California Public Employees Pension Reform Act of 2013 ( PEPRA ) FREQUENTLY ASKED QUESTIONS

Transcription

1 California Public Employees Pension Reform Act of 2013 ( PEPRA ) FREQUENTLY ASKED QUESTIONS Recent news about the enactment of new pension laws as a result of the California Public Employees Pension Reform Act (PEPRA), also known as AB 340, has generated increased attention and questions from our members. We have created this FAQ to help answer your questions and provide additional information on pending changes for current and new members. These are preliminary interpretations that may be revised as the law is implemented. NOTE: PEPRA is currently being analyzed by SDCERS and other retirement systems throughout California. SDCERS continues to refine its understanding of the implications of PEPRA and will consider additional information or further advice to SDCERS on the topic. Additionally, potentially unclear provisions of PEPRA may be subject to clean up legislation, which may change some of the information in these FAQs. These FAQs are intended to provide SDCERS Members with a general summary of AB 340. However, this is not a legal document nor a substitute for the law, and in the event of a conflict between the law and the information provided in these FAQs, the law will prevail. 1. Question: What is PEPRA? Answer: On September 12, 2012, the California Public Employees Pension Reform Act of 2013 (PEPRA), also known as Assembly Bill 340 or AB 340, was signed into law by Governor Jerry Brown. The bill will take effect January 1, 2013 and will impact SDCERS members who are either current employees, future employees or retirees from the San Diego Unified Port District (Port) or current employees, future employees or retirees from the San Diego County Regional Airport Authority (Airport). With the exception of the Working After Retirement provisions discussed below, the bill does not affect current employees, future employees or retirees of the City of San Diego (City). The measure includes a number of provisions intended to establish statewide uniformity in pension benefits provided to public employees who qualify as New Members under PEPRA. In addition, the measure changes some rules as to current public employees, such as its elimination of air time service credit purchases on or after January 1, 2013 and its felony forfeiture provisions. Finally, the measure places additional limits on retirees who seek to work during retirement for an employer in the same retirement system from which an individual is drawing a retirement allowance. 2. Question: When does PEPRA go into effect? Answer: January 1, Question: Why does the PEPRA apply to employees and retirees of the Port and Airport but does not apply to the employees and retirees of the City? 1

2 Answer: By its terms, PEPRA applies to all state and local public retirement systems and to their participating employers, except charter cities and charter counties that do not participate in a retirement system governed by state statute and the University of California ( UC ). Neither the Port nor the Airport qualify as entities that are exempt from PEPRA because the constitutional charter city authority recited in PEPRA extends only to those cities and their employees. The City has exercised its constitutional authority to create an exempt retirement plan on behalf of its own employees. However, the City s constitutional independence from state law does not extend to creating benefits for the employees of other entities, such as the Port and Airport. 4. Question: Which California public retirement systems are covered by PEPRA? Answer: All state and local public retirement systems and their participating employers (except exempted charter city or charter county systems for those city s or county s employees and UC), including the following: California Public Employees Retirement System (CalPERS); County Employees Retirement Law of 1937 (CERL); California State Teachers Retirement System (CalSTRS); Independent public retirement systems in California; and Individual retirement plans offered by public employers. 5. Question: What impact does PEPRA have on retirees of the Port and Airport? Answer: The only provision of PEPRA that is expected to impact retirees of the Port and Airport, as well as City, is the Working After Retirement provision discussed below. 6. Question: What impact does PEPRA have on current employees of the Port and Airport? Answer: In addition to the new Working After Retirement rules, the provisions of PEPRA that are expected to impact Port and Airport current employees are the following: Elimination of air time and, potentially, any purchase of nonqualified service other than FMLA leave or military leave under USERRA for all members Prohibition against retroactive benefits enhancements for all members Forfeiture upon felony conviction Health benefit vesting 7. Question: What impact does PEPRA have on future employees of the Port and Airport who are New Members as defined by PEPRA? Answer: In addition to the provisions noted above as to current retirees and current employees, which also apply to future employees of the Port and Airport, the following provisions of PEPRA apply to New Members : 2

3 Reduced benefit formulas (with one possible exception for Miscellaneous Members working for the Port) normal cost split and no offset (with one limitation) 3-year final compensation period Cap on Pensionable Compensation (except potentially for Miscellaneous Members working for the Port) New definition of Pensionable Compensation The impact of each of these provisions is discussed in more detail below. 8. Question: Do the new reduced benefit formulas in PEPRA impact all employees hired by the Port or Airport on or after January 1, 2013? Answer: No. The new benefit formulas apply only to New Members as defined by PEPRA. 9. Question: How does PEPRA define a New Member? Answer: A New Member is one who has either (1) never been a member of a public retirement system before January 1, 2013, or (2) who has previously been a member of a public retirement system but had a break in service of more than six months before becoming a member of the Port or Airport plans. Under PEPRA, a break in service would occur if an SDCERS deferred member who had been employed by the Port returned to active membership through employment by the Airport (or vice versa) more than six months after having left active service. A break in service is not expected to occur, however, if the SDCERS deferred member who had been employed by the Port returned to active membership through reemployment by the same employer (i.e., Port to Port, or Airport to Airport) more than six months after having left active service, so long as the individual s member contributions remained on deposit with SDCERS or were re-deposited with interest upon reemployment. 10. Question: What is the mandated new pension formula for non-safety New Members? Answer: The PEPRA formula for non-safety New Members is: 2% at age 62, with a minimum benefit of 1% at age 52 and a maximum benefit of 2.5% at age 67. No non-safety New Member may receive a retirement allowance under PEPRA prior to earning at least 5 years of service. This new formula will apply to non-safety New Members employed by the Airport Authority. SDCERS actuary is currently analyzing whether the existing formula for new Miscellaneous Members of the Port District has a lower normal cost than provided by the new PEPRA tier; if so, then the existing formula would remain in effect for non-safety 3

4 New Members of the Port District. Otherwise, the new formula will apply for non-safety New Members of the Port District as well. 11. Question: What is the mandated pension formula for safety New Members? Answer: The PEPRA formula for safety New Members employed by the Port District is 2.5% at age 55, with a minimum benefit of 2.0% at age 50 and a maximum benefit of 2.7% at 57. No safety New Member may retire at any age without at least five years of service. 12. Question: Is there a cap on pensionable compensation for New Members? If so, what is it? Answer: Yes, to the extent a PEPRA formula applies to a New Member (see discussion of Miscellaneous Members employed by the Port above), the pensionable compensation cap applies as well. Because both the Port and the Airport participate in Social Security, the cap on the amount of compensation that can be used to calculate defined retirement benefits for New Members is capped at 100% of the Social Security wage index limit ($110,000 as of January 1, 2012). The pensionable compensation cap is indexed to inflation based on the CPI for All Urban Consumers and adjustments will be effective annually each January 1 following the annual valuation. 13. Question: Is there a new cap on pensionable compensation for current Port or Airport employees or future employees who do not fit the definition of a New Member? Answer: No. 14. Question: Does PEPRA change the definition of pay items that may be included in retirement allowance calculations for New Members? Answer: Yes. The new term for such compensation under PEPRA is Pensionable Compensation. The definition of Pensionable Compensation (referred to as Base Compensation in the Port and Airport plan documents) is defined in PEPRA as 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. PEPRA also provides specifically that the following items may not be included in Pensionable Compensation: compensation provided in kind that was converted to and received by the member in cash; one-time payments made to a member; severance or separation payments; payments for unused leave even if cashed out during service; payments for services rendered outside of normal working hours; employer-provided allowances, reimbursements or payments including those for housing, vehicles or uniforms; overtime other than FLSA time for fire or law enforcement employees; 4

5 contributions to retirement plans; bonuses, unless they are part of base pay; compensation determined by the retirement board to have been paid to increase a member s retirement benefit and any other form of compensation that the board determines is inconsistent with PEPRA. SDCERS continues to analyze whether compensation that is currently included in Base Compensation for Port and Airport employees, in addition to mandatorily excluded allowances and leave cash-outs, must also be excluded from Pensionable Compensation. 15. Question: Does the change in the definition of Pensionable Compensation affect current Port and Airport employees or future employees who do not fit the definition of a New Member? Answer: No. 16. Question: What are the new cost-sharing rules for New Members? Answer: For all public employers and all New Members, 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; but the employer may not unilaterally impose an increase in the employee contribution above this statutory requirement. The normal pension cost is annually determined by the actuary and expressed as a percentage of payroll. PEPRA provides that if a New Member is hired into a group that is protected by an existing contract, including an existing Memorandum of Understanding ( MOU ), in effect on January 1, 2013 that provides for an offset or a lower employee contribution rate than 50% of normal cost, the mandatory cost-sharing provision does not apply to that New Member until that contract expires. But, any renewal, amendment or extension of that contract is subject to the 50% normal cost split with no offset. The current Port and Airport MOUs both include member offset provisions. The actuary will determine the 50% normal cost allocation between employee and employer to go into effect on January 1, 2013 as to New Members. However, the offset provisions of the applicable MOUs may continue to apply until those MOUs are extended or expire without extension. 17. Question: I am a current Port or Airport employee hired before January 1, Do the new cost-sharing rules mean that my contributions are going to increase to cover the full 50% of normal cost, without any offset, effective January 1, 2013? Answer: No. 5

6 18. Question: How does PEPRA impact the calculation of an employee s final compensation? And, who does this impact? Answer: When calculating a New Member s pension benefit, the final compensation period used to calculate the benefit must be at least three years, meaning the average of the highest three consecutive years of earnings. Existing employees who do not later become New Members are not affected. 19. Question: Does the PEPRA 3-year final compensation period requirement apply to current Port and Airport employees or future employees who are not New Members? Answer: No. 20. Question: What members are affected by the elimination of 5-year purchase of nonqualified service credit provision in PEPRA? Answer: Under both the Port and Airport plan documents, members who were hired before the dates set forth in those plans may purchase up to five years of nonqualified service credit, often referred to as air time ( NQSC ). However, PEPRA prohibits a retirement system from accepting applications for the purchase of NQSC by both current and future employees on or after January 1, Therefore, a current Port and Airport Member who was otherwise eligible to purchase the 5-Year NQSC will not be permitted to do so unless his or her formal application to purchase this service is received by SDCERS prior to January 1, But, upon timely receipt of an application, the Member can complete the purchase after January 1, 2013 pursuant to the provisions of the Port or Airport s plan and the SDCERS Board Rules; however, filing an application does not obligate the Member to enter into the purchase should the Member decide it is not in his or her best interest to do so. For more information on the requirements to complete a purchase of service, see the Purchase of Service Credit booklet on the Member Publications page online: Question: Does PEPRA eliminate purchases of service other than Air Time? Answer: While the legislative history of AB 340 indicates that the bill may have sought only to prohibits the purchase of air time, the statute s reference to all nonqualified service credit as defined in the Internal Revenue Code, if read expansively, potentially could eliminate the ability to purchase other service credit, such as uncompensated leaves of absence and probation periods, unless an application to purchase service credit is received by SDCERS prior to January 1, Members would still be eligible to purchase leaves of absence under FMLA and military leave covered by USERRA under federal law. SDCERS is continuing to analyze this topic and anticipates that this may be the subject of further legislative clarification. 22. Question: What is the Working after Retirement Provision and who does it impact? 6

7 Answer: PEPRA provides that any person receiving a pension from a public retirement system may not work for a public employer under the same retirement system without reinstatement from retirement, unless that individual is appointed by a public employer during an emergency to prevent work stoppage or because the retired person has specialized skills to perform work of limited duration. Such an individual is limited to 960 total hours of work for all employers in that retirement system during a consecutive 12 month period, and the rate of pay for the employment may not be less than the minimum, nor exceed the maximum, paid to other employees performing comparable duties, divided by for an hourly rate. This means that under PEPRA an SDCERS Member who has retired from any plan sponsor within the SDCERS Group Trust (City, the Port or Airport) must be reinstated into active membership as a result of working for the Port or Airport, unless one of the above exceptions applies. In addition, the Working After Retirement provision prohibits a retiree from returning to work for an employer in the same retirement system for a period of 180 days following the date of retirement, unless (1) the employer certifies in a public meeting (not consent calendar) that the appointment is necessary to fill a critically needed position before 180 days; or (2) the retiree is a public safety officer or firefighter; provided further that neither of these two exceptions apply if the retired person accepted a retirement incentive upon retirement. 23. Question: What are retroactive benefits enhancements and who do they impact? Answer: PEPRA prohibits an employer from adopting any benefit enhancement on or after January 1, 2013, for both current and future employees, that applies retroactively to service already rendered. If a member is reclassified from one membership classification to another offering a higher retirement formula, only future service earned after the operative date of the change may be credited at the higher retirement formula. 24. Question: What is the Forfeiture upon Felony Conviction and to whom does it apply? Answer: PEPRA replaces existing law applicable to elected officials with a new law impacting both public officials and employees, requiring an individual to forfeit pension and related benefits if he or she is convicted of a felony in carrying out official duties, in seeking an elected office or appointment, or in connection with obtaining salary or pension benefits. An individual convicted of such a felony would forfeit all of the retirement benefits earned from the earliest date of the commission of the felony. Employee contributions paid after that day will be returned without interest. This provision appears to apply to any Port or Airport employee who is convicted of a qualifying felony on or after January 1, 2013, though the crime may have been committed prior to that date. 7

8 25. Question: Does PEPRA affect any other benefits provided in the current Port or Airport plans such as death benefits, disability benefits or the COLAs? Answer: No. PEPRA does not address all aspects of the Port or Airport s plans such as death, or disability benefits or the right to cost of living adjustments. Benefits not addressed in PEPRA remain governed by the existing terms of the employer s plan documents or as modified in accordance with future applicable law. 26. Question: What is the health benefits vesting provision? Answer: The health benefits provision specifies that a public employer may not provide an elected or appointed employee, a trustee, or a manager any health benefit vesting schedule that is more advantageous than that provided to other represented public employees of the same public employer in related classifications. This applies specifically to the health benefit schedule, and not to the amount of the employer contribution for those benefits. As indicated above, this provision is not applicable to the City of San Diego. SDCERS does not manage health benefits for the Port or Airport. If you are a Port or Airport employee and have any questions relating to your health benefits, please contact your employer. 27. Question: Does PEPRA affect employer contributions? Answer: PEPRA affects employer contributions because it prohibits employers to whom it applies from paying more than 50% of the normal cost for New Members, unless, for a period of time, the terms of an existing contract that applies to the New Member requires otherwise. PEPRA also prohibits such an employer being relieved of its requirement to pay the employer normal cost of retirement benefits annually (i.e., receiving a so-called contribution holiday ), even if a retirement system is overfunded, unless the overfunding is 120% and other findings are made. 28. Question: I am a current Port or Airport employee. Aren t some of the provisions of PEPRA an unconstitutional violation of my vested rights? Will SDCERS implement PEPRA if they are? Answer: It is possible that a court could determine that some of the provisions of PEPRA that apply to some current Port and Airport employees are an unconstitutional violation of those individual s vested rights. However, an administrative agency such as SDCERS has no power to declare a statute unenforceable or to refuse to enforce a statute on the basis of it being unconstitutional unless and until a court of competent jurisdiction has made a final determination that the statute is unconstitutional or has ordered SDCERS not to implement the statute. Even if some provisions of PEPRA may ultimately be deemed to be unconstitutional, SDCERS must implement all provisions in the statute unless and until there is a judicial decision applicable to SDCERS that orders otherwise. 8