Steve Delaney, CEO, Orange County Employees Retirement System. Amy Potter, CFO, Transportation Corridor Agencies (TCA)

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1 DATE: July 7, 2016 TO: FROM: SUBJECT: Steve Delaney, CEO, Orange County Employees Retirement System Amy Potter, CFO, Transportation Corridor Agencies (TCA) TCA Excluded Workers Follow-up to June 22, 2016 Board Meeting At the Orange County Employees Retirement System Board Meeting on June 22, 2016, the Board of Retirement requested that TCA provide its own legal analysis of the TCA Excluded Workers item for review and consideration at the Board meeting on July 18, We have attached such memorandum (legal memo) prepared by Chang Ruthenberg & Long and have also included additional background information related to this item. As stated at the June 22 nd Board meeting and included in the attached legal memo, TCA conferred with OCERS staff regarding exclusion of these employees prior to employing them as temporary employees and specifically asked how long these employees could be considered temporary and whether their employment as such could extend beyond one year. OCERS staff told TCA that there was no specific time frame that determined whether an employee was temporary, and TCA relied, and continues to rely on this response in hiring these workers. As indicated in the legal memo, both Subsection c of section 1 of article I of the OCERS regulations and Government Code section 31527(e) contain no time limit on how long an employee can be classified as extra help or temporary, consistent with the response provided by OCERS staff. Also presented previously and included in our June 17, 2016 memo (attached) are certain facts related to the historical employment of these excluded workers by way of contracted services. These toll operations customer service and violation processing activities have been performed by an outside vendor for the entire history of TCA. The temporary project employees (excluded workers) were not TCA employees at all prior to the expiration of TCA s contract with 3M on June 30, 2015, and TCA s intent from the beginning, and remains, for them to serve as TCA s employees only during the limited period of time between the expiration of 3M s contract and the placement of a new third party vendor to take 3M s place as the employer of the workers performing their tasks. The procurement process for the new third party vendor is currently in process, including an extensive industry outreach process and consultant review as considered a best practice for a large, long-term, best qualified contract such as this, and the formal RFP will be issued in August The current employment arrangement is clearly intended to last for a limited time and is indeed temporary employment that should be excluded from inclusion in the OCERS system. thetollroads.com 125 Pacifica, Irvine, CA (949) Fax (949)

2 We recognize that the Board is considering modifying the OCERS Regulations to include a specified time period related to temporary employment, however this decision should be addressed independently and should not have bearing on the TCA situation since 1) the current Regulations and Statute do not specify a time period, and 2) TCA based its decision to employ these temporary employees based on the current law and direction from OCERS staff. It appears that the Board may not need to make a ruling on the TCA situation at all, since the Regulations and statute clearly allow for temporary employment, and it is not currently a matter that is reviewed by the Board for other member Agencies. If the Board does believe that it should make a determination as to whether TCA s temporary project employees should continue to be excluded from OCERS, it would be unfair to consider this case along with a change to the Regulations. Furthermore, as stated in the legal memo: The Board should determine that TCA's temporary project employees will continue to be excluded from OCERS as "extra-help" employees, pursuant to subsection c of section 1 of article I of the OCERS regulations, because: They are such "extra-help" employees as contemplated by this provision in view of the exigencies of the circumstances giving rise to them having to become TCA employees; They have been excluded from OCERS membership on this basis since they first became TCA employees, which step was taken after TCA conferred with OCERS about excluding them with no time limit on how long they could be excluded; Their status as such "extra-help" employees does not change by virtue of them having to remain TCA employees in view of the difficulties that TCA has encountered in the contracting process to again out-source these workers; and Neither the regulation that excludes such "extra-help" employees nor Government Code section 31527(e), which authorizes the Board to adopt such a regulation, contains any time limit on a worker remaining an "extra-help" employee (in fact, the regulations provide that the exclusion applies "regardless of number of hours worked").

3 June 17, 2016 Memo

4 DATE: June 17, 2016 TO: FROM: SUBJECT: Steve Delaney, CEO, Orange County Employees Retirement System Amy Potter, CFO, Transportation Corridor Agencies (TCA) TCA Excluded Workers Additional Background Information The purpose of this memorandum is to provide additional background regarding the procurement efforts that TCA has taken to select and transition to a new customer service and violation processing contractor. TCA has extensively used private contractors to operate and staff its customer service and violation processing operations since the Toll Roads were opened. The selection of a contractor is intricate as the relationships are long term, lasting in excess of 10 years, with millions of dollars in costs. The performance of the contractor translates to the experience of the 700,000 account holders and 300,000 daily users of the toll roads, providing a direct reflection on the agency. TCA estimates its new contract will be valued between $60-$90 million and wants to ensure it selects the right partner. The following timeline represents the procurement activities that have taken place: December 2014 Contractor (3M) indicated lack of desire to extend agreement January TCA issued a combined Request for Information (RFI) for Industry Review to solicit feedback from potential proposers on a long-term system and operations procurement. February TCA issued an RFP for combined interim operations to contract services during the procurement process. April TCA analyzed the industry feedback and determined that the Agency would be best served by a "best of class" procurement approach that splits various components of the contracted services into separate contracts resulting in better service and increased competition. April TCA cancels combined interim operations procurement and issues RFP for interim system support after it was determined that a combined interim contract would not be feasible and that it could jeopardize competition in the long-term contract procurements. June Interim System Support Contract was awarded with service to start on July 1 at termination of contract with 3M. This contract absorbed eight 3M employees. thetollroads.com 125 Pacifica, Irvine, CA (949) Fax (949)

5 June TCA and 3M informed 3M staff of 3M's decision and TCA's interim plan to hire the staff as temporary project employees until a new contractor is selected. TCA also began efforts to segregate scopes of work and procurement packages for best of class procurements. August TCA issued RFP for manual image review services and later awarded a contract. Delays were incurred and services will start July 1, This contract will eliminate 12 temporary project employees. September November TCA held multiple meetings with various product and services suppliers to get additional input regarding best of class procurements. January TCA awards contract for consultant support to finalize procurement strategies and documents. Working through contractual insurance provisions resulted in delay of execution of agreement and issuance of task order until May June 3, Consultant began work to review final documents, approach and provide strategic advice to TCA. Next steps are as follows: August TCA anticipates issuance of the RFP for Customer Service Operations. January/February TCA Awards Contract and notifies temporary project employees of termination date. March 2017 New contractor starts services. TCA has been diligent in its efforts to procure the replacement contracted services, however as indicated above, entering into long-term contracts that greatly affect the Agency and customers of the Toll Roads must be thought through carefully. We believe that the unanticipated delays in the procurement process have been addressed appropriately, and the original intent of employing the excluded workers on a temporary basis has not changed.

6 Legal Memo

7 MEMORANDUM To: From: Orange County Employees Retirement System Board Of Retirement Kenneth W. Ruthenberg, Jr. Jeffrey C. Chang Date: July 8, 2016 Re: Exclusion Of Transportation Corridor Agencies Temporary Project Employees Background On June 8, 2016, Steve Delaney, Chief Executive Officer of the Orange County Employees Retirement System (OCERS), and Jeff Rieger, Esq. of ReedSmith, presented the OCERS Board of Retirement (Board) with a memorandum regarding the continued exclusion of certain employees of Transportation Corridor Agencies (TCA). A copy of that memorandum is attached. The memorandum served as background for a discussion of the issue at the Board meeting on June 22, 2016 and for further consideration at the Board meeting on July 18, As a result of the discussion of the memorandum at the Board meeting on June 22, 2016, the Board requested that TCA provide its own legal analysis of the issue for the Board's consideration at the Board meeting on July 18, This memorandum provides that analysis. This memorandum should be read in conjunction with the accompanying memorandum prepared by TCA that sets forth the factual background for the situation that the Board has been asked to address. Therefore, the facts are not repeated in this memorandum. This memorandum should also be read in conjunction with the June 8, 2016 memorandum from Messrs. Delaney and Rieger as it contains important factual information and legal analysis, as supplemented by this memorandum.

8 Orange County Employees Retirement Association Board Of Retirement July 8, 2016 Page 2 Summary Of Recommendations The Board should determine that TCA's temporary project employees will continue to be excluded from OCERS as "extra-help" employees, pursuant to subsection c of section 1 of article I of the OCERS regulations, because: They are such "extra-help" employees as contemplated by this provision in view of the exigencies of the circumstances giving rise to them having to become TCA employees; They have been excluded from OCERS membership on this basis since they first became TCA employees, which step was taken after TCA conferred with OCERS about excluding them with no time limit on how long they could be excluded; Their status as such "extra-help" employees does not change by virtue of them having to remain TCA employees in view of the difficulties that TCA has encountered in the contracting process to again out-source these workers; and Neither the regulation that excludes such "extra-help" employees nor Government Code section 31527(e), which authorizes the Board to adopt such a regulation, contains any time limit on a worker remaining an "extra-help" employee (in fact, the regulations provide that the exclusion applies "regardless of number of hours worked"). Discussion Government Code section provides, as relevant here (emphasis in bold added): In its regulations, the board may include the following provisions: (e) For the exemption or exclusion from membership as a peace officer member or as a safety member or from membership altogether, in the discretion of the board, of persons whose tenure is temporary, seasonal, intermittent, or for part time only, or persons whose compensation is fixed at a rate by the day or hour. CHANG RUTHENBERG & LONG PC

9 Orange County Employees Retirement Association Board Of Retirement July 8, 2016 Page 3 Pursuant to Government Code section 31527(e), the Board adopted regulations that include subsection c of section 1 of article I of the OCERS regulations. It provides, as relevant here: All employees who are classified as extra-help regardless of number of hours worked, are hereby excluded from membership. TCA's temporary project employees have been classified as such "extra-help" employees and excluded from membership in OCERS since they first became TCA employees in June 2015 as a result of the expiration of TCA's contract with 3M who had employed these workers before then. They were not hired by TCA as its employees until after TCA had conferred with OCERS staff regarding the exclusion of these workers. Having been excluded from OCERS membership for the beginning of their employment by TCA, is there any reason why they should no longer be excluded because of the passage of time? In other words, have these workers ceased being such "extra-help" employees based solely on the passage of time (i.e., because no other facts have changed since they were first hired as employees of TCA)? Subsection c of section 1 of article I of the OCERS regulations contains no time limit on how long an employee can be classified as "extra-help." In fact, quite the opposite is implied by the modification of the exclusion by the phrase "regardless of number of hours worked." The exclusion of "extra-help" employees is an exception to the general rules for membership set forth in subsections a and b of section 1 of article I of the OCERS regulations. They provide that full-time employees and part-time employees are eligible for membership so long as they work a minimum number of hours, "including limited term employees." Thus, when the Board was promulgating these regulations, the Board was cognizant of the need to address hours and time of service, and yet the Board decided to address this aspect of the exclusion of "extra-help" employees by indicating that the number of hours worked was not relevant. Had the Board wanted to limit the time during which an employee could have been classified as "extra-help," the Board certainly could have done so but it did not add a time limit to this exclusion. Government Code section 31527(e) contains no time limit for an employee whose tenure is "temporary." If the California legislature had intended to limit the Board's authority to exclude temporary employees from membership in the Board's regulations by including a time limit on such a classification, it certainly could have done so. It did not, however, include a time limit in this statute. Contrast this statutory provision with other retirement plan provisions in the Government Code that do contain such time limits, such as the following: CHANG RUTHENBERG & LONG PC

10 Orange County Employees Retirement Association Board Of Retirement July 8, 2016 Page 4 1. Government Code section addresses the treatment of retired annuitants who are rehired. As relevant here, it provides in subsections (e), (f) and (g) (emphasis in bold added): (e) (1) Notwithstanding subdivision (c), any retired person shall not be eligible to serve or be employed by a public employer if, during the 12-month period prior to an appointment described in this section, the retired person received any unemployment insurance compensation arising out of prior employment subject to this section with a public employer. A retiree shall certify in writing to the employer upon accepting an offer of employment that he or she is in compliance with this requirement. (2) A retired person who accepts an appointment after receiving unemployment insurance compensation as described in this subdivision shall terminate that employment on the last day of the current pay period and shall not be eligible for reappointment subject to this section for a period of 12 months following the last day of employment. (f) A retired person shall not be eligible to be employed pursuant to this section for a period of 180 days following the date of retirement unless he or she meets one of the following conditions: (1) The employer certifies the nature of the employment and that the appointment is necessary to fill a critically needed position before 180 days have passed and the appointment has been approved by the governing body of the employer in a public meeting. The appointment may not be placed on a consent calendar. (2) The state employer certifies the nature of the employment and that the appointment is necessary to fill a critically needed state employment position before 180 days have passed and the appointment has been approved by the Department of Human Resources. The department may establish a process to delegate appointing authority to individual state agencies, but shall audit the process to determine if abuses of the system occur. If necessary, the department may assume an agency s appointing authority CHANG RUTHENBERG & LONG PC

11 Orange County Employees Retirement Association Board Of Retirement July 8, 2016 Page 5 for retired workers and may charge the department an appropriate amount for administering that authority. (3) The retiree is eligible to participate in the Faculty Early Retirement Program pursuant to a collective bargaining agreement with the California State University that existed prior to January 1, 2013, or has been included in subsequent agreements. (4) The retiree is a public safety officer or firefighter hired to perform a function or functions regularly performed by a public safety officer or firefighter. (g) A retired person who accepted a retirement incentive upon retirement shall not be eligible to be employed pursuant to this section for a period of 180 days following the date of retirement and subdivision (f) shall not apply. 2. Government Code section addresses the exclusion of certain employees from CalPERS. As relevant here, it provides in subsections (a)(1), (a)(2) and (a)(3) (emphasis in bold added): (a) An employee whose appointment or employment contract does not fix a term of full-time, continuous employment in excess of six months is excluded from this system unless: (1) He or she is a member at the time he or she renders that service and is not otherwise excluded pursuant to this article or by a provision of a contract. (2) His or her position requires regular, part-time service for one year or longer for at least an average of 20 hours a week, or requires service that is equivalent to at least an average of 20 hours a week for one year or longer, unless he or she elects membership pursuant to Section (3) His or her employment is, in the opinion of the board, on a seasonal, limited-term, on-call, emergency, intermittent, substitute, or other irregular basis, and is compensated and meets one of the following conditions: CHANG RUTHENBERG & LONG PC

12 Orange County Employees Retirement Association Board Of Retirement July 8, 2016 Page 6 (A) (B) The appointment or employment contract does not fix a term of full-time, continuous employment in excess of six months, but full-time employment continues for longer than six months, in which case membership shall be effective not later than the first day of the first pay period of the seventh month of employment. The person completes 125 days, if employed on a per diem basis or, if employed on other than a per diem basis, completes 1,000 hours within the fiscal year, in which case, membership shall be effective not later than the first day of the first pay period of the month following the month in which 125 days or 1,000 hours of service were completed. For purposes of this subdivision, "day" means each eighthour period of employment worked by an employee paid on a per diem basis so that membership is effective after he or she has completed 1,000 hours of compensated service in a fiscal year. Therefore, the California legislature is quite familiar with including time limits, either before an individual can resume employment, while an individual is performing services as an employee, or when an individual must cease such employment. However, it did not include any time limit under Government Code section 31527(e). In the absence of a time limit in Government Code section 31527(e) and under subsection c of section 1 of article I of the OCERS regulations, the issue becomes who is a "temporary" employee or an "extra-help" employee and, as a result, is excluded from OCERS membership. Let us start with the definition of "temporary" in Webster's Dictionary the word means "lasting for a time only; existing or lasting for a limited time." This definition certainly applies here because TCA's temporary project employees were not TCA's employees at all prior to the expiration of the contract with 3M (i.e., they were 3M's employees) and TCA's intent was from the beginning, and remains, for them to serve as TCA's employees only during the limited period of time between the expiration of 3M's contract and the placement of a new third party vendor to take 3M's place as the employer of the workers performing their tasks. The current employment arrangement is clearly intended to last "for a time only" and to exist "for a limited time." In other words, it is indeed "temporary" employment. CHANG RUTHENBERG & LONG PC

13 Orange County Employees Retirement Association Board Of Retirement July 8, 2016 Page 7 Such an interpretation is consistent with how CalPERS has interpreted the word "temporary" in other settings. On October 3, 2011, the Governor signed AB 1028 into law, effective as of January 1, Among other things, AB 1028 amended Government Code sections and by adding the word "temporary" to each section. As part of its explanation of this change in both (i) Circular Letter No , dated January 26, 2012, to all public agencies, county offices of education, and school districts, and (ii) Circular Letter No , dated January 26, 2012, to all State agencies and California State University, CalPERS stated, as relevant here (emphasis in bold added): This Circular Letter also serves to remind that pursuant to G.C. sections and 21229: A retiree can work for more than one fiscal year for the same employer only if the employment is temporary "extra help" work as defined above. Therefore, at least with respect to AB 1028, CalPERS interpreted the amended statute to mean that "temporary" work was not limited to one fiscal year no time limit applies so long as the employment is "temporary." In addition, the lack of a time limit on how long an employee could be classified as "temporary" or "extra-help" is consistent with what OCERS staff told TCA when, prior to hiring these temporary project employees, TCA specifically asked OCERS staff how long these employees could be considered temporary and whether their employment as such could extend beyond one year. OCERS staff told TCA that there was no specific time frame that determined whether an employee was "temporary." TCA relied, and continues to rely, on this response in hiring these workers. What about the meaning of "extra help"? There does not appear to be any statutory use of or definition for this phrase. It must be either synonymous with or within the meaning of "temporary" (see above) in order for subsection c of section 1 of article I of the OCERS regulations to be valid under Government Code section 31527(e). CalPERS has given such an interpretation to the phrase and has given us insights as to what it thinks the phrase means in the following CalPERS Circular Letters: 1. In a Circular Letter (not numbered), dated January 14, 2014, to all CalPERS employers, CalPERS discussed the post-retirement service requirements set forth in Government Code section (quoted in part above). The letter states, as relevant here (emphasis in bold added): CHANG RUTHENBERG & LONG PC

14 Orange County Employees Retirement Association Board Of Retirement July 8, 2016 Page 8 The work a retiree performs should supplement the work of regular staff (e.g., it is extra help work such as elimination of backlog, special project work, or to help with work in excess of that which regular staff can do). 2. In both Circular Letter No , dated January 26, 2012, to all public agencies, county offices of education, and school districts, and Circular Letter No , dated January 26, 2012, to all State agencies and California State University, CalPERS discussed the changes made to Government Code sections and effective as of January 1, These letters state, as relevant here (emphasis in bold added): Both sections were amended as follows: To include the word "temporary" to clarify that these sections apply to retirees as temporary "extra help" appointments during an emergency to prevent stoppage of public business or to perform work of limited duration, i.e., elimination of backlog, special projects, work in excess of what the employer's permanent employees can do, etc. To include the word "specialized" to clarify that retirees employed as temporary "extra help" are to have the specialized skills required to perform the needed work. Lastly, we want to emphasize what Messrs. Delaney and Rieger said in their June 8, 2016 memorandum to the Board about the distinction between this situation and a situation such as that addressed by the California Supreme Court in Balen v. Peralta Junior College District. In this case, the court addressed the "administrative practice" in which the Peralta Junior College District engaged in dismissing its part-time instructors annually and then rehiring them in order to, in the view of the court, "circumvent proper classification" of the instructors. The court stated that these actions were not determinative of the instructors' employment status. This is not the case here. When TCA hired the temporary project employees, it did so only to meet the need that it had for the services provided by such workers until such time as a contract with a new vendor for such services could be implemented. While it is unfortunate that the contracting process is taking longer than a year, the delay is not part of an "administrative practice" or any other scheme to "circumvent proper classification" of these workers. They have been, and continue to be, properly classified as "extra-help" employees. CHANG RUTHENBERG & LONG PC

15 Orange County Employees Retirement Association Board Of Retirement July 8, 2016 Page 9 Conclusion The temporary project employees were hired by TCA as temporary, "extra-help" employees in order to perform critical tasks for TCA during the gap between the expiration of the 3M contract and the commencement of a contract for such services with a new vendor. These services are of a type that is beyond what TCA's regular staff can do, have historically been performed for TCA by an outside vendor such as 3M, and are performed by third party vendors for all tolling entities in California (with the exception of one SANDAG). Numerous tolling entities across the nation use third party vendors for these services as well. Therefore, these workers have been properly classified as "extra-help" employees who are excluded from OCERS membership, and this exclusion does not expire because of the passage of time. TCA's temporary project employees should continue to be excluded from OCERS membership.. KWR/lm Enclosure NO Q CHANG RUTHENBERG & LONG PC

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