California Public Employees’ Pension Reform Act of 2013 (“PEPRA”)

PEPRA is a complex and far-reaching piece of legislation signed by Governor Brown in September 2012. Most of the provisions apply to new employees (hired after January 1, 2013), but there are “anti-spiking” and cost-sharing provisions that apply to current employees.

PEPRA Analysis

October 2, 2012

  • Effective date of PEPRA – 1/1/2013.
    • Most provisions apply only to new employees.
    • Current MOU’s stay in place through their duration.
    • PEPRA prohibits a public agency from providing better retirement terms or benefits to excluded and exempt non-represented employees than it does for union-represented employees.
  • New Employee definition
    • One who is hired on or after 1/1/13 and has never been a member of any public retirement system prior to 7/1/13 – or -
    • An employee who moves between public employers or between public retirement systems (i.e. PERS and a County system) after 180+ days break in service. Employee will be considered a “new employee” and covered by all the rules of PEPRA for new hires.
    • Important: An employee who does not meet the definitions above and who moves between retirement systems and/or public employers, with less than a 180-day break in service, is not considered a “new employee.” That employee is grandfathered into the plan that existed for employees on 12/31/2012.
  • Cost Sharing
    • The aim of PEPRA is that, at least by 2018, employees will equally share the “normal cost” of pensions. . Employees of many employers (i.e. Sonoma County and other agencies where employees pick up the entire employee share) are already paying at or close to 50% of the normal cost.
    • “Normal cost” is a murky actuarial term and differs from agency to agency. The actual “normal cost” figure can be determined from the particular retirement system’s actuarial study. Simplistically, it mostly means “regular, recurring” pay, i.e. base pay.
    • This aim of 50% must be reached by collective bargaining before 2018. Before that time, an agency cannot unilaterally impose this cost sharing unless impasse procedures are followed.
    • Existing MOU’s and current employees:
      • Existing MoU’s will stay in place during this time and take precedence over the 50% sharing requirements during the term of the MOU “without extension or renewal.”
      • The 50% cost sharing may not exceed 8% of pay for employees under a PERS system – or – 14% of pay for County employees (miscellaneous only – safety’s ceilings are higher).
      • Contribution Rates – can now differ by bargaining unit.
  • New Employees Formula and Final Compensation
    • All new miscellaneous employees will be under a formula that equates to 2% at age 62, with the earliest possible retirement at age 52 (at 1%) with 5 years of service, and a maximum benefit of 2.5% at age 67. If an agency already has a plan that is less than this, it can continue.
    • Pension will be based on the highest average annual compensation over a three-year period.
  • Pensionable Compensation
    • For most current employees, the plans and compensation will remain the same, for now.
      • No change for current employees under PERS
      • For employees of 37 Act Counties (Sonoma, ContraCosta, Marin – as applied to City of San Rafael), the pension board will have more discretion to determine what is pensionable and how “normal costs” are determined. In general, it is based on the “average number of days ordinarily worked by persons in the same grade or class of positions during the period, and at the same rate of pay.”
    • Air Time, purchase of non-qualified extra service, is not allowed on or after 1/1/2013 for any employees, both current and new. No applications will be accepted on or after January 1, 2013. (Does not apply to service credit purchases to military leave, maternity leave or service prior to membership).
    • For New Employees – Limits are placed on pensionable earnings.
      • Pensionable compensation is capped at the Social Security wage index limit of approximately $110K and $132K for safety. (For employees who do not pay into Social Security, these caps are higher). Amounts may increase with annual CPI for Urban wage earners. Employers cannot circumvent this by offering an additional defined program, except in limited circumstances.
      • The employer is prohibited from paying any of the employee’s share for new hires (in PERS terms, this employer pickup of the employee share is called the “EPMC”, which will be a thing of the past by at least 2018).
  • “Enhancements (for both PERS and Counties, including current employees) are not “compensation earnable” and are prohibited from being used to calculate pension amount (called “anti-spiking” rules). The following are prohibited:

    • Retroactive pension enhancements (higher formulas, pick up of past service). (COLA’s for retirees are not enhancements).
    • “In kind” compensation paid by the employer or cash payment in the final average salary period.
    • Any one-time or ad hoc payments made to a member but not to similarly situated employees.
    • Any payment made solely due to termination of employment (terminal pay or severance pay) that is received while employed.
    • Payments for unused vacation, annual leave, personal leave, sick leave, or comp that exceed what may be earned or payable in each 12-month period during the final average salary period.
    • Payments for services rendered outside of normal working hours.
    • Employer contributions to deferred compensation or defined contribution plans (in PERS, called “EPMC”).
    • Any bonus.
    • Uniform, housing or vehicle allowances.
    • Overtime pay, except planned overtime.

Note: This is one of the most complicated areas of the new law. Most of these “enhancements” apply to County employees and are already not allowed in PERS systems. The law is a bit unclear about what applies to current employees, and also whether all provisions apply to both PERS and County systems. Particularly for employees in County retirement systems, you should check with your retirement association as to their interpretation.

  • Working after Retirement (applies to those who retire on or after 1/1/2013)
    • Limited to 960 work hours in a consecutive 12-month period.
    • Retired annuitants cannot return to work for 180 days after retirement unless the action is approved in an open meeting or an emergency exception.
    • Cannot return to work for 180 days if received a retirement incentive (such as VSIP or golden handshake).
    • Cannot return to work for 12 months if received unemployment benefits.
  • Other Changes
    • No more pension “holidays” in which the agency thinks it has enough money to fund the retirement obligations without paying the employer’s share. The contribution by the employer and the employee must not be less than the total annual normal cost for the plan year.

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