BB&K Attorney Isabel Safie Analyzes Some of the Law's More Vague Facets
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.
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