Which public retirement systems are covered by the California Public Employees Pension Reform Act of 2013 (PEPRA)? (Government Code 7522.

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1 BRIEF FAQS REGARDING THE PROPOSED CALIFORNIA PUBLIC EMPLOYEES PENSION REFORM ACT OF 2013 by Janae H. Novotny, Esq. Burke, Williams & Sorensen, LLP After lengthy debate this afternoon, the Legislature approved AB 340, the California Public Employees' Pension Act of The following questions and answers address the major legislative changes that will impact public employers and employees. A companion bill, AB 197 was amended to fix two drafting errors discovered after AB 340 was printed, and the actual bill language of the last minute amendments is not yet available. In addition, there are details and nuances in the legislation that are not addressed in this broad overview and can be addressed with your agency's legal counsel. Which public retirement systems are covered by the California Public Employees Pension Reform Act of 2013 (PEPRA)? (Government Code (a)) All state and local public retirement systems and their participating employers, including: PERL; CERL of 1937; STRS; Independent public retirement systems; and Individual retirement plans offered by public employers. Does the PEPRA apply to charter counties or charter cities? (Government Code (a)(1) and (2)) The Pension Reform Act applies to a charter county to the extent that the county participates in a retirement system governed by state statute, i.e., PERL or CERL. Similarly, the Act applies to a charter city to the extent that the city participates in PERL. What is the mandated new pension formula for new miscellaneous employees? (Government Code ) 2% at 62 for all employees hired on or after January 1, 2013, in a miscellaneous/nonsafety position. Employees will retire at 67 to receive the maximum benefit. Janae H. Novotny Page 1

2 What is the mandated pension formula for new safety employees? (Government Code ) On and after January 1, 2013, the employer must offer to new safety hires one or more of the following safety formulas. The formula offered shall be the formula that is closest to, and provides a lower benefit at age 55, than the formula provided to members in the same safety retirement classification on December 12, 2012: Basic Safety Plan: 1.836% at 55 Safety Option Plan One: 2.357% at 55 Safety Option Plan Two: 2.5% at 55 If Option Plan One or Two apply, the employer and employees may negotiate and agree in a memorandum of understanding to a lower plan Option One or the Basic Safety Plan; however, the employer may not impose a lower plan. Safety employees will retire at age 57 to receive the maximum benefit. May an employer offer a supplemental defined benefit plan to existing employees after January 1, 2013? (Government Code ) If an employer offers a supplemental defined benefit plan before January 1, 2013, it may not offer a supplemental plan to any additional employee group that did not have the plan before January 1, If the employer does not offer a supplemental plan for existing employees before January 1, 2013, it shall not offer one to any employee group after January 1, May an employer offer a different pension formula to new management employees hired after January 1, 2013? (Government Code (f)(4) and (e)(1)) No. For both safety and non-safety classifications, an employer cannot provide non-represented, management, or supervisory employees with a different defined benefit plan than offered to other employees in the same pension membership classification. Has the definition of pensionable compensation changed for new employees? (Government Code ) Yes. The amount of compensation that can be used to calculate retirement benefits for new members under defined benefit plans is capped at the Social Security wage index limit ($110,000) for employees who participate in Social Security, or 120% of the limit ($132,120) for employees not covered by Social Security. The caps are adjusted annually based on the CPI for All Urban Consumers. Janae H. Novotny Page 2

3 The employer may make contributions to a defined contribution plan on compensation greater than the cap; employees do not have a vested right to continued employer contributions to a defined contribution plan. What time frames are available to calculate final compensation for new employees when they retire? (Government Code ) Only one three years. Final compensation is defined as the highest average annual compensation during a consecutive 36-month period. What are the new cost-sharing rules for new employees? (Government Code ) For all public employers and all new employees, the standard is that employees will pay at least 50% of normal pension costs, as defined, and employers shall not pay any part of the required employee contribution. Employee contributions may exceed 50% of the normal cost if the increase is collectively bargained; the employer may not unilaterally impose an increase in the employee contribution above the statutory requirement. The normal pension cost is annually determined by the actuary and expressed as a percentage of payroll. What are the cost-sharing rules under PERL? (Government Code and ) In addition to any existing authority to negotiate an increase in employee contributions, PERL employers may implement cost-sharing for current employees with or without also changing the existing pension benefits. For represented employees, an agreement to share the employer s contribution costs must be negotiated and included in a collective bargaining agreement that specifies the precise percentage of employee compensation that will be paid toward the current pension costs. The employees contributions in excess of their normal contributions are treated as normal contributions; the employer s remaining contributions are credited to the employer s account. When mutually agreed to through collective bargaining, employee cost-sharing may differ within pension employee classifications. Beginning January 1, 2018, employers may impose certain levels of cost-sharing after bargaining in good faith and exhausting any required impasse procedures. Specifically, employer may require employees to pay 50% of the normal cost of their pension benefits up to 8% of pay for local miscellaneous and school employees, no more than 12% of pay for local police officers, firefighters, and county peace officers, and not more than 11% of pay for all other local safety employees. Again, employees may pay a greater share of pension costs when mutually agreed to through collective bargaining. Janae H. Novotny Page 3

4 How has the definition of pensionable compensation changed? (Government Code ) The following changes apply to all public retirement systems: Pensionable compensation for new employees means normal monthly rate of pay or base pay paid to similarly situated members of the same group or class of employment for services performed on a full-time basis during normal working hours, pursuant to a publicly available pay schedule. Excluded from pensionable pay are the following: o Any compensation paid to increase an employee s retirement benefit; o Previously in-kind compensation converted to cash; o Any one-time or ad hoc payment; o Severance payments received while the employee is still employed; o Payments for unused vacation, annual leave, personal leave, sick leave, or compensatory time off; o Payments for additional services performed outside normal working hours; o Employer-provided payments/allowances for housing, vehicles, or uniforms; o Overtime pay, except as specified; o Employer contributions to deferred compensation or defined contribution plans; o Any bonus; and o Any other form of compensation that a public retirement board determines is inconsistent with the statutory definition or should not be pensionable compensation. Is the compensational earnable definition under CERL changed? (Government Code 31461(a)) Yes; proposed amendments to Government Code follow the changes described above and exclude the following from compensation earnable : Any compensation paid to enhance a retirement benefit, including: o Previously in-kind compensation converted to cash in the final average salary period, e.g., a car allowance when a county car was previously provided. Janae H. Novotny Page 4

5 o A one-time or ad hoc payment made to a member, but not all members in the same classification. o A termination payment received while the employee is still employed, except payments that do not exceed what is earned in each 12-month period during the final average salary period, regardless of when reported or paid. Payments for unused vacation, annual leave, personal leave, sick leave, or comp time off in an amount that exceeds the amount that may be earned in each 12-month period during the final average salary period, regardless of when reported or paid. Payments for additional services performed outside of normal working hours. Payments at the termination of employment, except payments that do not exceed what is earned in each 12-month period during the final average salary period, regardless of when reported or paid. What are the new CERL rules for current employees to share the cost of existing pension formulas? In addition to any existing authority under CERL to change the amount of member contributions, counties will have the following authorization: 1. Effective January 1, 2013 (Government Code 31631): 2. On and after January 1, 2018: Without a change of benefits, a board of supervisors may require that members pay all or part of the member s or employer s contributions or both. All of employee payments are designated as employee contributions. For represented employees, the employee payment requirement must be negotiated and approved in a memorandum of understanding. (Cannot be imposed after exhaustion of impasse procedures.) The employee payments must be the same either (1) for all members of a bargaining unit, or (2) within each of the following classifications: local miscellaneous, local police, local firefighters, county peace officers, and all local safety members other than local police, firefighters, and county peace officers. A board of supervisors may require that employees pay 50% of the normal cost of benefits, as defined, but no more than 14% above the applicable normal contribution rate for general members and no more than 33% above the normal contribution rate for local police officers, local firefighters, and county peace officers, and no more than 37% above the applicable normal rate of member contributions for all local safety members other than police officers, firefighters, and county peace officers. (The applicable normal rate of Janae H. Novotny Page 5

6 employee contribution means the statutorily authorized rate as of December 31, 2012.) Before implementing these changes for represented employees, the county must bargain in good faith through any impasse procedures, including mediation and fact-finding. (These increased employee contributions may be imposed after impasse procedures are exhausted.) This authorization for unilateral imposition does not apply to any bargaining unit when the bargaining unit members are already paying at least 50% of the normal cost of their pension benefit or to a bargaining unit that has negotiated employee payments under Option One. Other notable changes that impact employees and employers? Purchasing nonqualified service credit ( air time ) is prohibited, unless a formal application to purchase air time is received by the retirement system before January 1, 2013 and later approved. Pension holidays are prohibited. Retroactive pension benefit increases are prohibited for current and future employees. If you need more information, please call Janae Novotny at Janae H. Novotny Page 6