The California Public Employees’ Retirement System (“CalPERS”) substantially increased the number of public agency audits it conducted last year. As discussed in our previous post, the audit process can be long, complex, and time-consuming. An audit can also result in significant liability or administrative headache for an agency when its reporting practices and labor agreements are not in compliance with the Public Employees’ Retirement Law (“PERL”) and applicable regulations. It can also cause conflict between the agency and employee organizations regarding how to correct past mistakes and implement compliant policies and language.
As agencies gear up for negotiations on successor labor agreements, agencies can use this time to conduct an “internal audit” of their labor agreements and existing policies to ensure that they are in compliance with the PERL and other provisions of law. A proactive internal audit allows agencies to identify and correct any errors so that they can be addressed at the bargaining table, before the agency is locked into a labor agreement and confronted with an unlawful provision that needs to be corrected after-the-fact on a piecemeal basis. It can also correct errors before compliance agencies come knocking.
CalPERS recently issued Circular Letter No. 200-064-14, which discusses items of special compensation that are commonly misreported. In order to qualify as special compensation and be included in calculating pension benefits, payment must meet the definitions set forth in the PERL and applicable California Code of Regulations provisions. The Circular Letter identifies, among others, the following common reporting errors CalPERS discovered during its audits:
- Longevity Pay – Longevity pay should not have additional requirements other than length of service, or service in a particular class, for a minimum period exceeding five years. For example, where a longevity incentive is combined with educational or performance requirements, the additional requirements remove the payment from the definition of “longevity pay” and the item may be excluded by CalPERS.
- Uniform Allowances – Agencies must report the value of uniforms provided to employees, even if no specific payment is made directly to the employees. The value of the uniform should also be set forth in the labor agreement. Items solely for personal health or safety are not reportable. Moreover, uniform allowances are not reportable for “new members” subject to the Public Employees’ Pension Reform Act (“PEPRA”).
- Bonus – In order to qualify as a “bonus,” the bonus must be made to a group or class, awarded for superior performance or merit, and in accordance with a “program or system…to plan and identify performance goals and objectives.” Bonus pay is also not reportable for new members subject to PEPRA.
Agencies should conduct internal audits to determine whether any of their policies, labor agreements, or reporting practices contain the errors identified by CalPERS. For example, agencies should ensure that they are differentiating among “classic members” and “new members” in reporting certain items of special compensation. Agencies should also review whether their labor agreements are at odds with any other legal requirement, such as the Fair Labor Standards Act or the Affordable Care Act. Correcting these issues early on can save the agency time and money in the event of an external audit by a compliance agency.