Tuesday, September 4, 2012 The CSAC Bulletin
Reform Takes Center Stage in Last Days of Legislative Session

Pension Reform

The Legislature passed AB 340 (Furutani) and AB 197 (Buchanan), two bills to enact the California Public Employees’ Pension Reform Act of 2013. The Assembly passed the main provisions in AB 340 48-8 with many Republican members abstaining, while the Senate passed the bill 36-1.  While there are provisions in AB 340 that CSAC might not support if contained in a stand-alone bill, when combined with the other substantial reforms, CSAC supported AB 340 because on balance, it will result in reduced costs for counties and significant improvement to public pension systems.

AB 340 makes several changes to the pension benefits that may be offered to employees hired on or after January 1, 2013, including, setting as new maximum benefit, a lower-cost pension formula for safety and non-safety employees with requirements to work longer in order to reach full retirement age and a cap on the amount used to calculate a pension. Among other things, AB 340 also enacts pension spiking reform for new and existing employees, requires three-year averaging of final compensation for new employees, and provides counties with new authority to negotiate cost-sharing agreements with current employees. AB 340 also contains limitations on the use of retired annuitants, requiring that an annuitant have a six-month break in service prior to returning to work. Public safety officers and firefighters are exempted from the annuitant restrictions and a retiree can return to work for the county prior to the six month break, if approved by the Board of Supervisors in a public meeting. AB 197 contains corrections to two drafting errors discovered in AB 340. A full list of the provisions of AB 340 can be found below. 
  1. Establishes new pension formulas for new employees hired on or after January 1, 2013. All new employees in the miscellaneous classification will receive a 2% @ 62 benefit formula with a full benefit of 2.5% @ 67. New safety employees will be provided one of three formulas that are at full retirement: 2% @ 57, 2.5% @ 57, and 2.7% @ 57. The employer and/or retirement system will determine which of the three formulas is closest to the formula currently provided to safety members.
  2. Establishes a cap on the amount of compensation that can be used to determine pension benefits. The cap is based on the social security contribution and benefit base as specified on January 1, 2013, currently $110,100. The cap for employees not receiving social security benefits is 120 percent of the social security base or $132,120. The cap will be adjusted annually based on changes to the Consumer Price Index.
  3. Establishes a cap on the contributions to any retirement benefit for employees, including defined contribution plans, at the IRS 401 (a) limits, currently $250,000. For any employees earning more than $250,000, employers are prohibited from making contributions to any retirement benefit on salary amounts above $250,000.
  4. Restricts the use of supplemental defined benefit plans. The bill prohibits the establishment of new supplemental defined benefit plans and requires that no additional employee group be added to existing plans.
  5. Establishes as a standard that employees pay at least 50 percent of the normal costs of pension benefits and prohibits employers from paying the employee share of that cost. All new employees will be required to pay 50 percent of the normal costs of their pensions on January 1, 2013. Beginning in 2018, if existing employees are not paying 50 percent of normal pension costs or have not agreed to other cost sharing agreements authorized in the bill, counties can negotiate increased contributions of 50 percent of normal costs up to specified new contribution caps. The 50 percent requirements for existing employees achieved pursuant to this section of the bill do not require agreement by employee representatives and can be imposed after good faith negotiations.
  6. Authorizes local agencies, including counties, to negotiate cost sharing agreements that include the costs of the unfunded pension liability. Cost sharing must be by agreement between the employer and employee representatives; however, additional new authority provides that the agreement may be reached bargaining unit-by-bargaining unit, rather than requiring all safety or all non-safety employees to agree.
  7. Requires final compensation for new employees to be calculated based on the highest average annual pensionable compensation earned during a period of at least three years.
  8. Defines a new employee as an individual who has never been a member of any public retirement system prior to January 1, 2013 or an individual who has moved between public employers or retirement systems and had more than a 6 month break in service. If an employee moves to a new public employer within six months of leaving a previous public employer and maintains pension system reciprocity with the new employer, then the employee would be entitled to the pension benefit that was available to the similar employee group on December 31, 2012, rather than be treated as a new employee.
  9. Eliminates pension spiking for new employees with a strict definition of “pensionable compensation”. The new definition does not include payments for items such as vacation, sick leave, vehicle allowance, uniform allowance, and employer contributions to defined benefit plans.
  10. Limits pension spiking for existing employees. The bill attempts to restrict some items of pensionable compensation for existing employees by allowing only the amount earned and payable in each 12-month period during the final average pay period. Late amendments attempt to clarify that the new pension spiking rules are intended to be consistent with caselaw.
  11. Provides the 1937 Act retirement boards of counties with new authority to assess and determine whether pension spiking has occurred, including the authority to audit the county or district. Additionally, authorizes retirement boards to assess a county or district a reasonable fee to cover the cost of audit, adjustment, or correction to new requirements for reporting compensation to the retirement system.
  12. Restricts the use of retired annuitants. Prohibits a retired annuitant from returning to service before 180 days has passed unless the employer certifies the appointment is necessary to fill a critically needed position before 180 days and the appointment has been approved by the governing body of the employer in a public meeting. (The 180 prohibition does not apply to a retiree who is a public safety officer or firefighter.)
  13. Restricts reciprocity benefits for individuals elected to the City Council or Board of Supervisors on or after January 1, 2013. This change is intended to prohibit a city council member or supervisor from collecting a pension using his or her highest final salary from other public employment for the years of service in an elected position. This restriction is currently in place within CalPERS agencies, the proposal would extend it to other retirement systems.
  14. Limits the ability of retired individuals to serve on boards and commissions without reinstatement from retirement. Any retired individual first appointed on or after January 1, 2013 to a salaried position on a state board or commission shall not serve without reinstatement unless the appointment is to a part-time position. If part-time is not otherwise defined, it shall mean the position has a salary of no more than $60,000 per year with an annual adjustment as specified.
  15. Prohibits employers from providing health vesting schedules and pension contribution rates for non-represented individuals and elected or appointed officials that are more advantageous than those provided for represented employees in related membership classifications.
  16. Prohibits retroactive pension benefit increases. Any future pension benefit enhancements would apply to future service only. Note—statutory authority would be necessary to provide any benefits above what is authorized in the reform bill.
  17. Prohibits the purchase of nonqualified service credit (air-time).
  18. Prohibits contribution holidays. Pension boards may suspend contributions if a plan is 120 percent funded or if the retirement system determines that additional contributions would jeopardize the tax status or otherwise harm the plan.
  19. Limits the ability of individuals who have committed specified felonies to collect a public pension related to that office or position.
  20. Adds a new industrial disability benefit for safety officers. Allows a safety member to receive an actuarially reduced pension benefit if he or she is not qualified for service retirement. This option may be available in some 1937 Act retirement systems, but is not currently offered by CalPERS.
  21. Makes additional changes related to state employees.

Workers' Compensation Reform

CSAC apprised you last month of impending reform in the area of workers' compensation. Senate Bill 863, by Senator Kevin de Leon, became the vehicle for the reform language negotiated between employers and labor organizations and was approved by the Legislature in the late hours of August 31. In a showing of bipartisan support, the Senate passed the legislation by a vote of 34-2 with the Assembly passing it 72-3. Governor Brown, who had voiced his support of the measure, is expected to sign SB 863. The bill reflects a $740 million increase in permanent disability benefits to injured workers (to be phased-in over two years) with substantial changes in the system to eliminate waste and unnecessary litigation. Please refer to the aforementioned link for a specific summary of the reform measure.

Counties should note that SB 863 was amended late Thursday night to fully eliminate the "bump-up/bump-down" provision in which an injured workers' weekly permanent disability rate is reduced by 15 percent if the employee can return to work for the employer or increased by 15 percent if the employer cannot return to work for the employer. The bump-up/bump-down approach created additional litigation for employers; in exchange for this elimination, an amendment was taken that creates a return to work program, an effort to quell concern that SB 863 underserved catastrophically injured workers. The program, to be administered by the Department of Industrial Relations and funded annually with $120,000 from the Workers' Compensation Administration Revolving Fund (Fund), is intended to make supplemental payments to workers whose permanent disability payments are disproportionately low in compareison to their wage loss. Since public employers pay into the Fund, CSAC made it clear that counties should be involved in the establishment of guidelines for fee assessment and disbursement; Governor Brown, in a meeting with employers on Friday, stated his commitment to involving employers in this process. 

While aspects of SB 863 cause some concern for public employers, CSAC joined the Chamber of Commerce and many other employer representatives to support the bill because the increase in benefits provided to injured workers in the bill is balanced by considerable savings to employers through decreased litigation and frictional systemic costs.