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

This blog post was authored by Heather DeBlanc

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. 

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 guest post was authored by Heather DeBlanc.

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.

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This guest post was authored by Oliver Yee

In today’s challenging economic environment, public agency employers are looking to employ retirees for overflow work, special projects and other extra help assignments.  There are, however, important implications that agencies should be aware of when hiring retirees, particularly retirees who are members of the California Public Employees’ Retirement System (“PERS”).  A frequently asked question has arisen alongside this practice of hiring PERS retirees: are public agencies required to withhold taxes for Medicare and/or Social Security for PERS retirees?

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.

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.

Two pension reform ballot measures were overwhelmingly passed by voters in San Diego and San Jose last week.  Now, other cities, counties and districts in California that participate in CalPERS or STRS, or maintain a ’37 Act system are asking, “can we do the same thing?”  The short answer is, “no,” at least not at the local level.   The following is an abbreviated look at why the San Diego and San Jose measures will not directly impact other California public employers, but how other public employers may see some pension reform in the future at the State level.

The Difference Between San Diego/San Jose and Many Other Public Employers in California

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.

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.

This guest post was authored by Steve Berliner 

Assembly 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 “Retirees 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.

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.

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.

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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.

The 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.