Guidance From CalPERS Sheds Light On Understanding The Public Employees’ Pension Reform Act: Determining An Impairment Of A Memorandum Of Understanding And A “Break In Service” For Lateral Hires

By Guest Author on January 16, 2013

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.