Pension Reform Legislation Analysis By John Lovell

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1 Pension Reform Legislation Analysis By John Lovell AB 340 was enacted by the Legislature at warp speed last week. The text of the Legislation was unveiled on Tuesday evening, August 28, adopted by the Legislative Conference Committee two hours later with no public testimony and passed the floor of the Legislature on Friday, August 31. The bill is long and complex (spanning 59 pages), needed more public vetting than it received and is still in the throes of analysis by stakeholders and policy makers. PERS, which has been an excellent source of information, is itself continuing to revise its analytical take on the bill. The purpose of this document is to give you the best current information we have on AB 340. Since many of you have raised questions about elements of the bill, we will attempt to incorporate answers where we have them to those questions. WHAT PENSION SYSTEMS ARE COVERED BY AB 340? AB 340 is intended to apply to all statutorily created pension systems, including PERS and 1937 Act retirement systems. Government Code Section (a)(1)of the bill outlines the scope of the bill as applying to all state and local public retirement systems and to their participating employers, including the Public Employees Retirement System... county and district retirement systems created pursuant to the County Employees Retirement Law of 1937, independent public retirement systems, and to individual retirement plans offered by public employers. From a practical sense, virtually every police agency, sheriff s department, district attorney, and probation department are subject to the provisions of AB 340. WHAT ABOUT CHARTER CITIES AND CHARTER COUNTIES, AREN T THEY ALL EXEMPT FROM AB 340? No, the only Charter cities or Charter counties that are exempt from AB 340 are those who do not participate in a statutorily enacted retirement plan. A Charter city or county that is not participating in a statutorily enacted retirement is not subject to AB 340. The relevant section of the bill is Government Code Section (a)(2). For the record, the following charter cities, each having their own local retirement systems are not covered by AB 340: Fresno, Los Angeles, San Diego, San Francisco (a charter city and county), San Jose and San Luis Obispo. All other Charter cities and counties are under the rubric of AB 340. DO THE CHANGES IN THE BILL APPLY TO EXISTING EMPLOYEES AS WELL AS NEW EMPLOYEES? Some changes apply to existing employees as well as new employees. Most of the changes in the bill apply to new employees or new members. A new member is defined in Government Code (f) of the bill as being (a) An individual who has never been a member of any public retirement system prior to January 1, 2013; (b) an individual who has moved between retirement systems and was not subject to reciprocity, as specified; or (c) an individual who has moved between public employers within a retirement system after a break in service that is greater than six months as specified. A change in employment

2 between state entities or from one school employer to another is not considered as service with a new employer. Anyone falling outside of this definition is an existing employee. In other words, if your agency hires an entry level recruit after January 1, 2013, but that recruit has been in a public retirement system within six months of being hired, they would be treated as an existing employee. WHAT ARE THE KEY CHANGES MADE BY THE BILL? 1. A CAP ON PENSIONABLE COMPENSATION (THIS CHANGE APPLIES ONLY TO NEW EMPLOYEES) AB 340 caps the pensionable compensation for new employees. This means that the amount of compensation that can be used to calculate a retirement benefit for a new employee is limited to $ 110,100 for those new employees who participate in Social Security and $ 132,120 for those who do not participate in Social Security. Government Code Section (c) addresses the cap. Under Government Code Section (d)(1) adjustments to the cap will be required annually based on changes to the Consumer Price Index (CPI). The Legislature is given the authority to modify the CPI prospectively based on Government Code Section (d)(2). The cap is a hard cap in the sense that local governments may not offer a defined benefit plan even one provided by the private sector on compensation in excess of the new cap. This prohibition is spelled out in Government Code (e). 2. A CHANGE IN THE CALCULATION OF RETIREMENT BENEFITS (THIS CHANGE APPLIES ONLY TO NEW EMPLOYEES) AB 340 limits the calculation of retirement benefits for new employees to regular recurring pay. Under Government Code (a) Pensionable compensation of a new member of any public retirement system means the normal monthly rate of pay or base pay of the member paid in cash to similarly situated members of the same group or class of employment for services rendered on a full-time basis during normal working hours, pursuant to publicly available pay schedules. Further, AB 340 again for new employees only enumerates a number of factors that cannot be included in pensionable compensation. Under Government Code (c) the following are specifically excluded from the category of pensionable compensation for new employees: (1) Any compensation determined by the board to have been paid to increase a member s retirement benefit under that system. (2) Compensation that had previously been provided in kind to the member by the employer or paid directly by the employer to a third party other than the retirement system for the benefit of the member and which was converted to and received by the member in the form of a cash payment. (3) Any one-time or ad hoc payments made to a member.

3 (4) Severance or any other payment that is granted or awarded to a member in connection with or in anticipation of a separation from employment, but is received by the member while employed. (5) Payments for unused vacation, annual leave, personal leave, sick leave, or compensatory time off, however denominated, whether paid in a lump sum or otherwise, regardless of when reported or paid. (6) Payments for additional services rendered outside of normal working hours, whether paid in a lump sum or otherwise. (7) Any employer-provided allowance, reimbursement, or payment, including, but not limited to, one made for housing, vehicle, or uniforms. (8) Compensation for most overtime work. (9) Employer contributions to deferred compensation or defined contribution plans. (10) Any bonus paid in addition to the pensionable compensation. (11) Any other form of compensation a public retirement board determines is inconsistent with the definition of pensionable compensation 12) Any other form of compensation a public retirement board determines should not be pensionable compensation. Finally, AB 340 provides that the final pension compensation for a new employee shall be based on the highest level of pensionable compensation over a period of 36 consecutive months. This limitation can be found in Government Code (a). There have been several questions from Chiefs as to whether these exclusions apply to existing employees. They do not. In other words an existing employee is not prohibited by AB 340 from either using accumulated sick time or vacation time to add to their total pensionable compensation where their employer has contracted with the employee to provide it. According to PERS, this is true even if the contract with the existing employees was entered into after January 1, Another question that has come up involves where a city pays the employees 9% PERS (for now) as the EPMC (Employer Paid Member Contribution) and in an employee s final year, the 9% is calculated as salary for purposes of determining final compensation, whether that is still possible for existing employees. In discussions with PERS, we have been informed that AB 340 does not impact the EPMC status of current employees, nor does it prohibit the use of that contribution in determining final compensation 3. PROHIBITION ON THE PURCHASE OF AIRTIME. (APPLIES TO EXISTING AND NEW EMPLOYEES) Government Code Section (a) will prohibit either existing or new employees from purchasing airtime. Section (b) permits purchase by existing employees, but only if the official application to purchase airtime is received by the public retirement system prior to January 1, 2013 and is then subsequently approved by the system. That approval itself can take place after January 1, Interestingly, PERS preliminary analysis of AB 340 commented editorially that eliminating [airtime] for existing members of the retirement system may be subject to legal challenge on the basis that it is an impairment of vested rights. This suggests the possible viability of a legal challenge to this provision as it relates to existing employees.

4 4. INCREASED RETIREMENT AGE FOR SAFETY EMPLOYEES (APPLIES TO NEW EMPLOYEES ONLY) Government Code Section raises the retirement age for new safety employees to 57. A new employee may retire at 50 provided they have worked for five years. They would retire at a reduced rate. 5. NEW MANDATORY RETIREMENT FORMULAS FOR SAFETY EMPLOYEES (APPLIES TO NEW EMPLOYEES ONLY) AB 340 creates, pursuant to Government Code Section , three retirement formulas for safety employees with a normal retirement age of 50 and a maximum benefit available at 57. The Basic Safety Plan formula is 2% at 57, and 1.426% at 50. The Safety Option Plan One formula is 2.5% at 57 with 2% at 50. The Safety Option Plan Two formula is 2.7% at 57 and 2% at 50. The city doesn t get to freely choose the plan they wish to use. Instead, they must adopt the formula that is closest to (or provides a lower benefit at 55) than the formula provided to employees in the same retirement classification offered by the city on December 31, EMPLOYEE CONTRIBUTIONS TO NORMAL COSTS OF BENEFITS (APPLIES TO EXISTING AND NEW EMPLOYEES, BUT IN DIFFERENT WAYS) Government Code Section provides that new employees must contribute at least 50% of the normal cost of benefits. The only exception to this requirement would be where a new employee was under the rubric of an existing memorandum of understanding which provided for a different contribution rate. In that case, they would contribute at the rate provided by the MOU until that MOU came up for renewal. Government Code Section (b) relates to existing employees. It provides that your city may require that existing employees pay 50% of the normal cost of benefits, provided that (for police officers) this contribution not exceed 12% of pay. The bill requires that the employer bargain in good faith with represented employees. Please note that Government Code Section (c) of the bill provides that the provisions of Subdivision (b) become operative on January 1, In other words, the ability of your city to require existing employees to pay 50% of normal costs does not become operative until January 1, There has been a great deal of discussion among Police Chiefs as to the level of contributions that could be required of both existing employees and new employees. For existing employees, the current contributions indentified in the PERS actuarial study for each city as normal costs, which do not include unfunded costs, are added together and then adjusted to a split, provided that no existing public safety officer pay more than 12% of pay. For cities who are part of the PERS system, normal costs are determined by PERS. Upon making that determination, PERS then informs the city of those normal costs. Cities can and do either through bargaining or resolution then determine how those normal costs will be divided. For example, in one city, the normal cost is 26%. Currently, that city pays 17% and the safety employee pays 9%. Under 50/50 cost sharing, the shared costs would be 13% each. Because there is a 12% cap, however, when the cost sharing provisions go into effect in 2018, the employee share for an existing employee would go up to only 12%.

5 New employees, hired after 1/1/13 however, are not protected by a cap. They would pay 50% of the normal costs (the city portion and the employee portion added together). In the above example with a 26% normal cost, a new employee would be paying 13%. The provisions for new employees go into effect on January 1, Several Police Chiefs have asked if the cost sharing means that the employee must continue to pay their share and one half of the city s cost as well. We have specifically asked for clarification from the Governor s Office, Legislative staff and from PERS. All are clear that this is not the case. Laura Enderton of PERS stated unambiguously that cost sharing contemplates the sharing of the entire cost of the normal benefit. In other words, an agency that had a 26% cost where the employee was currently paying 9% and the employer was paying 17% would, under cost sharing, result in a situation where the current employee was paying 12% and the employer was paying 14%. The suggestion that, under this scenario, the employee would pay 9% plus one-half of the employer s 17% is simply inaccurate. 7. RESTRICTIONS ON NEWLY RETIRED EMPLOYEES REQUIRING THAT THEY SIT OUT FOR 180 DAYS BEFORE WORKING AS RETIRED ANNUITANT (THIS PROVISION DOES NOT APPLY TO A PUBLIC SAFETY OFFICER) Although AB 340 has new provisions that require a newly retired employee to sit out for 180 days before working as a retired annuitant, Government Code Section (f)(4) specifically exempts retirees who are public safety officers from these provisions. Retired public safety officers may retire on Friday and return Monday as a retired annuitant. 8. FORFEITURE OF PENSION DUE TO A FELONY CONVICTION (APPLIES TO EXISTING AND NEW EMPLOYEES) Government Code Sections or provides that any existing or new employee would forfeit pension rights, as of the earliest date of the commission of the covered felony, and accrue no further benefits on the date of conviction. Covered felonies include any that involve accepting or giving, or offering of a bribe, embezzlement, extortion or theft of public money, perjury or conspiracy to commit any of these offenses arising out of their duties as a public employee, any felony arising out of the public employee s official duties, in pursuit of office or employment, or in connection with obtaining salary, disability retirement, service retirement or other benefits. Further, any felony committed within the scope of a public employee s official duties against or involving a child who the employee has contact with as a part of their official duties. 9. PROHIBITION OF RETROACTIVE RETIREMENT BENEFIT ENHANCEMENTS (APPLIES TO EXISTING AND NEW EMPLOYEES) Government Code prohibits retroactive retirement benefit enhancements. This prohibition from granting any retroactive retirement benefit enhancements applies to new or existing employees if the retroactive retirement benefit enhancement was adopted after January 1, Any enhancement enacted after January 1, 2013 shall only apply to service performed on or after the operative date of the enhancement. Section (d) provides that an increase in a retiree s annual cost of living adjustment (within statutory limits) is not considered a prohibited retroactive retirement benefit enhancement.

6 10. PROHIBITION ON PENSION HOLIDAYS (APPLIES TO ALL PUBLIC EMPLOYERS COVERED BY AB 340) Government Code Section (a) prohibits a public employer (whether done by the employer, or the employer and the employee) from contributing less than the normal cost rate of a defined benefit plan. AB 340 does permit the suspension of contribution under the circumstances where all of the following are true: (1) the plan is funded more than 120%; (2) the retirement system actuary determines that continued contributions could result in jeopardizing the plan s tax exempt status and (3) the board determines that receipt of additional contributions would conflict with its fiduciary responsibility set forth in Section 17 or Article 16 of the California Constitution. 11. RESTRICTIONS ON POST-RETIREMENT FULL-TIME EMPLOYMENT (APPLIES TO EXISTING AND NEW EMPLOYEES) Government Code Section (b) prohibits a retired employee from obtaining postretirement full-time employment in the same retirement agency. It does not prohibit fulltime employment in a different retirement agency. For example, a retired PERS employee could obtain post-retirement full-time employment from a non-pers retirement system (for example, a 1937 Act system) without reinstatement.