January 1, 2018, is just around the corner, and as of that date PERS contracting agencies, as well as employers in ‘37 Act county retirement systems, will for the first time have the legal ability to impose increases to the member contribution rate of their classic employees.

The Public Employee Pension Reform Act of 2013 (PEPRA) was intended to put the brakes on the increasing costs of pension systems.  This has not—at least as of now—eventuated; costs continue to rise, and the prognosis for the future is not good. Many local agencies are now paying almost fifty cents or more into the retirement system for every dollar of payroll, and the likelihood is that these numbers will continue to rise.

What can local agencies do? Are they obligated forever to sign blank checks to retirement systems?

Well, PERS contracting agencies will be able to utilize Government Code section 20516.5. The Government Code already provides that employers and employees both contribute to PERS. Employee member contribution rates are fixed by statute: for local safety members (police and fire) the rate is 9% of pay; for local miscellaneous employees, the rate is 7% of pay, or 8% if the employees are provided a more generous pension formula (e.g. 2.7% at age 55.)

PEPRA added section 20516.5 to the Government Code; it will allow an increase to member contribution rates as of January 1, 2018, without requiring agreement with the employee organizations.  This effectively shifts some of the normal cost from the employer to the member.  It can be imposed on classic members  in the absence of agreement but only after impasse and any mediation and fact finding.  However, the benefit of this new opportunity may be limited. An increase to the member contribution rate for classic miscellaneous employees cannot exceed 8% of pay. Since classic member contributions are already capped at 7% or 8%, this new provision gives agencies little or no room to increase employee support of the cost of their benefits.  (PEPRA new members are already required to pay by payroll deduction  50% of normal cost of their future benefit and are limited to a retirement formula of 2.7% at age 57 for safety and 2% at age 62 for miscellaneous members. As a result, section 20516.5 is not applicable to new members.)

The situation for police and fire safety employees allows greater sharing of normal costs. The maximum permitted for classic police and fire employees  under section 20516.5 is 12%. Since the statutory classic safety member contribution is already 9%, PEPRA will allow, starting January 1, an agency to impose, even without agreement, a significantly higher contribution to PERS by police and fire.  Any increase to member contribution rates under section 20516.5 will be credited to the member’s account.

The counterpart PEPRA provision added to the County Employees Retirement Law of 1937 is similar in intent but different in specifics. That provision, Government Code section 31631.5, also will allow an employer in a ’37 Act system to require employees to pay fifty percent of normal cost of benefits, but again, only after completion of the negotiations process and any impasse procedures including mediation and fact finding. And, similar to the PERS provision, imposing an increase to member contributions is capped. The maxima are set forth as percentages above the normal rates of contribution for different groups of employees. Thus, the maximum contribution cannot be more than 14% above the normal cost for general members, 33% for police and fire, and 37% for safety employees other than police and fire.

While the ability of an employer to impose an equal sharing of the normal cost of the benefit is capped, employers and employee organizations may still agree to cost share the employer’s contribution rate.  Under PERS, Government Code section 20516 has always permitted employers and employee organizations to agree that members will pay a portion of the employer’s contribution rate, but this additional cost sharing cannot be imposed.  For 1937 Act agencies, PEPRA added Government Code section 31631 which permits the employer and members to agree that members will pay any portion of the employer’s contributions, but again, this cannot be imposed.

Further changes in the retirement landscape could be on the horizon for 2018. The California State Association of Counties recently reported that the PERS Board of Administration is currently reviewing its investment strategy and could adopt a further reduction in its discount rate. PERS reduced the discount rate from 7.5 to 7% in December 2016, after determining that its expected rate of return on investments needed to be reduced. One option under consideration is a further reduction, potentially to as low as 6.5%. Any reduction of the discount rate by PERS is likely to result in further increases in the contribution percentage required of local agencies contracting with PERS. We will keep you advised of further developments as they occur. Stay tuned.