UNFINISHED BUSINESS  

Bill No: SB 266

Author: Leyva (D)

Amended: 9/3/19

Vote: 21

SENATE LABOR, PUB. EMP. & RET. COMMITTEE: 4-0, 3/27/19

AYES: Hill, Jackson, Mitchell, Pan

NO VOTE RECORDED: Morrell

SENATE APPROPRIATIONS COMMITTEE: 4-1, 5/16/19

AYES: Portantino, Bradford, Hill, Wieckowski

NOES: Jones

NO VOTE RECORDED: Bates

SENATE FLOOR: 31-4, 5/21/19

AYES: Allen, Archuleta, Atkins, Beall, Bradford, Caballero, Chang, Dodd, Durazo, Galgiani, Glazer, Hertzberg, Hill, Hueso, Hurtado, Jackson, Leyva, McGuire, Mitchell, Monning, Nielsen, Pan, Portantino, Roth, Rubio, Skinner, Stern, Umberg, Wieckowski, Wiener, Wilk

NOES: Borgeas, Jones, Morrell, Stone

NO VOTE RECORDED: Bates, Grove, Moorlach

ASSEMBLY FLOOR: 73-0, 9/11/19 - See last page for vote

SUBJECT: Public Employees’ Retirement System: disallowed compensation: benefit adjustments

SOURCE: California Professional Firefighters

Peace Officers’ Research Association of California

DIGEST:

This bill requires that, in the event of a California Public Employees’ Retirement System retiree having their pension reduced due to the inclusion of compensation by the relevant public employer that cannot be counted towards a final pension calculation, the public employer must cover the reduced benefit to the retiree, as specified.

Assembly Amendments

clarify the need to maintain confidentiality of contact information of retired members, require that the pension shortfall be covered by an annuity (except as provided), and clarify the obligations of educational entities.

ANALYSIS:

Existing law:

1. Establishes the California Public Employees’ Retirement System (Cal-PERS) and sets the purpose of the System as effecting the economy and efficiency of public service by providing a path for employees who are incapacitated or superannuated to leave state service, without hardship or prejudice, and be replaced by more capable employees. (Government Code §§20001 & 20002)
2. Establishes the Cal-PERS Board of Administration (Board) and vests the Board with the authority to administer the Cal-PERS defined benefit pension system, including determining who is an eligible employee to receive benefits and what assets can be purchased by Cal-PERS. (Government Code §§20090, 20125 & 21090)
3. Provides that, in its discretion and upon any terms it deems just, the Board may correct errors or omissions of any active or retired member, or any beneficiary of an active or retired member, as specified. (Government Code §20160)
4. Requires that, in the event of an erroneous payment to a Cal-PERS member or beneficiary, Cal-PERS has three years from the date of payment to collect the erroneous payment from the member or beneficiary. In the case of fraud, however, Cal-PERS has 10 years from the discovery of the erroneous payment to collect. (Government Code §20164)
5. Creates the California Public Employees’ Pension Reform Act (PEPRA) of 2013, which limited what types of compensation can be counted in the calculation of pension benefits for new members. (Government Code §§7522 & 7522.34)
6. States the intent of the Legislature, in implementing PEPRA, that the Board has all powers reasonably necessary to invest the assets associated with, and to administer and implement the provisions of PEPRA, to the extent and with the same effect as if the provisions of the act are contained in the Public Employees’ Retirement Law. (Government Code §20004)

This bill:

1. Requires that, if Cal-PERS determines that the compensation reported for a Cal-PERS member by a public employer is in conflict with existing law or regulations, Cal-PERS must prohibit the public employer from continuing to report the disallowed compensation. This requirement also applies to determinations made on or after January 1, 2017, if the appeal rights of the Cal-PERS member have not been exhausted.
2. Requires that, in the case of an active Cal-PERS member, all contributions on disallowed compensation must be credited against future contributions to the benefit of the public employer by Cal-PERS and the public employer must return the member’s contributions that were paid on the disallowed compensation.
3. Requires, in the case of a retired Cal-PERS member or survivor or beneficiary whose final compensation at the time of retirement was based on disallowed compensation, the contributions made on the disallowed compensation must be credited against future contributions to the benefit of the public employer.
4. Requires Cal-PERS to permanently reduce the retired Cal-PERS member or survivor or beneficiary’s benefit to exclude the disallowed compensation.
5. Requires the public employer to both pay Cal-PERS the full cost of any overpayment resulting from the disallowed compensation AND pay to the retired Cal-PERS member, survivor, or beneficiary an annuity based on the difference between the permissible retirement benefit and the actuarially equivalent present amount of the disallowed compensation. If both the member and employer agree, the benefit may be provided as a lump sum instead of an annuity.
6. States that Cal-PERS must also provide a notice to the public employer and affected retired Cal-PERS member or survivor or beneficiary that includes, at a minimum:
   1. The amount overpayment resulting from the disallowed compensation made by the public employer;
   2. The actuarial equivalent present amount owed to the retired Cal-PERS member, survivor, or beneficiary; and
   3. Written disclosures by the public employer’s obligations to the retired member under this bill.
7. Requires that the double-payment described above is only due if the following is applicable:
   1. The compensation was reported to Cal-PERS and the contributions were made on that compensation while the member was actively employed;
   2. The compensation was provided for in a memorandum of understanding or collective bargaining agreement as compensation for pension purposes;
   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.
8. Requires Cal-PERS to provide, upon request, to the state, a school employer, or a contracting agency with contact information data in its possession of a relevant retired member, survivor, or beneficiary in order for the state, a school employer, or a contracting agency to fulfill their obligations to that retired member, survivor, or beneficiary pursuant to this section. The recipient of this contact information data shall keep it confidential.
9. Permits public employers to submit to Cal-PERS for review any compensation proposal intended to form the basis of a pension benefit calculation in order to determine compliance with California Public Employment Retirement Law (PERL). Cal-PERS must provide guidance on the compensation proposal within 90 days.
10. States, explicitly, that, for educational entities participating in Cal-PERS, the final responsibility for funding payments described above is that of the educational entity that is the actual employer of the employee. A county superintendent of schools shall have final responsibility for funding payments for its own employees and not for those employees of other educational entities that participate in the system under the auspices of a county superintendent of schools pursuant to contract.
11. Requires that Cal-PERS periodically publishes a notice of the proposed compensation language submitted to the system by public employers for review and Cal-PERS’s determination of compliance.
12. Makes findings and declarations on the need to protect retired Cal-PERS members from retroactive clawbacks and permanent reductions in retirement benefits.

Comments

Need for this bill? The author states the following:

[I]n 2012, after serving the public for nearly 30 years, a firefighter employed by the City of Davis retired. Prior to retiring, the firefighter requested an official retirement estimate from CalPERS, which provided a projection of retirement benefits as of the firefighter’s estimated retirement date. Based on the information provided by CalPERS in their official retirement estimate, the firefighter made the decision to retire.

In 2017, CalPERS notified the long-retired firefighter that the City of Davis had reported certain compensation, which CalPERS believed was not pensionable compensation. Consequently, CalPERS sought to collect the overpayment reimbursement not from the City of Davis that had mistakenly reported the special compensation, but from the retired firefighter. The reimbursement sought by CalPERS included a lump sum amount of $42,000 and a sizeable, future reduction in the retired firefighter’s monthly retirement allowance.

Unfortunately, a handful of other firefighter, law enforcement, and school retirees have reported similar stories across multiple CalPERS employers.…

SB 266 protects a retiree’s already-promised and paid-for collectively bargained benefits in cases where the benefit is disallowed by CalPERS after the member has already retired. It also sets parameters for resolving future disputes over active and retired employees’ collectively-bargained pensionable compensation.

Related/Prior Legislation

SB 1124 (Leyva, 2018) also dealt with disallowed compensation for Cal-PERS members, retirees, beneficiaries, and survivors. SB 1124 was vetoed by Governor Brown, who said the following in his veto message:

This bill would establish a retiree's permanent right to incorrectly calculated pension benefits in cases where an error resulted in paying the retiree higher pension benefits than allowed by law.

I share the author's view that a pension must be correctly calculated according to the law in the first instance so that retirees never find themselves on the hook for overpayments. Clearly, remedies are needed to correct such situations.

But I'm concerned that this bill's broad provisions could be easily abused to circumvent limitations in law intended to protect the government-and ultimately taxpayers-from pension spiking. Indeed, in the case of an error, this bill would effectively perpetuate that error for the rest of a member's life, at substantial taxpayer expense.

Before changing the law in the way that this bill does, I encourage the Legislature to develop policies to prevent such errors in the first place. Such policies might include requiring CalPERS to review and approve any proposals for pensionable compensation in a memorandum of understanding before the memorandum is finalized. Then, if errors still occurred after CalPERS's review, the penalties and ongoing costs in this bill might be warranted.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Assembly Appropriations Committee, this bill would result in ongoing costs to Cal-PERS of approximately $456,000 (for additional staff, including an actuary) to review MOUs and calculate employer costs where a retirement benefit must be adjusted. In addition, this bill would result in significant state costs, possibly in the millions of dollars (State General Fund or Proposition 98), if state agencies or school employers must cover the upfront costs of disallowed overpayments. Contributions based on disallowed compensation will be credited against future contributions, but employers must expend funds upfront to make the retired members whole.

SUPPORT: (Verified 9/11/19)

California Professional Firefighters, AFL-CIO (co-source)

Peace Officers’ Research Association of California (co-source)

American Federation of State, County and Municipal Employees, AFL-CIO

California School Employees Association, AFL-CIO

Riverside Sheriffs Association

OPPOSITION: (Verified 9/11/19)

California Special Districts Association

California State Association of Counties

City of Brentwood

City of Burlingame

City of Coronado

City of Downey

City of Fortuna

City of La Mirada

City of Laguna Beach

City of Laguna Niguel

City of Lodi

City of Madera

City of Modesto

City of Monterey

City of Morgan Hill

City of Norwalk

City of Novato

City of Oceanside

City of Palm Springs

City of Piedmont

City of Pinole

City of Portola

City of Ridgecrest

City of Sacramento

City of San Carlos

City of South Pasadena

City of Sunnyvale

City of Thousand Oaks

City of Torrance

City of Union City

City of Vista

City of Willits

City of Yreka

League of California Cities

Manteca Chamber of Commerce

Mayor Robert Whalen, City of Laguna Beach

Mayor Sam Hindi, Foster City

Tuolumne County Chamber of Commerce

ARGUMENTS IN SUPPORT: The California Professional Firefighters, AFL-CIO argue the following in support of this bill:

Under current practice, when a CalPERS member is within one year of their expected retirement date, they may request up to two official CalPERS-generated retirement estimates in a 12-month period. Official estimates use a member’s current account information to project retirement benefits….

As a contracting agency, CalPERS requires an employer to submit specific information about each of its employees to the retirement system in the form of a payroll report. Information contained in this report includes an employee’s earnings, contributions, and other pertinent information, such as pay rate, work schedule, total hours worked, reportable earnings, special compensation, and contribution amounts (both by employer and employee).…

In 2012, a firefighter employed by the City of Davis retired after serving the public for nearly 30 years. Prior to retiring, the firefighter twice requested an official retirement estimate from CalPERS, which provided a projection of retirement benefits as of the firefighter’s estimated retirement date. Based on the information provided by CalPERS in their official retirement estimate, the firefighter made the decision to retire.

In 2017 – five years after the Davis firefighter retired -- CalPERS notified the retired firefighter that the City of Davis had reported certain compensation that CalPERS believed was not pensionable. Consequently, CalPERS sought to collect reimbursement for the overpayment -- not from the City of Davis that had bargained in good faith over that pensionable compensation, but instead sought collection from the retired firefighter. The reimbursement sought by CalPERS included a lump sum amount of $42,000 and a sizeable, future reduction in the retired firefighter’s monthly retirement allowance….

If the employer promises and pays for a benefit that is disallowed after the fact, the retiree living on a fixed income who is budgeting according to that fixed income should not have to pay the price for that broken promise. And, employers should make sure that taxpayers don’t have to pay the cost of such mistakes to future retirees. For these reasons, we are pleased to sponsor this important bill.

ARGUMENTS IN OPPOSITION: The California Special Districts Association , League of California Cities, and the California State Association of Counties, writing in opposition, argue the following:

Under current law, once a benefit is determined to be disallowed, both the employer and the employee cease making future payments on that benefit, past contributions from the employee are returned to the employee, while past contributions from the employer are applied towards future payment. Unfortunately, in the case of a retiree that received the disallowed benefit, the pension system must recoup the overpaid benefit from the retiree. The pension system must recoup that overpayment from the retiree because it is unlawful to pay out a benefit that is not legally allowable or earned.

Public agencies cannot continue to make payments to retirees as proposed by SB 266 for the same legal basis that requires pension systems to recoup their disallowed retirement benefit payments to retirees. Continued payment of a disallowed benefit to a retiree would constitute a gift of public funds, in violation of Section 6, Article 16 of the California Constitution. Again, it is unfortunate that after an agency and their bargaining unit came to an agreement on benefits and those benefits had been paid for any amount of time for the benefit to be taken from the retiree. Although public agencies may feel morally or ethically compelled to do so, public agencies simply cannot continue to make payments directly to a retiree for an unlawful benefit.

ASSEMBLY FLOOR: 73-0, 9/11/19

AYES: Aguiar-Curry, Arambula, Bauer-Kahan, Berman, Bloom, Boerner Horvath, Bonta, Brough, Burke, Calderon, Carrillo, Cervantes, Chau, Chen, Chiu, Chu, Cooley, Cooper, Cunningham, Daly, Diep, Eggman, Flora, Fong, Frazier, Friedman, Gabriel, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez, Gray, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, McCarty, Medina, Melendez, Nazarian, Obernolte, O'Donnell, Patterson, Petrie-Norris, Quirk, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Voepel, Waldron, Weber, Wood, Rendon

NO VOTE RECORDED: Bigelow, Choi, Mayes, Mullin, Muratsuchi, Wicks

Prepared by: Gideon L. Baum / L., P.E. & R. / (916) 651-1556

9/11/19 20:14:30

**** END ****

SENATE THIRD READING

STR Bill Id:SB 266

Author:(Leyva)

As Amended Ver:September 3, 2019

Majority vote

SUMMARY:

Establishes new procedures and requirements relating to the reporting of disallowed compensation by state, school or contracting agency employers to the California Public Employees' Retirement System (CalPERS).

Major Provisions

1. Defines "disallowed compensation" for these purposes, and provide that if CalPERS determines that the compensation reported for a member by a public employer is disallowed compensation, CalPERS must require the employer to discontinue reporting such compensation. This requirement also applies to determinations made on or after January 1, 2017, if an appeal has been filed and the member, retired member, survivor or beneficiary has not exhausted their administrative of legal remedies.
2. Requires, after satisfaction of certain conditions, CalPERS to provide a notice to the public employer that reported contributions on disallowed compensation and the affected retired member, survivor or beneficiary. The public employer that reported the disallowed compensation must refund any overpayment of a prior paid benefit to CalPERS resulting from the disallowed compensation, and pay an annuity to affected retired member, survivor or beneficiary whose benefit has been reduced, unless there is a mutual agreement to pay a lump sum. As to educational entities participating in CalPERS, the final financial responsibility for funding such payments belong to the actual employer of the employee, as provided.
3. Permits public employers to submit to CalPERS an additional compensation item that is proposed to be included or contained in a memorandum of understanding (MOU) adopted or collective bargaining agreement entered into on and after January 1, 2020, that is intended to form the basis of a pension benefit calculation. CalPERS then must review the compensation item, as prescribed, for consistency of the proposal with the Public Employees' Pension Reform Act of 2013, certain statues relating to compensation earnable, and CalPERS' administrative regulations.
4. Expressly provides that these provisions do not alter or abrogate the responsibility of the employer and employee organization to meet and confer in good faith relating to the product of collective bargaining, and do not effect or alter a party's right to appeal any CalPERS determination regarding disallowed compensation.

COMMENTS:

Please see the policy committee analysis for a full discussion of this bill.

According to the Author:

"Retirees often plan and rely on a fixed income and should not be forced to take unpredictable and unfair benefit cuts. Senate Bill 266 gives retirees the peace of mind that they will not be forced to pay money back or have reductions to their future payments because of their employer's accounting or reporting errors."

Arguments in Support:

The California Professional Firefighters state that employers have a legal and actuarial obligation to correctly report pension-eligible compensation to CalPERS as a result of employer bargaining. If an item of compensation is later determined to be improper, it is appropriate public policy to require the employer to bear the actuarial liability of that promise made to their retiree. If the employer promises and pays for a benefit that is disallowed after the fact, the retiree living on a fixed income who has relied on the employer's commitment should not have to pay the price for that broken promise.

Arguments in Opposition:

Numerous local government entities state that this bill places 100% of the total liability for overpayments on public agencies which would abdicate the responsibility held by CalPERS to ensure the correct calculation and administration of retirement benefits. As a result, this bill constitutes a retroactive benefit enhancement that would further strain agency budgets at a time when retirement obligations are eliminating agencies' ability to provide critical services to the public. Opponents further express that this bill would create compliance and implementation issues that would constitute a gift of public funds in violation of the California Constitution.

FISCAL COMMENTS:

The Assembly Appropriations Committee states that this bill would result in ongoing costs to CalPERS of approximately $456,000 (for additional staff, including an actuary) to review MOUs and calculate employer costs where a retirement benefit must be adjusted. In addition, this bill would result in significant state costs, possibly in the millions of dollars (State General Fund or Proposition 98), if state agencies or school employers must cover the upfront costs of disallowed overpayments. Contributions based on disallowed compensation will be credited against future contributions, but employers must expend funds upfront to make the retired members whole.

VOTES:

SENATE FLOOR: 31-4-3

YES: Allen, Archuleta, Atkins, Beall, Bradford, Caballero, Chang, Dodd, Durazo, Galgiani, Glazer, Hertzberg, Hill, Hueso, Hurtado, Jackson, Leyva, McGuire, Mitchell, Monning, Nielsen, Pan, Portantino, Roth, Rubio, Skinner, Stern, Umberg, Wieckowski, Wiener, Wilk

NO: Borgeas, Jones, Morrell, Stone

ABS, ABST OR NV: Bates, Grove, Moorlach

ASM PUBLIC EMPLOYMENT AND RETIREMENT: 7-0-0

YES: Rodriguez, Voepel, Cervantes, Cooley, Cooper, Fong, O'Donnell

ASM APPROPRIATIONS: 18-0-0

YES: Gonzalez, Bigelow, Bloom, Bonta, Brough, Calderon, Carrillo, Chau, Diep, Eggman, Fong, Gabriel, Eduardo Garcia, Maienschein, Obernolte, Petrie-Norris, Quirk, Robert Rivas

UPDATED:

VERSION: September 3, 2019

CONSULTANT: Michael Bolden / P.E. & R. / (916) 319-3957 FN: 0001779

Date of Hearing: August 21, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

SBPCA Bill Id:SB 266

Author:(Leyva) – As Amended Ver:August 14, 2019

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill establishes new procedures and requirements related to the reporting of disallowed compensation and the adjustment of retired benefit levels for members of the California Public Employees’ Retirement System (CalPERS). Specifically, this bill

1. Requires the state, school employer or contracting agency (covered employer) to discontinue reporting disallowed compensation, as defined, that occurred on or after January 1, 2017, and adjusts contributions and benefits as follows:
2. For an active member, all contributions made on the disallowed compensation will be credited against future contributions to the benefit of the covered employer and the covered employer will return the member’s contributions.
3. For a retiree, survivor or beneficiary (retired member) whose final compensation was predicated upon the disallowed compensation, contributions made on that compensation will be credited against future contributions to the covered employer’s benefit and then CalPERS will permanently adjust the benefit of the retired member.
4. Requires covered employers, in cases affecting retired members, to pay, either as a lump sum or as an annuity, the actuarial equivalent present value of the difference between the monthly allowance that was based on the disallowed compensation and the new monthly corrected allowance. A lump sum will be paid to the retired member only if all parties agree.
5. Authorizes a covered employer to submit an additional compensation item that is proposed to be part of a memorandum of understanding (MOU) or collective bargaining agreement for CalPERS to review for consistency with current law and administrative regulations.

FISCAL EFFECT:

1. Ongoing costs to CalPERS of approximately $456,000 to review MOUs and calculate employer costs in cases when a retirement benefit must be adjusted. These costs reflect the costs of two staff to review MOUs and one actuary for the new actuarial process.
2. Significant state costs – possibly in the millions of dollars General Fund or Proposition 98 - to the extent that state agencies or school employers must cover the upfront costs of disallowed overpayments. Contributions based on disallowed compensation will be credited against future contributions, but employers must still expend funds upfront to make the retired members whole.

COMMENTS:

1. Background and purpose. CalPERS requires contracting employers to provide accurate and timely payroll information to correctly calculate employees’ service credit and final compensation for retirement. These payroll reports contain information on the employee’s earnings and contributions, as well as other information, such as work schedule and special compensation.

According to SB 226’s findings and declarations, a firefighter with nearly 30 years of service requested an official retirement estimate from CalPERS. However, in 2017, CalPERS notified the firefighter retiree that their former employer had erroneously reported and remitted contributions, which CalPERS later determined in an audit was not pensionable compensation. CalPERS sought repayment of the overpayment directly from the retired firefighter totaling thousands of dollars and imposed a future reduction to the firefighter’s monthly allowance.

According to the bill’s sponsor, the California Professional Firefighters, SB 266 will protect the retirement security of CalPERS members by ensuring any collectively bargained compensation promised by the employer and reported to CalPERS cannot be subsequently and retroactively taken back at the retired member’s expense.

1. Recent amendments. Recent author amendments to SB 266 include technical clarifications as well as substantive changes. These changes include:
   1. Clarifying that the default repayment to a retiree is through an annuity. Prior versions of this bill allowed a retired member whose monthly benefit was reduced because it was predicated on disallowed compensation to choose either a lump sum payment or an annuity as a repayment option. Local employers expressed concern about the financial constraints of a lump sum payment, and the current version of the bill allows such a payment only if all parties mutually agree.
   2. Softening CalPERS’ review responsibilities. Under prior versions of SB 266, a contracting agency may submit to CalPERS a compensation item proposed to be included in an MOU or collective bargaining agreement, and CalPERS would determine compliance with current law and regulations. The current version softens this requirement by having CalPERS review a proposal’s “consistency” with current law and regulations and requiring CalPERS to provide guidance to an employer, rather than a determination.
2. Recent legislation. SB1124 (Leyva), of the 2017-18 Legislative Session, also dealt with disallowed compensation for CalPERS members, retirees, beneficiaries and survivors, and was vetoed by Governor Brown who stated:

I share the author's view that a pension must be correctly calculated according to the law in the first instance so that retirees never find themselves on the hook for overpayments. Clearly, remedies are needed to correct such situations.

But, I'm concerned that this bill's broad provisions could be easily abused to circumvent limitations in law intended to protect the government – and ultimately taxpayers – from pension spiking. Indeed, in the case of an error, this bill would effectively perpetuate that error for the rest of a member's life, at substantial taxpayer expense.

Before changing the law in the way that this bill does, I encourage the Legislature to develop policies to prevent such errors in the first place. Such policies might include requiring CalPERS to review and approve any proposals for pensionable compensation in a [MOU] before the memorandum is finalized. Then, if errors still occurred after CalPERS's review, the penalties and ongoing costs in this bill might be warranted.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: June 26, 2019

ASSEMBLY COMMITTEE ON PUBLIC EMPLOYMENT AND RETIREMENT

Freddie Rodriguez, Chair

SBPCA Bill Id:SB 266

Author:(Leyva) – As Amended Ver:June 17, 2019

SENATE VOTE: 31-4

SUBJECT: Public Employees’ Retirement System: disallowed compensation: benefit adjustments

SUMMARY: Establishes requirements relating to the reporting of disallowed compensation by state, school or contracting agency employers to, and retirement benefits paid by, California Public Employees’ Retirement System (CalPERS) retirees and their survivors or beneficiaries. Specifically, this bill:

1. Defines “disallowed compensation” to mean compensation reported for a member by a public employer that CalPERS subsequently determines is not in compliance with the Public Employees’ Pension Reform Act (PEPRA) of 2013, other existing law or administrative regulations of the system.
2. Requires, if CalPERS determines that the compensation reported for a member by state, school or contracting agency employers is disallowed compensation, that CalPERS must require discontinued reporting of such compensation by these employers and that this applies to determinations made on or after January 1, 2017, if the appeal rights (administrative or legal) of the member, survivor or beneficiary have not been exhausted.
3. Requires, for active CalPERS members, that all contributions (including normal contributions required to be paid by the member) made on disallowed compensation be credited by CalPERS against future contributions to the benefit of state, school or contracting agency employers that reported such compensation, and returned to the member by the employer.
4. Requires, for retired CalPERS members, survivors or beneficiaries whose final compensation at the time of retirement was based on disallowed compensation, the contributions made on the disallowed compensation must be credited against future contributions to the benefit of state, school or contracting agency employers, and CalPERS to permanently adjust the benefit of the affected retired member, survivor or beneficiary to reflect exclusion of the disallowed compensation.
5. Requires CalPERS to provide a notice to state, school or contracting agency employers that reported contributions on disallowed compensation and the affected retired member, survivor or beneficiary, including, at minimum, the following information:
   1. The amount of overpayment resulting from the disallowed compensation made by the state, school or contracting agency employer;
   2. The actuarial equivalent present amount owed to the retired member, survivor or beneficiary; and
   3. Written disclosure of the employer’s obligations to the retired member, as provided.
6. Provides that the aforementioned repayment and notice requirements regarding a permanent adjustment to the benefit to the retired member, survivor or beneficiary apply only if all of the following conditions are satisfied:
7. The compensation was reported to CalPERS and contributions were made on that compensation while the member was actively employed;
8. The compensation was provided for in a memorandum of understanding (MOU) or collective bargaining agreement (CBA) as compensation for pension purposes;
9. The determination by the system that disallowed compensation was made after the date of retirement; and
10. The member was not aware that compensation was disallowed at the time it was reported.
11. Requires, if all conditions (see number six above) are satisfied, the state, school or contracting agency employer that reported the disallowed compensation to (a) pay, as a direct payment to CalPERS, the full cost of any overpayment paid that resulted from the disallowed compensation and (b) pay either a lump sum or annuity to, and in accordance with the option selected by, the retired member, survivor or beneficiary.

The lump sum or annuity to be paid by the employer must be based on the amount of the actuarial equivalent present value of the difference between the monthly allowance predicated on the disallowed compensation and the permanently adjusted benefit for the duration that the allowance is projected to be paid by the system and pursuant to a settlement or agreement between the parties.

1. Requires CalPERS, upon request, to provide the state, school or contracting agency employer with contact information in its possession of the retired member, survivor or beneficiary so that they may fulfill their obligations pursuant to remitting a lump sum payment or annuity to those individuals. In addition, the recipient of this contact information must keep it confidential.
2. Permits state, school or contracting agency employers to submit to CalPERS for review, an additional compensation item that is proposed to be included or is contained in, a MOU adopted or CBA entered into on and after January 1, 2020, that is intended to form the basis of a pension benefit calculation for the system to determine compliance with the Public Employees’ Retirement Law (PERL), as specified, and the administrative regulations of the system.
3. Provides that a submission by state, school or contracting agency employers to CalPERS for review must include only the proposed compensation item language and a description of how it meets criteria, as specified, along with any other supporting documents or requirements that CalPERS deems necessary to evaluate compliance with the PERL, as specified, and administrative regulations of the system.

In addition, CalPERS is required to respond to the submission within 90 days of receipt of all information required to make a determination, and must periodically publish a notice of the proposed compensation package language submitted to the system for review and determination of compliance.

1. Expressly provides that these provisions do not alter or abrogate the responsibility of the employer and employee organization to meet and confer in good faith relating to the product of collective bargaining.
2. Makes findings, declarations and states legislative intent for these purposes, including the necessity to limit public access to confidential personal contact information held by CalPERS regarding retired members of the system, their survivors and beneficiaries.

EXISTING LAW:

1. Establishes CalPERS and sets the purpose of the system as affecting the economy and efficiency of public service by providing a path for employees who are incapacitated or superannuated to leave state service, without hardship or prejudice, and be replaced by more capable employees.
2. Establishes the CalPERS Board of Administration (Board) and vests the Board with the authority to administer the CalPERS defined benefit pension system, including determining who is an eligible employee to receive benefits and what assets can be purchased by CalPERS.
3. Provides that, in its discretion and upon any terms it deems just, the Board may correct errors or omissions of any active or retired member, or any beneficiary of an active or retired member, as specified.
4. Requires that, in the event of an erroneous payment to a CalPERS member or beneficiary, CalPERS has three years from the date of payment to collect the erroneous payment from the member or beneficiary. However, in the case of fraud, CalPERS has 10 years from the discovery of the erroneous payment to collect.
5. Establishes the PEPRA of 2013 (Chapter 296, Statutes of 2012) which, among other provisions, limit the types of compensation that can be counted towards the calculation of pension benefits for new members. Pursuant to the PEPRA, this is referred to as “limitations on pensionable compensation.”
6. Requires, pursuant to the PEPRA, CalPERS to limit the pensionable compensation used to calculate the contributions required of any employer or a new member to the amount of compensation that would be used for calculating a defined benefit as set forth under federal law (Section 430 (b) of Title 42 of the United States Code on January 1, 2013) and the Consumer Price Index for All Urban Consumers, as specified.
7. States the intent of the Legislature in implementing PEPRA that the Board has all powers reasonably necessary to invest the assets associated with, and to administer and implement the provisions of the PEPRA, to the extent and with the same effect as if the provisions of the act are contained in the PERL.
8. Permits a contracting agency to report an amount for each member that is equal to a uniformly applied percentage of salary in lieu of computing and reporting the actual compensation attributable for each individual member, if the contracting agency has agreed in a memorandum of understanding pursuant to existing law, as specified, that the aggregate amount to be reported for all members within a class of membership classification bears a reasonable relation to the aggregate amount that would otherwise be required to be reported for purposes of compensation earnable.
9. Defines “compensation” to mean remuneration paid out of funds controlled by the employer in payment for the member’s services performed during normal working hours or for time during which the member is excused from work because of holidays, sick leave or industrial disability leave.
10. Defines “compensation earnable” to mean the payrate and special compensation of the member, as defined and limited pursuant to existing law, and “payrate” to mean the normal monthly rate of pay or base pay of the member paid in cash to similarly situated members of the same group or class of employment for services rendered on a full-time basis during normal working hours, pursuant to publicly available pay schedules. For members who are not in a group or class, payrate means the monthly rate of pay or base pay of the member, paid in cash and pursuant to publicly available pay schedules for services rendered on a full-time basis during normal working hours, subject to certain limitations, as specified.

FISCAL EFFECT: According to the Senate Appropriations Committee, CalPERS indicates that its costs to implement the bill are unknown, but would likely be in the millions of dollars annually (General Fund and Special Funds). The precise amount will depend on specific factors that are difficult to determine in advance.

COMMENTS: According to the author, “[r]etirees often plan and rely on a fixed income and should not be forced to take unpredictable and unfair benefit cuts. Senate Bill 266 gives retirees the peace of mind that they will not be forced to pay money back or have reductions to their future payments because of their employer’s accounting or reporting errors.

‘In 2012, after serving the public for nearly 30 years, a firefighter employed by the City of Davis retired. Prior to retiring, the firefighter requested an official retirement estimate from CalPERS, which provided a projection of retirement benefits as of the firefighter’s estimated retirement date. Based on the information provided by CalPERS in their official retirement estimate, the firefighter made the decision to retire.

‘In 2017, CalPERS notified the long-retired firefighter that the City of Davis had reported certain compensation, which CalPERS believed was not pensionable compensation. Consequently, CalPERS sought to collect the overpayment reimbursement not from the City of Davis that had mistakenly reported the special compensation, but from the retired firefighter. The reimbursement sought by CalPERS included a lump sum amount of $42,000 and a sizeable, future reduction in the retired firefighter’s monthly retirement allowance.

‘Unfortunately, a handful of other firefighter, law enforcement, and school retirees have reported similar stories across multiple CalPERS employers.

‘Senate Bill 266 protects a retiree’s already-promised and paid-for collectively bargained benefits in cases where the benefit is disallowed by CalPERS after the member has already retired. It also sets parameters for resolving future disputes over active and retired employees’ collectively bargained pensionable compensation.”

1. Comments by Supporters

According to the California Professional Firefighters, “[e]mployers have a legal and actuarial obligation to correctly report pension-eligible compensation to CalPERS as a result of employer bargaining. If an item of compensation is later determined to be improper, it is appropriate public policy to require the employer to bear the actuarial liability of that promise made to their retiree.

‘If pensionable compensation is misapplied, it should be corrected. But that misapplication should not come at the cost of breaking the promise made to someone already retired and living on a fixed pension that they depend on in retirement. It is the employer’s sole responsibility to ensure that any offers for compensation be consistent with state law and regulation for the express purpose of correctly calculating an employee’s future service credit and final compensation for retirement. It is also the employer’s obligation to meet and confer with the employee organization regarding the disputed item of compensation to immediately remedy the error with respect to active employees.

‘If the employer promises and pays for a benefit that is disallowed after the fact, the retiree living on a fixed income who is budgeting according to that fixed income should not have to pay the price for that broken promise. And, employers should make sure that taxpayers don’t have to pay the cost of such mistakes to future retirees.”

1. Comments by Opponents

The California Special Districts Association and League of California Cities state in part that, “Senate Bill 266 places 100 percent of the total liability for overpayments on public agencies – abdicating all responsibility previously held by CalPERS to ensure that retirement benefits are calculated and administered correctly. Senate Bill 266 is a de facto and retroactive benefit enhancement measure that will further strain local agency budgets at a time when retirement obligations are effectively eliminating agencies’ ability to provide critical services for the public.” More specifically, they state that CalPERS would have no incentive to properly calculate benefits; SB 266 will create compliance and implementation issues and constitutes a gift of public funds in violation of the California Constitution, and also express concerns relative to the legislative findings and declarations.

Several cities, the California State Association of Counties, and the Rural Counties Representatives of California state similar, but not all, aforementioned concerns regarding this measure.

The County of Placer states in part that this bill would eliminate due process rights for employees and employers, increases financial risks for local governments, violates separation of powers, lacks financial certainty for employees and employers, and offers similar aforementioned arguments expressed by others. In addition, the County of Placer states that, “[a]n amendment to Section 20164 of the Government Code would substantially protect the employee and require CalPERS to work with local entities to make sure proper compensation is reported.”

The San Bernardino County District Advocates for Better Schools (SANDABS) requests that “school employers” be removed from the bill given recent budgetary actions in the 2019 Budget Act to provide relief to schools regarding pension liabilities, but this bill would shift a financial burden onto public schools. In addition, SANDABS states that use of term “school employer” is misleading when considering with whom the retiree was employed at the time the disallowed compensation was contained in a collective bargaining agreement, and is confusing based on the role of school districts and county offices of education for purposes of employment and CalPERS reporting. SANDABS also questions whether this bill would apply to charter schools because of ambiguity as to whether such schools are “school employers.” In conclusion, SANDABS requests that “school employers” be removed from the provisions of the measure.

3) Prior or Related Legislation

Senate Bill 1124 (Leyva, 2018) also dealt with disallowed compensation for CalPERS members, retirees, beneficiaries, and survivors, and was vetoed by Governor Brown who stated:

“I share the author's view that a pension must be correctly calculated according to the law in the first instance so that retirees never find themselves on the hook for overpayments. Clearly, remedies are needed to correct such situations.

‘But, I'm concerned that this bill's broad provisions could be easily abused to circumvent limitations in law intended to protect the government – and ultimately taxpayers – from pension spiking. Indeed, in the case of an error, this bill would effectively perpetuate that error for the rest of a member's life, at substantial taxpayer expense.

‘Before changing the law in the way that this bill does, I encourage the Legislature to develop policies to prevent such errors in the first place. Such policies might include requiring CalPERS to review and approve any proposals for pensionable compensation in a [MOU] before the memorandum is finalized. Then, if errors still occurred after CalPERS's review, the penalties and ongoing costs in this bill might be warranted.”

Chapter 909, Statutes of 2018 (Assembly Bill 1912, Rodriguez) provides protections relating to a reduction in retirement benefits by prohibiting member agencies of a Joint Powers Authority (JPA) from disclaiming the retirement liability of a JPA, and requiring the apportionment of retirement liability among JPA member agencies if the JPA's agreement with CalPERS is terminated, or the JPA dissolves or ceases operations as applied to other California public retirement systems or associations, among other provisions.

REGISTERED SUPPORT / OPPOSITION:

Support

California Professional Firefighters (Sponsor)

American Federation of State, County and Municipal Employees, AFL-CIO

Association of California State Supervisors

California School Employees Association, AFL-CIO

Organization of SMUD Employees

Peace Officers’ Research Association of California

Riverside Sheriffs’ Association

San Diego County Court Employees Association

Opposition

California Association of School Business Officials

California Special Districts Association

California State Association of Counties

City of Beverly Hills

City of Downey

City of Thousand Oaks

County of Placer

League of California Cities

Rural County Representatives of California

San Bernardino County District Advocates for Better Schools (Opposed, unless amended)

Analysis Prepared by: Michael Bolden / P.E. & R. / (916) 319-3957

 THIRD READING  

Bill No: SB 266

Author: Leyva (D)

Amended: 5/17/19

Vote: 21

SENATE LABOR, PUB. EMP. & RET. COMMITTEE: 4-0, 3/27/19

AYES: Hill, Jackson, Mitchell, Pan

NO VOTE RECORDED: Morrell

SENATE APPROPRIATIONS COMMITTEE: 4-1, 5/16/19

AYES: Portantino, Bradford, Hill, Wieckowski

NOES: Jones

NO VOTE RECORDED: Bates

SUBJECT: Public Employees’ Retirement System: disallowed compensation: benefit adjustments

SOURCE: California Professional Firefighters, AFL-CIO

Peace Officers’ Research Association of California

DIGEST:

This bill requires that, in the event of a California Public Employees’ Retirement System retiree having their pension reduced due to the inclusion of compensation by the relevant public employer that cannot be counted towards a final pension calculation, the public employer must cover the reduced benefit to the retiree, as specified.

ANALYSIS:

Existing law:

1. Establishes the California Public Employees’ Retirement System (Cal-PERS) and sets the purpose of the System as effecting the economy and efficiency of public service by providing a path for employees who are incapacitated or superannuated to leave state service, without hardship or prejudice, and be replaced by more capable employees. (Government Code §§20001 & 20002)
2. Establishes the Cal-PERS Board of Administration (Board) and vests the Board with the authority to administer the Cal-PERS defined benefit pension system, including determining who is an eligible employee to receive benefits and what assets can be purchased by Cal-PERS. (Government Code §§20090, 20125 & 21090)
3. Provides that, in its discretion and upon any terms it deems just, the Board may correct errors or omissions of any active or retired member, or any beneficiary of an active or retired member, as specified. (Government Code §20160)
4. Requires that, in the event of an erroneous payment to a Cal-PERS member or beneficiary, Cal-PERS has three years from the date of payment to collect the erroneous payment from the member or beneficiary. In the case of fraud, however, Cal-PERS has 10 years from the discovery of the erroneous payment to collect. (Government Code §20164)
5. Creates the California Public Employees’ Pension Reform Act (PEPRA) of 2013, which limited what types of compensation can be counted in the calculation of pension benefits for new members. (Government Code §§7522 & 7522.34)
6. States the intent of the Legislature, in implementing PEPRA, that the Board has all powers reasonably necessary to invest the assets associated with, and to administer and implement the provisions of PEPRA, to the extent and with the same effect as if the provisions of the act are contained in the Public Employees’ Retirement Law. (Government Code §20004)

This bill:

1. Requires that, if Cal-PERS determines that the compensation reported for a Cal-PERS member by a public employer is in conflict with existing law or regulations, Cal-PERS must prohibit the public employer from continuing to report the disallowed compensation. This requirement also applies to determinations made on or after January 1, 2017, if the appeal rights of the Cal-PERS member have not been exhausted.
2. Requires that, in the case of an active Cal-PERS member, all contributions on disallowed compensation must be credited against future contributions to the benefit of the public employer by Cal-PERS and the public employer must return the member’s contributions that were paid on the disallowed compensation.
3. Requires, in the case of a retired Cal-PERS member or survivor or beneficiary whose final compensation at the time of retirement was based on disallowed compensation, the contributions made on the disallowed compensation must be credited against future contributions to the benefit of the public employer.
4. Requires Cal-PERS to permanently reduce the retired Cal-PERS member or survivor or beneficiary’s benefit to exclude the disallowed compensation.
5. Requires the public employer to both pay Cal-PERS the full cost of any overpayment resulting from the disallowed compensation and pay to the retired Cal-PERS member, survivor, or beneficiary a lump sum or annuity based on the difference between the permissible retirement benefit and the actuarially equivalent present amount of the disallowed compensation.
6. States that Cal-PERS must also provide a notice to the public employer and affected retired Cal-PERS member or survivor or beneficiary that includes, at a minimum:
   1. The amount overpayment resulting from the disallowed compensation made by the public employer;
   2. The actuarial equivalent present amount owed to the retired Cal-PERS member, survivor, or beneficiary; and
   3. Written disclosures by the public employer’s obligations to the retired member under this bill.
7. Requires that the double-payment described above is only due if the following is applicable:
   1. The compensation was reported to Cal-PERS and the contributions were made on that compensation while the member was actively employed;
   2. The compensation was provided for in a memorandum of understanding as compensation for pension purposes;
   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.
8. Permits public employers to submit to Cal-PERS for review any compensation proposal intended to form the basis of a pension benefit calculation in order to determine compliance with California Public Employment Retirement Law. Cal-PERS must respond to the compensation proposal within 90 days.
9. Requires that Cal-PERS periodically publishes a notice of the proposed compensation language submitted to the system by public employers for review and Cal-PERS’s determination of compliance.
10. Makes findings and declarations on the need to protect retired Cal-PERS members from retroactive clawbacks and permanent reductions in retirement benefits.

Comments

Need for this bill? The author states the following:

[I]n 2012, after serving the public for nearly 30 years, a firefighter employed by the City of Davis retired. Prior to retiring, the firefighter requested an official retirement estimate from CalPERS, which provided a projection of retirement benefits as of the firefighter’s estimated retirement date. Based on the information provided by CalPERS in their official retirement estimate, the firefighter made the decision to retire.

In 2017, CalPERS notified the long-retired firefighter that the City of Davis had reported certain compensation, which CalPERS believed was not pensionable compensation. Consequently, CalPERS sought to collect the overpayment reimbursement not from the City of Davis that had mistakenly reported the special compensation, but from the retired firefighter. The reimbursement sought by CalPERS included a lump sum amount of $42,000 and a sizeable, future reduction in the retired firefighter’s monthly retirement allowance.

Unfortunately, a handful of other firefighter, law enforcement, and school retirees have reported similar stories across multiple CalPERS employers.…

SB 266 protects a retiree’s already-promised and paid-for collectively bargained benefits in cases where the benefit is disallowed by CalPERS after the member has already retired. It also sets parameters for resolving future disputes over active and retired employees’ collectively-bargained pensionable compensation.

Related/Prior Legislation

SB 1124 (Leyva, 2018) also dealt with disallowed compensation for Cal-PERS members, retirees, beneficiaries, and survivors. SB 1124 was vetoed by Governor Brown, who said the following in his veto message:

This bill would establish a retiree's permanent right to incorrectly calculated pension benefits in cases where an error resulted in paying the retiree higher pension benefits than allowed by law.

I share the author's view that a pension must be correctly calculated according to the law in the first instance so that retirees never find themselves on the hook for overpayments. Clearly, remedies are needed to correct such situations.

But I'm concerned that this bill's broad provisions could be easily abused to circumvent limitations in law intended to protect the government-and ultimately taxpayers-from pension spiking. Indeed, in the case of an error, this bill would effectively perpetuate that error for the rest of a member's life, at substantial taxpayer expense.

Before changing the law in the way that this bill does, I encourage the Legislature to develop policies to prevent such errors in the first place. Such policies might include requiring CalPERS to review and approve any proposals for pensionable compensation in a memorandum of understanding before the memorandum is finalized. Then, if errors still occurred after CalPERS's review, the penalties and ongoing costs in this bill might be warranted.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee, Cal-PERS indicates that its costs to implement this bill are unknown, but would likely be in the millions of dollars annually (General Fund and special funds); the precise amount will depend on specific factors that are difficult to determine in advance.

SUPPORT: (Verified 5/16/19)

California Professional Firefighters, AFL-CIO (co-source)

Peace Officers’ Research Association of California (co-source)

American Federation of State, County and Municipal Employees, AFL-CIO

California School Employees Association, AFL-CIO

Riverside Sheriffs Association

OPPOSITION: (Verified 5/16/19)

California Special Districts Association

California State Association of Counties

League of California Cities

ARGUMENTS IN SUPPORT: The California Professional Firefighters, AFL-CIO argue the following in support of this bill:

Under current practice, when a CalPERS member is within one year of their expected retirement date, they may request up to two official CalPERS-generated retirement estimates in a 12-month period. Official estimates use a member’s current account information to project retirement benefits….

As a contracting agency, CalPERS requires an employer to submit specific information about each of its employees to the retirement system in the form of a payroll report. Information contained in this report includes an employee’s earnings, contributions, and other pertinent information, such as pay rate, work schedule, total hours worked, reportable earnings, special compensation, and contribution amounts (both by employer and employee).…

In 2012, a firefighter employed by the City of Davis retired after serving the public for nearly 30 years. Prior to retiring, the firefighter twice requested an official retirement estimate from CalPERS, which provided a projection of retirement benefits as of the firefighter’s estimated retirement date. Based on the information provided by CalPERS in their official retirement estimate, the firefighter made the decision to retire.

In 2017 – five years after the Davis firefighter retired -- CalPERS notified the retired firefighter that the City of Davis had reported certain compensation that CalPERS believed was not pensionable. Consequently, CalPERS sought to collect reimbursement for the overpayment -- not from the City of Davis that had bargained in good faith over that pensionable compensation, but instead sought collection from the retired firefighter. The reimbursement sought by CalPERS included a lump sum amount of $42,000 and a sizeable, future reduction in the retired firefighter’s monthly retirement allowance….

If the employer promises and pays for a benefit that is disallowed after the fact, the retiree living on a fixed income who is budgeting according to that fixed income should not have to pay the price for that broken promise. And, employers should make sure that taxpayers don’t have to pay the cost of such mistakes to future retirees. For these reasons, we are pleased to sponsor this important bill.

ARGUMENTS IN OPPOSITION: The California Special Districts Association , League of California Cities, and the California State Association of Counties, writing in opposition, argue the following:

Under current law, once a benefit is determined to be disallowed, both the employer and the employee cease making future payments on that benefit, past contributions from the employee are returned to the employee, while past contributions from the employer are applied towards future payment. Unfortunately, in the case of a retiree that received the disallowed benefit, the pension system must recoup the overpaid benefit from the retiree. The pension system must recoup that overpayment from the retiree because it is unlawful to pay out a benefit that is not legally allowable or earned.

Public agencies cannot continue to make payments to retirees as proposed by SB 266 for the same legal basis that requires pension systems to recoup their disallowed retirement benefit payments to retirees. Continued payment of a disallowed benefit to a retiree would constitute a gift of public funds, in violation of Section 6, Article 16 of the California Constitution. Again, it is unfortunate that after an agency and their bargaining unit came to an agreement on benefits and those benefits had been paid for any amount of time for the benefit to be taken from the retiree. Although public agencies may feel morally or ethically compelled to do so, public agencies simply cannot continue to make payments directly to a retiree for an unlawful benefit.

Prepared by: Gideon L. Baum / L., P.E. & R. / (916) 651-1556

5/20/19 13:37:49

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

SB 266 (Leyva) - Public Employees’ Retirement System: disallowed compensation: benefit adjustments

Bill Summary:

SB 266 would establish new procedures for employees covered by the California Public Employees Retirement System (CalPERS) in cases where their pensionable benefits are erroneously calculated and reported to CalPERS by their employer.

*********** ANALYSIS ADDENDUM – SUSPENSE FILE ***********

The following information is revised to reflect amendments

adopted by the committee on May 16, 2019

Fiscal Impact:

CalPERS indicates that its costs to implement the bill are unknown, but would likely be in the millions of dollars annually (General Fund and special funds); the precise amount will depend on specific factors that are difficult to determine in advance.

Author Amendments:

(1) Clean up definition of “disallowed compensation,” (2) Clarify

which documentation should be submitted to CalPERS for review, (3) Provides 90 days, following all requested materials, for CalPERS to make a determination, (4) Removes CalPERS liability if it overturns its own determination, (5) Requires the publication of model language for ease of administration and employer replication, and (6) Provides employers clear process for receiving determinations from CalPERS on whether their pensionable comp proposal, as applied, is compliant.

-- END --

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

SB 266 (Leyva) - Public Employees’ Retirement System: disallowed compensation: benefit adjustments

Bill Summary:

SB 266 would establish new procedures for employees covered by the California Public Employees Retirement System (CalPERS) in cases where their pensionable benefits are erroneously calculated and reported to CalPERS by their employer.

Fiscal Impact:

CalPERS indicates that its costs to implement the bill are unknown, but would likely be in the millions of dollars annually (General Fund and special funds); the precise amount will depend on specific factors that are difficult to determine in advance (See Staff Comments).

Background:

Current law provides (1) a defined benefit retirement plan for state and public school employees administered through CalPERS, and (2) that local public employers can contract, as specified, with CalPERS to provide retirement benefits for their local public employees. The Public Employees’ Pension Reform Act of 2013 (PEPRA) made substantial changes to public retirement benefits provided to new members, including defining the categories of pensionable compensation that can be used to calculate a retirement allowance.

CalPERS requires contracting employers to provide accurate and timely payroll information in order to correctly calculate their employees’ service credit and final compensation for retirement. These payroll reports contain information on the employee’s earnings and contributions, as well as other information, including pay rate, work schedule, and special compensation. In the event of an erroneous payment to a CalPERS member or beneficiary, CalPERS has three years to collect. The window is ten years in the case of fraud.

Instances have occurred where employers incorrectly reported employees’ pensionable compensation to CalPERS. Current law places on the employee all of the penalties for a public employer filing disallowed compensation with CalPERS. This has resulted in the retired member (1) having to pay back to CalPERS the overpayment amount, and (2) sustaining a reduction in their future retirement allowances.

Proposed Law:

This bill would, among other things, do the following:

• Require that, if CalPERS determines that the compensation reported for a CalPERS member by a public employer is in conflict with existing law or regulations, it must prohibit the public employer from continuing to report the disallowed compensation. This requirement also applies to determinations made on or after January 1, 2017 if the appeal rights of the CalPERS member have not been exhausted.
• Require that, in the case of an active CalPERS member, all contributions on disallowed compensation must be credited against future contributions to the benefit of the public employer by CalPERS and the public employer must return the member’s contributions that were paid on the disallowed compensation.
• Require, in the case of a retired CalPERS member or survivor or beneficiary whose final compensation at the time of retirement was based on disallowed compensation, the contributions made on the disallowed compensation must be credited against future contributions to the benefit of the public employer.
• Require CalPERS to permanently reduce the retired CalPERS member or survivor or beneficiary’s benefit to exclude the disallowed compensation.
• Require the public employer to both pay CalPERS the full cost of any overpayment resulting from the disallowed compensation AND pay to the retired CalPERS member, survivor, or beneficiary a lump sum or annuity based on the difference between the permissible retirement benefit and the actuarially equivalent present amount of the disallowed compensation.
• Require CalPERS to provide a notice to the public employer and affected retired CalPERS member or survivor or beneficiary that includes, at a minimum: (1) the amount overpayment resulting from the disallowed compensation made by the public employer, (2) the actuarial equivalent present amount owed to the retired CalPERS member, survivor, or beneficiary, and (3) written disclosures by the public employer’s obligations to the retired member under this bill.
• Require that the aforementioned overpayment is only due if the following is applicable: (1) the compensation was reported to CalPERS and the contributions were made on that compensation while the member was actively employed, (2) the compensation was provided for in a memorandum of understanding as compensation for pension purposes, (3) the determination by the system that compensation was disallowed was made after the date of retirement, (4) the member was not aware that the compensation was disallowed at the time it was reported, and (5) for any disallowed compensation subject to a memorandum of understanding entered into on or after January 1, 2020, the public employer failed to secure an affirmative determination of the compensation proposal from CalPERS.
• Require public employers to submit to CalPERS for review any compensation proposal intended to form the basis of a pension benefit calculation in order to determine compliance with California Public Employment Retirement Law (PERL). CalPERS must respond to the compensation proposal within 60 days.
• Require that, if CalPERS determines that the compensation proposal complies with PERL, then CalPERS must fulfill the obligations described above for disallowed compensation, rather than the public employer.

Related Legislation:

SB 1124 (Leyva, 2018) was similar to this bill, as it also pertained to disallowed compensation for CalPERS members, retirees, beneficiaries, and survivors. The bill was vetoed by the Governor.

Staff Comments:

As noted above, this bill would place with an employer (as opposed to the employee per current law) the consequences of reporting disallowed pensionable compensation to CalPERS. Additionally, the bill would require CalPERS to analyze all compensation proposals and determine if they comply with the law within 60 days. If the compensation agreements comply with the law, then CalPERS assumes the full liability of any future disallowable compensation. CalPERS provides retirement benefits to the State, over 1,500 public agencies and over 1,300 school districts. CalPERS indicates that participating employers include roughly 30,000 MOUs covering various bargaining units. Several of the bill’s resulting annual fiscal drivers are unknown, including (1) number of MOUs that would need to be reviewed each fiscal year, (2) the number of “compensation proposals” CalPERS would receive each fiscal year, and (3) complexity of each “compensation proposal” and corresponding length of time that would be required to conduct the review.

When SB 1124 was heard by this Committee last year, CalPERS indicated that it would require eight hours to review a State Bargaining Unit MOU, and 12 hours for an MOU of a contracting agency. The agency estimated a total annual need of 38 positions and $4 million to perform the additional workload. One position (roughly $150,000 annually in salary and operating expenses) would be dedicated to reviewing State Bargaining Unit MOUs; the remaining positions would review contracting agency MOUs.

-- END --

SENATE COMMITTEE ON LABOR, PUBLIC EMPLOYMENT AND RETIREMENT

Senator Jerry Hill, Chair

2019 - 2020 Regular

Bill No: SB 266 Hearing Date: March 27, 2019

Subject: Public Employees’ Retirement System: disallowed compensation: benefit adjustments

KEY ISSUE

Should the Legislature require that, in the event of a California Public Employees’ Retirement System retiree having their pension reduced due to the inclusion of compensation by the relevant public employer that cannot be counted towards a final pension calculation, the public employer must cover the reduced benefit to the retiree, as specified?

Should the Legislature require that, if Cal-PERS found that a compensation complied with the law and later revised that decision, Cal-PERS must cover the reduced benefit for the retiree, as specified?

ANALYSIS

Existing law:

1. Establishes the California Public Employees’ Retirement System (Cal-PERS) and sets the purpose of the System as effecting the economy and efficiency of public service by providing a path for employees who are incapacitated or superannuated to leave state service, without hardship or prejudice, and be replaced by more capable employees.
   (Government Code §§20001 & 20002)
2. Establishes the Cal-PERS Board of Administration and vests the Board with the authority to administer the Cal-PERS defined benefit pension system, including determining who is an eligible employee to receive benefits and what assets can be purchased by Cal-PERS.
   (Government Code §§20090, 20125 & 21090)
3. Provides that, in its discretion and upon any terms it deems just, the Board may correct errors or omissions of any active or retired member, or any beneficiary of an active or retired member, as specified. (Government Code §20160)
4. Requires that, in the event of an erroneous payment to a Cal-PERS member or beneficiary, Cal-PERS has 3 years from the date of payment to collect the erroneous payment from the member or beneficiary. In the case of fraud, however, Cal-PERS has 10 years from the discovery of the erroneous payment to collect. (Government Code §20164)
5. Creates the California Public Employees’ Pension Reform Act (PEPRA) of 2013, which limited what types of compensation can be counted in the calculation of pension benefits for new members. (Government Code §§7522 & 7522.34)
6. States the intent of the Legislature, in implementing PEPRA, that the Board has all powers reasonably necessary to invest the assets associated with, and to administer and implement the provisions of PEPRA, to the extent and with the same effect as if the provisions of the act are contained in the Public Employees’ Retirement Law. (Government Code §20004)

This bill:

1. Requires that, if Cal-PERS determines that the compensation reported for a Cal-PERS member by a public employer is in conflict with existing law or regulations, Cal-PERS must prohibit the public employer from continuing to report the disallowed compensation. This requirement also applies to determinations made on or after January 1, 2017 if the appeal rights of the Cal-PERS member have not been exhausted.
2. Requires that, in the case of an active Cal-PERS member, all contributions on disallowed compensation must be credited against future contributions to the benefit of the public employer by Cal-PERS and the public employer must return the member’s contributions that were paid on the disallowed compensation.
3. Requires, in the case of a retired Cal-PERS member or survivor or beneficiary whose final compensation at the time of retirement was based on disallowed compensation, the contributions made on the disallowed compensation must be credited against future contributions to the benefit of the public employer.
4. Requires Cal-PERS to permanently reduce the retired Cal-PERS member or survivor or beneficiary’s benefit to exclude the disallowed compensation.
5. Requires the public employer to both pay Cal-PERS the full cost of any overpayment resulting from the disallowed compensation AND pay to the retired Cal-PERS member, survivor, or beneficiary a lump sum or annuity based on the difference between the permissible retirement benefit and the actuarially equivalent present amount of the disallowed compensation.
6. Cal-PERS must also provide a notice to the public employer and affected retired Cal-PERS member or survivor or beneficiary that includes, at a minimum:
   • 1. The amount overpayment resulting from the disallowed compensation made by the public employer;
     2. The actuarial equivalent present amount owed to the retired Cal-PERS member, survivor, or beneficiary; and
     3. Written disclosures by the public employer’s obligations to the retired member under this bill.
7. Requires that the double-payment described above is only due if the following is applicable:
   • 1. The compensation was reported to Cal-PERS and the contributions were made on that compensation while the member was actively employed;
     2. The compensation was provided for in a memorandum of understanding as compensation for pension purposes
     3. The determination by the system that compensation was disallowed was made after the date of retirement;
     4. The member was not aware that the compensation was disallowed at the time it was reported; and
     5. For any disallowed compensation subject to a memorandum of understanding entered into on or after January 1, 2020, the public employer failed to secure an affirmative determination of the compensation proposal from Cal-PERS.
8. Requires public employers to submit to Cal-PERS for review any compensation proposal intended to form the basis of a pension benefit calculation in order to determine compliance with California Public Employment Retirement Law (PERL). Cal-PERS must respond to the compensation proposal within 60 days.
9. Requires that, if Cal-PERS determines that the compensation proposal complies with PERL, then Cal-PERS must fulfill the obligations described above for disallowed compensation, rather than the public employer.
10. Makes findings and declarations on the need to protect retired Cal-PERS members from retroactive clawbacks and permanent reductions in retirement benefits.

COMMENTS

1. Need for this bill?

The author states the following:

“[I]n 2012, after serving the public for nearly 30 years, a firefighter employed by the City of Davis retired. Prior to retiring, the firefighter requested an official retirement estimate from CalPERS, which provided a projection of retirement benefits as of the firefighter’s estimated retirement date. Based on the information provided by CalPERS in their official retirement estimate, the firefighter made the decision to retire.

In 2017, CalPERS notified the long-retired firefighter that the City of Davis had reported certain compensation, which CalPERS believed was not pensionable compensation. Consequently, CalPERS sought to collect the overpayment reimbursement not from the City of Davis that had mistakenly reported the special compensation, but from the retired firefighter. The reimbursement sought by CalPERS included a lump sum amount of $42,000 and a sizeable, future reduction in the retired firefighter’s monthly retirement allowance.

Unfortunately, a handful of other firefighter, law enforcement, and school retirees have reported similar stories across multiple CalPERS employers.

…

SB 266 protects a retiree’s already-promised and paid-for collectively bargained benefits in cases where the benefit is disallowed by CalPERS after the member has already retired. It also sets parameters for resolving future disputes over active and retired employees’ collectively-bargained pensionable compensation.”

1. Staff Comments:

Incentives and Behavior

As discussed above, current law places all of the penalties for a public employer filing disallowed compensation with Cal-PERS on the employee. This opens the door to unfortunate possibility of a public employer, trying to resolve an impasse during a negotiation for a new Memorandum of Understanding (MOU), pledging to count special compensation as pensionable compensation. While such an offer might be in good faith, the final consequences of a reduced pension and significant owed compensation to Cal-PERS would be on the retired public employee, rather than the public employer. SB 266 places these consequences on the shoulders of the public employer, rather than the employee.

However, SB 266 also creates new requirements on Cal-PERS. Specifically, the bill requires Cal-PERS to analyze all compensation proposals and determine if they comply with the law within 60 days. If the compensation agreements comply with the law, then Cal-PERS takes on the full liability of any future disallowable compensation. The bill is silent on what happens if Cal-PERS finds that a compensation proposal does not comply with the law or if Cal-PERS is simply silent and does not reach a conclusion within the required 60 days.

On one hand, this creates the potential incentive that public employers will attempt to force future MOUs through Cal-PERS approval process, placing the liability on the entire retirement system, rather than the individual employer, for the inclusion of disallowed compensation in a MOU. Similarly, if Cal-PERS concluded that a MOU contained disallowed compensation, would that place Cal-PERS in the middle of a contentious negotiation between labor and an employer?

The Committee may wish to consider if SB 266 creates negative incentives for Cal-PERS that undermine the retirement system and the core mission of Cal-PERS.

Technical Amendments

As noted above, Cal-PERS is required to analyze compensation proposals from public employers in order to determine if the proposals are comply with PERL. However, the bill is silent on what is a “compensation proposal”, and this may create confusion as to which employees the bill covers.

Therefore, the Committee may wish to consider inserting “from a memorandum of understanding” after “compensation proposal” on pages 6, line 33, and page 7, line 1.

1. Proponent Arguments

The California Professional Firefighters argue the following in support of the bill:

“ Under current practice, when a CalPERS member is within one year of their expected retirement date, they may request up to two official CalPERS-generated retirement estimates in a 12-month period. Official estimates use a member’s current account information to project retirement benefits as of the estimated retirement date.

As a contracting agency, CalPERS requires an employer to submit specific information about each of its employees to the retirement system in the form of a payroll report. Information contained in this report includes an employee’s earnings, contributions, and other pertinent information, such as pay rate, work schedule, total hours worked, reportable earnings, special compensation, and contribution amounts (both by employer and employee).

…

In 2012, a firefighter employed by the City of Davis retired after serving the public for nearly 30 years. Prior to retiring, the firefighter twice requested an official retirement estimate from CalPERS, which provided a projection of retirement benefits as of the firefighter’s estimated retirement date. Based on the information provided by CalPERS in their official retirement estimate, the firefighter made the decision to retire.

In 2017 – five years after the Davis firefighter retired -- CalPERS notified the retired firefighter that the City of Davis had reported certain compensation that CalPERS believed was not pensionable. Consequently, CalPERS sought to collect reimbursement for the overpayment -- not from the City of Davis that had bargained in good faith over that pensionable compensation, but instead sought collection from the retired firefighter. The reimbursement sought by CalPERS included a lump sum amount of $42,000 and a sizeable, future reduction in the retired firefighter’s monthly retirement allowance….

If the employer promises and pays for a benefit that is disallowed after the fact, the retiree living on a fixed income who is budgeting according to that fixed income should not have to pay the price for that broken promise. And, employers should make sure that taxpayers don’t have to pay the cost of such mistakes to future retirees. For these reasons, we are pleased to sponsor this important bill.”

1. Opponent Arguments:

The California Special Districts Association (CSDA), League of California Cities (LCC), and the California State Association of Counties (CSAC), writing in opposition, argue the following:

“Under current law, once a benefit is determined to be disallowed, both the employer and the employee cease making future payments on that benefit, past contributions from the employee are returned to the employee, while past contributions from the employer are applied towards future payment. Unfortunately, in the case of a retiree that received the disallowed benefit, the pension system must recoup the overpaid benefit from the retiree. The pension system must recoup that overpayment from the retiree because it is unlawful to pay out a benefit that is not legally allowable or earned.

Public agencies cannot continue to make payments to retirees as proposed by SB 266 for the same legal basis that requires pension systems to recoup their disallowed retirement benefit payments to retirees. Continued payment of a disallowed benefit to a retiree would constitute a gift of public funds, in violation of Section 6, Article 16 of the California Constitution. Again, it is unfortunate that after an agency and their bargaining unit came to an agreement on benefits and those benefits had been paid for any amount of time for the benefit to be taken from the retiree. Although public agencies may feel morally or ethically compelled to do so, public agencies simply cannot continue to make payments directly to a retiree for an unlawful benefit.”

1. Prior Legislation:

SB 1124 (Leyva) of 2018 also dealt with disallowed compensation for Cal-PERS members, retirees, beneficiaries, and survivors. SB 1124 was vetoed by Governor Brown, who said the following in his veto message:

“This bill would establish a retiree's permanent right to incorrectly calculated pension benefits in cases where an error resulted in paying the retiree higher pension benefits than allowed by law. 

I share the author's view that a pension must be correctly calculated according to the law in the first instance so that retirees never find themselves on the hook for overpayments. Clearly, remedies are needed to correct such situations.

But I'm concerned that this bill's broad provisions could be easily abused to circumvent limitations in law intended to protect the government-and ultimately taxpayers-from pension spiking. Indeed, in the case of an error, this bill would effectively perpetuate that error for the rest of a member's life, at substantial taxpayer expense.

Before changing the law in the way that this bill does, I encourage the Legislature to develop policies to prevent such errors in the first place. Such policies might include requiring CalPERS to review and approve any proposals for pensionable compensation in a memorandum of understanding before the memorandum is finalized. Then, if errors still occurred after CalPERS's review, the penalties and ongoing costs in this bill might be warranted.”

SUPPORT

California Professional Firefighters, AFL-CIO (Co-Sponsor)

Peace Officers’ Research Association of California (Co-Sponsor)

California School Employees Association, AFL-CIO

Riverside Sheriffs Association

OPPOSITION

California Special Districts Association

California State Association of Counties

League of California Cities

-- END –