retired for disability, which can occur with local safety members in a CalPERS agency, the employee has the right to appeal the employer’s decision pursuant to the appeal procedures under PERL and may have a right to appeal the separation from employment under the employer’s rules.  Agencies should carefully evaluate the circumstances and consult legal counsel before committing to a course of action in these cases.

The quagmire is perhaps a little less murky now, but employers should tread cautiously where the end of an employment relationship closely precedes or follows a retirement.

With AB 1028, The Legislature Clarifies The Limits On Post-Retirement Work Opportunities For PERS Retirees

Posted by Guest Author on December 12, 2011

This guest post was authored by Steve Berliner

 

As of January 1, 2012, PERS retirees will have additional restrictions on their ability to work for PERS agencies.  While AB 1028 affects several different Government Code sections, it is garnering the greatest attention for its changes to Government Code sections 21221(h) and 21224; the two statutes that address post-retirement work opportunities and restrictions for PERS service retirees with PERS agencies.

There is no doubt that AB 1028's changes in this area are important and must be followed, but they do not mark any monumental shift in philosophy.  In fact, they are more a clarification of the current law rather than a drastic change in the law.

Government Code section 21221(h) is the section used when the retiree is to be appointed by the agency's governing body.  It currently allows PERS retirees to be appointed for a limited duration to a position deemed by that governing body as requiring specialized skills or during an emergency to prevent stoppage of public business.  A retiree can be appointed for a term not to exceed one year, AND may not work more than 960 hours in a fiscal year (July 1- June 30).  There is an ability to exceed 960 hours in a fiscal year if a request is made to PERS before the 960 hour limit is exceeded and PERS does not deny the request.  There is no mechanism to request that the one year term be exceeded.  Section 21221(h) has generally been used to fill high level vacancies for positions that are appointed by the governing body, such as City Manager, Police Chief, Fire Chief, etc., with a retiree who is willing to work for a short period of time.  This arrangement helps the agency fill that position while a permanent replacement is sought.  However, section 21221(h) has not always been used solely for this purpose and the current statutory language does not explicitly limit it to that arrangement.

AB1028 simply takes the standard scenario described above and makes it the sole basis for post-retirement employment under the statute.  Moreover, if there was any question about whether the one year limitation on post-retirement employment could be circumvented by simply reappointing the retiree to another one year term, AB 1028 explicitly prohibits subsequent appointments.  Lastly, AB 1028 limits the retiree's compensation to the maximum published pay schedule for the vacant position. 

Changes to Government code section 21224 are even more modest.  This section does not require appointment by the governing body, but it does require appointments be for a limited term.  Currently, these appointments implicitly required specialized skills for the post-retirement appointment to be lawful.  That implication was derived from the heading of the section, although the plain language of the actual statute did not contain this requirement, only requiring the work to be in an emergency or because the retiree had needed "skills."  AB 1028 adds the special skills requirement in the actual statutory language.  It also reinforces the limited term restriction by added that the appointments shall be temporary.  It made no other changes to that statute.

AB 1028 does not affect any of the other limitations on post-retirement work, such as those applicable to retirees who retired before reaching normal retirement age or the limitations applicable to retirees who recently received unemployment insurance.

Pandora's Box Opens - California Supreme Court Rules Vested Health Benefit Rights For Retired County Employees Can Be Implied

Posted by Guest Author on December 01, 2011

This guest post was authored by Judith Islas

Pandora's box

The California Supreme Court recently opened the door to a new way employees and retirees can sue local public agencies.  The Court held that employees and retirees may have implied contractual rights.  Retired county employees may even have an implied contractual right to vested health benefits, although there is no ordinance, resolution or MOU expressly providing that right.

For years, Orange County combined active and retired employees into a single pool to calculate health insurance premiums.  Retirees benefitted from paying less than if they were pooled separately; however, active employees subsidized retirees by paying more. In 2007, the County split the pool, resulting in increased retiree premiums.

The retirees sued to stop the County from splitting the pool. There was no MOU, resolution or ordinance requiring combined pooling, so in the absence of an express requirement, the retirees claimed there was an implied contract requiring shared pooling.

The County argued the retirees could not sue based on an implied contract theory because public employment rights are created by state laws, local ordinances and resolutions, and not by contract. The Supreme Court disagreed, ruling that public employment can be governed both by laws and contracts, as long as any contracts are not inconsistent with the applicable laws or local legislative enactments.  The Court noted various laws authorizing local agencies to enter into employment based contracts, thereby allowing employee rights to be based on both statutory and contractual obligations.

The Court ruled a contract creating employment rights can be express-- based on words-- or implied-- based on conduct, including conduct reflecting the parties’ intent.  This means a county and its employees may form implied in fact contracts, including one creating vested retiree health benefit rights.  Thankfully, the standard for proving an implied contract is high and can only be established by showing that a right is clearly implied by a County ordinance or resolution or there is other convincing evidence of an implied contract.   Further litigation will determine whether the retirees in this case can prove existence of an implied contract to provide a vested right to a unified pool for health premiums.

CAUTION: The Court’s reasoning in Retired Employees Association of Orange Co. v. County of Orange can be used by county and other local agency retirees and employees to claim they have various implied contractual rights. In a time of economic turmoil, local agencies will want to act cautiously to avoid creating unanticipated and unwanted implied contractual obligations that may create unfunded and unanticipated liabilities.

Some TIPS to protect against implied contract claims are:

  • Clear language in MOUs, ordinances and resolutions, as implied contracts cannot be established if they contradict express language
  • Language in MOUs, ordinances and resolutions that expressly denies the creation of or intent to create any benefits or rights not expressly stated in writing
  • Be sure to comply with all applicable MOUs, ordinances, and resolutions
  • Do not provide benefits and rights not set forth in MOUs, ordinances or resolutions
  • Carefully review newsletters, pamphlets and other written communications to monitor for unintended statements, representations or promises that could be used to support an implied contract claim 

 

Photo Courtesy of Creative Commons by Christiaan Botha

New CalPERS Reporting System Launches September 19th; Employers Must Ensure Legal PERS Practices Now To Avoid Possible Audits

Posted by Frances Rogers on September 16, 2011

This post was co-authored by Steve Berliner

By now every local agency that contracts with CalPERS is aware of the launch of the new reporting software known as My|CalPERS which will replace the former software, ACES.  My|CalPERS is set to go live with local contracting agencies on September 19, 2011.  While agency payroll staff are gaining technical training from CalPERS, agency administrators should take the time now to understand the impact and changes that will come with the My|CalPERS reporting system.

The My|CalPERS system is not only intended to be a more user-friendly and versatile reporting format, but it will also provide more information to CalPERS than was previously reported on the current reporting format.  What this means for local contracting agencies is that it may now be easier for CalPERS to identify agencies who are out of compliance with the Public Employees’ Retirement Law (PERL) and its implementing regulations.

Some of reporting changes that will come with My|CalPERS include the following:

  • Reporting hours worked by PERS retirees.  Any employee of your agency who is also a PERS retired annuitant will be registered in My|CalPERS as any other new employee.  Agencies will be required to regularly report hours worked by retired annuitants.  When a retired annuitant nears 960 hours in the fiscal year, CalPERS is supposed to notify the agency.  However, most retired annuitants may only be appointed to a position of “limited duration,” and in many instances, that appointment may not exceed 12 months.  This new reporting format may allow CalPERS to more easily identify retired annuitants who illegally work beyond this limitation.
  • Identifying employment position rather than simply coverage group.  My|CalPERS will now require employers to identify the job into which the employee has been hired.  Previously, employers simply identified employees by coverage group (e.g. “local safety,” “local miscellaneous”).  The new system will provide employers with “Appointment IDs” for employees at the time of enrollment based on the employee’s position with the employer.  This might allow CalPERS to more easily identify employees who are in the wrong membership classification, such as an employee who should be in the local safety classification, rather than local miscellaneous.  It may also enable CalPERS to identify employers who are not complying with the new PERS regulations pertaining to payrate and special compensation.
  •  Reporting special compensation category and type.  When reporting special compensation, CalPERS will now require employers to identify the category of special compensation (e.g. incentive, educational, premium, or special assignment pay, or statutory items), as well as special compensation type (the type of compensation within a category such as paramedic pay, longevity pay, patrol premium, etc.).  This is not required under the current reporting system.  Sometimes employers may mistakenly believe an item of pay is special compensation and report it as such.  The new reporting system may make it easier for CalPERS to identify pay inappropriately reported as special compensation, when it in fact is not considered as such under the PERS regulations.
  •  Distinction is made between member contributions and employer contributions.  Under the current reporting system, there is not a clear distinction made between member paid contributions and employer paid contributions.  My|CalPERS will provide new fields allowing for distinguishing between pre-tax and after-tax contributions or deductions paid by the member, as well as pre-tax contribution amounts paid by the employer.  This may allow CalPERS to more easily identify Employer Paid Member Contributions (“EPMC”) that are not consistent with PERL.
  • Coming Soon: Reporting non-CalPERS member data.  Employers will not be required to report non-member data when My|CalPERS first launches on September 19th.  However, after the initial launch, PERS will begin to define requirements for collection of non-member data (e.g. part-time, seasonal, temporary, or intermittent employees, or independent contractors).  When this eventually happens, this will make it easier for CalPERS to identify employees who should by members of PERS, but whom employers have inappropriately excluded from enrollment.  It may also make it easier for CalPERS to identify independent contractors working for an agency who should be considered “common law employees,” and therefore, also members of CalPERS.

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CalPERS Issues New Regulations Defining Compensation For Retirement Benefit Purpose

Posted by Frances Rogers on August 24, 2011

On August 19, 2011, CalPERS adopted a new regulation and amended an existing regulation to further define those items of compensation which will be included in a member’s “compensation earnable” for purposes of determining the member’s retirement allowance.

Compensation earnable is made up of payrate and special compensation.  These regulations affect both.  Title 2 of the California Code of Regulations, section 570.5 was added providing that for purposes of determining “compensation earnable,” a member’s payrate will be limited to the amount listed on a pay schedule that meets all of the following requirements:

  1. Has been duly approved and adopted by the employer’s governing body pursuant to public meeting laws;
  2. Identifies the position title for every employee position;
  3. Shows the payrate for each identified position, which may be stated as a single amount or as multiple amounts within a range;
  4. Indicates the time base, including, but not limited to, whether the time base is hourly, daily, bi-weekly, monthly, by-monthly, or annually;
  5. Is posted at the office of the employer or immediately accessible and available for public review from the employer during normal business hours or posted on the employer’s internet website;
  6. Indicates an effective date and date of any revisions;
  7. Is retained by the employer and available for public inspection for not less than five years; and
  8. Does not reference another document in lieu of disclosing the payrate.   

This new regulation clarifies existing law which limited payrate to amounts set forth on a publicly availably pay schedule, but provided little guidance as to what the schedule was to include.

If an employer fails to meet these requirements with regard to “payrate,” CalPERS may, in its sole discretion, determine an amount that will be considered the member’s payrate, taking into consideration all information it deems relevant including, but not limited to: documents that were approved by an employer’s governing board in conformance to public meeting laws, as well as the last payrate of the member listed on a pay schedule that conforms to the requirements above for the current employer, current position, or former CalPERS employer, or the last payrate for the position with the current employer.

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California Supreme Court Denies Review Of Court's Decision That Orange County's Retroactive Retirement Formula Enhancement Is Not Unconstitutional

Posted by Frances Rogers on April 14, 2011

Yesterday, the California Supreme Court denied the County of Orange’s petition to review the decision in County of Orange v. Association of Orange County Deputy Sheriffs (2011) 192 Cal.App.4th 21.  This means the Court of Appeal’s decision stands holding that the County’s grant of a retroactive enhanced retirement formula for employees “all years of service” is not an unconstitutional gift of extra compensation or a violation of the municipal debt limitation.

Retirement2.pngThe County maintains a retirement pension system pursuant to the County Employees Retirement Law of 1937 (’37 Act).  For many years prior to 2001, the County’s peace officers held a retirement formula of 2% at 50.  On December 4, 2001, the County’s Board of Supervisors approved a tentative MOU which provided an enhanced retirement formula of 3% at 50, which would apply to “all years of service,” including those years served by the bargaining unit employees before the date of the Board’s resolution and before the County and the union’s MOU.  The Board approved and renewed the enhanced formula in subsequent MOUs in 2003, 2005 and 2007.

In 2008, after an actuarial analysis concluded that the past service portion of the increased retirement benefit totaled $187 million, the County passed a resolution stating that the enhanced formula’s application to service performed before the County approved of the increased benefit formula was unconstitutional.  The County then filed a lawsuit in superior court alleging that the retroactive benefit formula violated the California Constitution’s municipal debt limitation in Article XVI, Section 18, and the prohibition of payment of extra compensation to public employees in Article XI, Section 10, and sought to enjoin the County Retirement Board from paying out any benefit increases for service rendered before June 28, 2002.  The case eventually found its way to the California Court of Appeal.

Article XVI, Section 18 of the California Constitution generally provides that a city or county may not incur an indebtedness against its general funds beyond the year’s income without first obtaining the consent of two-thirds of the electorate.  Article XI, Section 10 provides that a local government body may not grant extra compensation or allowance to a public officer, employee, or contractor after service has been rendered or a contract has been entered into and performed in whole or in part.

The Court of Appeal held that the unfunded actuarial accrued liability(UAAL) did not represent a present debt that was immediately payable by the County.  As such, it did not unconstitutionally violate the municipal debt limitation.  The Court also held that the increased benefit formula, as applied to past service, did not offend the California Constitution because the ’37 Act specifically authorizes past service pension benefit increases where a Board of Supervisors, by resolution, makes a benefit formula calculation applicable to service credits earned on and after the date specified in the resolution, which may be earlier than the date the resolution is passed.

The Supreme Court’s decision was disappointing for many local agencies that seek to contain pension costs.  Agencies should carefully consider any agreement to increase or enhance pension benefits for their employees and should perform actuarial studies of any enhancement before agreeing to any enhancement.

Employment After PERS Retirement: What Are The Limits?

Posted by Jeffrey C. Freedman on January 11, 2011

Retirement-LCW.jpgA local agency employee retires and begins receiving a pension from the California Public Employees Retirement System (PERS) and is then offered part-time employment with the old employer because economically motivated layoffs had left the old department short-handed.  What obstacles and limitations do the agency and the retired employee face in this situation?

The PERS statutes contain an entire chapter on employment after retirement (beginning at Government Code section 21220.)  There are two specific provisions in that chapter which relate to this subject.  One of those (section 21221(g) and (h)) deals with employees brought back by a City Council, Board of Supervisors or other governing body.  These are positions which report directly to the governing body such as a City Manager.  The second provision (section 21224) applies to those positions appointed by an “appointing power” such as a City Manager, Executive Director or Superintendent. 

While these provisions have a great deal of similarity, there are a few significant differences.  Both allow retirees to return to work on a basis limited to 960 hours in a fiscal year.  The most significant difference between these two provisions is the permissible duration of the appointment.  For those appointments made by the governing body (section 21221) the appointment may not exceed one year unless specific permission for an additional year is granted by PERS.  Section 21224 does not have the specific one year limitation but only allows the appointment if the retiree has special skills or is needed in an emergency.  However, the appointment is allowed only for “a limited duration.”  Neither PERS nor any court has defined the term “limited duration” as it appears in section 21224.  However, caution would dictate that “limited duration” is not a synonym for “indefinitely.”  We have advised agencies that these appointments should be limited to one fiscal year or, if the agency can establish a specific need for extending the retiree’s services two years. 

Employment beyond the maximum limits set in the Government Code can have consequences.  Both the retiree and the employing agency can be required to repay PERS for any excess amount of pension benefits received while the retiree was reemployed.  In a worst case scenario, PERS could declare the retirement null and void and cancel the individual’s pension checks.  See Government Code section 21220.

We understand that some agency representatives have telephoned PERS staff to obtain oral opinions on questions such as these and some have received oral advice at variance with the views set forth above.  Our experience is that PERS will not necessarily stand behind oral opinions given by staff members.  PERS has been known to change its view on issues of statutory construction and will only recognize and follow interpretations set forth by courts, PERS regulations or its own interpretative bulletins.  In our view, any agency that relies on oral advice received from PERS staffers by phone does so at its own peril. 

We also suspect that employment of retirees beyond the limits set forth in the Code has often escaped detection.  An agency that relies upon a suspicion that PERS will not detect excessive employment of retirees also acts at its own peril.  PERS can require, and has required, both retirees and agencies to repay money.  There are a number of ways that PERS can be alerted to potential violations of the Code.  PERS conducts random audits of agencies and also receives “tip-offs” by phone calls from members of the public and newspapers.

We recommend that all PERS contractor agencies who employ PERS retirees examine their practices to ensure that they are not risking liability for exceeding the limits set forth in the Government Code on employment after retirement.