At a time when many public agencies in California are vulnerable to significant budget cuts and even bankruptcy, the pension reform measures in AB 340 are perceived by many to be too little, too late. Nevertheless, it is indisputable that the recent adoption of AB 340, meant to quell skyrocketing pension costs and save taxpayers billions of dollars, will significantly change the status quo in California.
By now, most people are familiar with the pension reform measures contained in AB 340, which includes the California Public Employees Pension Reform Act, otherwise known as PEPRA. Among other things, the 10-point plan raises the retirement age and decreases the benefit factors for new members, requires new members to pay for a portion of their retirement benefits and includes a cap on the salary used to calculate pensions. Nonetheless, questions remain regarding how the measures contained in AB 340 will be interpreted and applied when the law goes into effect on January 1, 2013.
PEPRA prohibits public employers from providing certain employees with a health benefit vesting schedule that is more advantageous than that provided to other employees. This provision in the law has generated a lot of confusion resulting from the lack of specificity in the statute and statements made by legislators leading up to the adoption of AB 340 that the bill did not address retirement health benefits. Further uncertainty may have been inadvertently created by a preliminary summary of AB 340 issued by CalPERS, the state’s public employee pension system. That summary states that the provision in question eliminates a public employer’s ability to provide not only a better health benefit vesting schedule but also better health benefits to unrepresented employees than it does to represented employees. Thus, public employers have questioned whether the restriction applies to all employees or only those defined as new members under PEPRA, and whether it applies to health benefits received while employed or only to those received during retirement.
Any suggestion that PEPRA’s restriction applies to health benefits received during employment is incorrect as the bill’s language strictly refers to a health benefit vesting schedule, a term that is commonly understood to refer to retirement health benefits. Further, the restriction applies to all employees, not just new members, but only to the extent that it does not impair a vested right to retirement health benefits. Though PEPRA does not directly acknowledge a 2011 decision by the California Supreme Court, the justices ruled in Retired Employees Association of Orange County, Inc. v. County of Orange that a vested right to retirement health benefits can be created by an agreement, whether explicit or implied, between an employer and its employees.
Regardless of how the restriction in the new law is eventually interpreted, it would be wise for public employers to evaluate their current health benefit program to determine to what extent, if any, their program may be affected by this provision. The task may be easier for public employers participating in the CalPERS health benefit program as they are bound by the rules codified in the Public Employees’ Medical and Hospital Care Act. That means, however, that such employers are subject to CalPERS’ interpretation of the health benefit vesting schedule restriction.
The requirement that new members pay a certain percentage of their pensionable compensation toward the cost of their retirement benefits has also generated confusion. This provision is compulsory for new members, as defined in PEPRA. However, AB 340 also amended the Public Employees’ Retirement Law (PERL), administered by CalPERS, and the County Employees Retirement Law of 1937 (1937 Act), administered by the various county retirement systems, to allow participating employers to require that current employees also contribute a percentage of their salary toward the cost of their retirement benefits beginning on January 1, 2018. This authority, as it relates to existing employees, is not compulsory. Rather, it can be imposed at the discretion of the employer, subject to collective bargaining rights. However, CalPERS employers need not wait until January 1, 2018 to pass on some of the cost of retirement benefits to existing employees; they can do so now by reducing or eliminating the employer-paid member contribution, subject to collective bargaining.
Neither PEPRA nor the broader provisions of AB 340 provide similar authority to public employers not participating in CalPERS or a 1937 Act plan. Thus, whether these public employers may require that current employees pay a share of the cost for their retirement benefits will depend on the terms of the retirement plan they sponsor. For example, CalSTRS allows an employer to pay all or a portion of the employee contribution but permits the employer to eliminate this benefit. Thus, a CalSTRS employer can transfer the full share of the employee contribution back to the employee, subject to collective bargaining rights.
Over the course of less than a year, the Legislature has amended PERL twice to clarify, and in some ways modify, the rules on the employment of CalPERS retirees by CalPERS employers. While CalPERS employers awaited further clarification from CalPERS on its interpretation of certain provisions within those bills, the Legislature adopted PEPRA, which contains restrictions on the employment of retirees by any employer subject to PEPRA. However, these restrictions apply only when a public employer employs a retiree receiving retirement benefits from the retirement system in which the employer participates. Further, they apply to all retirees irrespective of when they were first employed or when they retired. The PEPRA rules on employing retirees are similar to the CalPERS rules with one significant difference – PEPRA requires a 180-day, sit-out period between retirement and commencement of employment with some exceptions, including a blanket exception for safety retirees. However, many question whether this 180-day rule applies to non-safety retirees commencing employment within 180 days prior to January 1, 2013. While not explicitly stated in PEPRA, a reasonable interpretation of the statute suggests that it only applies to retirees commencing employment on or after January 1, 2013.
In the almost two months since AB 340 was signed into law by Gov. Brown, it has become clear that there are far more ambiguities than were apparent at first blush. As a result, further clarification of AB 340 is expected in the form of future legislative or regulatory action.
Isabel C. Safie is an attorney at Best Best & Krieger LLP in Riverside and is a member of the law firm’s Employee Benefits practice group. Her practice primarily focuses on issues relating to employee benefits, pensions and other post-employment benefits. Ms. Safie can be reached at Isabel.Safie@bbklaw.com