The California Public Employees’ Retirement System (“CalPERS”) has significantly increased the number of contracting agency audits to ensure that agencies’ practices are consistent with CalPERS’ interpretation of governing law.  At the same time, CalPERS has increased its vigilance in reviewing compensation reported for recent retirees.  Increasingly, CalPERS has contacted agencies regarding compliance with applicable CalPERS statutes and regulations either after an audit or when reviewing individual retiree pension benefits.  In many cases, the same language or reporting practices have been in place for years, or even decades.

If your agency or a specific agency retiree has been targeted for review, your agency may receive a communication from CalPERS stating that portions of your agency’s labor agreement are not in compliance with CalPERS statutes and regulations, and that changes or corrections need to be made or a recent retiree or group of employees’ benefits may be negatively impacted.  The communication may advise your agency to make the change, take it to the governing body, and provide CalPERS with proof of the change.

The request seems simple enough, but if your agency immediately makes the change, is it violating the agency’s obligations under applicable labor laws?

CalPERS administers the Public Employees’ Retirement Law (“PERL”).  The PERL, and applicable regulations, govern when a payment or item of compensation is reportable to CalPERS and included for the purposes of determining pension benefits for employees.  However, CalPERS does not have any responsibility or jurisdiction over labor relations laws.  As CalPERS’ responsibility is limited to interpreting and enforcing the PERL in this context, it may be unsympathetic to an agency’s competing obligation to negotiate with employee associations before making unilateral changes to compensation or benefits.

For most public employers, labor relations laws are under the jurisdiction of the Public Employment Relations Board (“PERB”).  The Meyers-Milias-Brown Act (“MMBA”), Educational Employment Relations Act (“EERA”), and other labor relations laws require employers to meet and confer with employees concerning wages, hours, and terms and conditions of employment.  Even where a decision is within the managerial prerogative or required by law, the employer may have to provide notice and an opportunity to bargain before implementing a decision that has foreseeable impacts on wages, hours, and working conditions within the scope of bargaining.  The agency’s obligations are overseen by PERB, not CalPERS.

CalPERS’ requests to make immediate changes or corrections may put the agency in a position where it is stuck between two different sets of statutory schemes, which are governed by separate administrative agencies with their own jurisdiction and administrative obligations.  The agency must navigate both statutory schemes simultaneously, without violating either.

In some situations, the changes requested by CalPERS will be relatively simple and can be easily corrected.  For example, if CalPERS informs the agency that its pay schedule has minor technical defects that need to be corrected, those issues can generally be remedied without involvement of employee associations.  However, in other circumstances, it can involve a change in benefits or benefits structure that may trigger an agency’s obligation to meet and confer with affected employee associations.  In other cases, where the agency believes CalPERS has made a mistake, it may be in the agency’s best interest to appeal CalPERS’ finding or request.

When presented with a conflict between what the applicable labor agreement states and what CalPERS states is required to make an item of compensation reportable under applicable CalPERS statutes and regulations, agencies should work with employee associations to reach a mutually beneficial agreement.  In many cases, it may work to the employee association’s advantage to agree to the change requested by CalPERS, as it will likely ensure that an item of compensation will continue to be included in pension benefits.  When discussing such changes with the employee association, the agency should also make the employee association aware that a failure to agree to the change or prolonged negotiations may lead CalPERS to exclude the item from pension benefits, which may ultimately lower employee pension benefits.  CalPERS has no obligation to allow the agency to negotiate before it takes administrative action, however.

In order to avoid inconsistent obligations between labor agreements and CalPERS regulations and statutes, agencies should avoid making express statements in labor agreements that payments or special compensation items will be reported to CalPERS.  Although it may be the intent of the parties to make the benefit reportable to CalPERS, agencies and employee associations are not free to determine what is and what is not special compensation when that agreement conflicts with CalPERS statutes or regulations.  Excluding express language on whether an item of compensation is reportable may help insulate the agency from claims that it breached the labor agreement or misled the employee association in negotiations.  It will also allow the agency greater flexibility if CalPERS questions whether the payment is reportable.

Agencies should also review and audit their labor agreements to ensure that their pay and reporting practices are in conformity with the Government Code and the California Code of Regulations.  A timely review and audit of labor agreements and CalPERS reporting practices will reduce the risk that CalPERS will challenge reported compensation in the future.  It will also reduce the time constraints to make the change.