SB 278 – Shifts Financial Exposure To Employers For CalPERS Compensation Reporting Errors

CATEGORY: Client Update for Public Agencies, Fire Watch, Law Enforcement Briefing Room, Public Education Matters
CLIENT TYPE: Public Education, Public Employers, Public Safety
DATE: Nov 03, 2021

The Public Employees’ Retirement Law (PERL) provides a defined benefit retirement plan administered by CalPERS, for employees of participating public agencies.  In 2013, the Public Employees’ Pension Reform Act (PEPRA) made changes to the categories of compensation that can be included in some employees’ retirement benefit calculation. The complex scheme of governing statutes, regulations, and administrative guidance sometimes leads to unintended reporting errors.  In addition, because the specific items of compensation at a given agency are often the product of negotiations, the parties sometimes inadvertently negotiate criteria that makes a pay item non-reportable on technical grounds.

Under existing law, if CalPERS determined that a disallowed item of compensation was included when calculating a retiree’s retirement benefit allowance, the retiree would have to repay CalPERS for the amount that was overpaid, and their retirement allowance would be reduced going forward based on what they should have received if the improper pay item was not reported. SB 278 was enacted to protect retirees from this kind of financial exposure, and in doing so, it transfers almost all of the risk of misreported compensation to the employer.

Under SB 278, local agencies must pay CalPERS the full cost of any overpayments received and retained by the retiree, as well as a 20-percent penalty of the present value of the projected lifetime and survivor benefit.  Ninety percent of the penalty is paid directly to the retiree and 10 percent is paid as a penalty to CalPERS.

For current employees, SB 278 does not make significant changes, as it allows improper contributions to act as a credit towards a public agency’s future contributions, and any contributions paid by the employee on the disallowed compensation is returned.  There are no overpayments to address because the employee has not yet retired or started receiving a retirement allowance.

With respect to retired members, the penalty is triggered where the following conditions are met:

  1. The compensation was reported to the system and contributions were made on that compensation while the member was actively employed;
  2. The compensation was agreed to in a memorandum of understanding or collective bargaining agreement between the employer and the recognized employee organization as compensation for pension purposes and the employer and the recognized employee organization did not knowingly agree to compensation that was disallowed;
  3. The determination by the system that compensation was disallowed was made after the date of retirement; and
  4. The member was not aware that the compensation was disallowed at the time it was reported.

The statutory language raises several questions that will require guidance from CalPERS or may need to be litigated, both with regard to the specific criteria outlined above, and with regard to the enforcement of the retroactive component of the statute.  In addition, the statute leaves unresolved lingering questions about what statute of limitations applies to CalPERS when seeking to collect overpayments from employers. LCW will continue to monitor any new guidance issued regarding this statute.

If the statute is interpreted to have broad retroactive effect, it may very well incentivize CalPERS to start aggressively auditing local agencies, because any unfunded liabilities for inadvertently misreported compensation would be shifted directly to the employer and compensation carrying unfunded liabilities can be removed from the books.  CalPERS also receives a portion of the prospective reduction of benefits as a penalty against the agency.  The potential combined retroactive liability and penalties for public employers could be significant – and impossible to predict.  While SB 278 has a provision for CalPERS to review labor agreements prospectively and provide guidance, the statute does not specify that CalPERS’ approval will be binding and prevent a later negative determination.

Public agencies should consult with trusted legal counsel to scrutinize pay items currently being reported to CalPERS and correct any compliance issues identified as soon as possible to reduce the potential financial exposure for future retirees.

(SB 278 adds Section 20164.5 to the Government Code.)

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