HR Management & Compliance

Pension Reform for California

By Jeff Sloan and Susan Yoon, Renne Sloan Holtzman Sakai LLP

In a groundbreaking decision issued in August, the California Court of Appeal shot down a constitutional challenge brought by employees and their unions against the Marin County Employees’ Retirement Association’s (MCERA) action to eliminate certain forms of “spiking” payments from being included in the calculation of employees’ final compensation.

“Spiking” is a practice whereby public employees use a variety of methods to inflate their income in order to increase their retirement benefits. Upon review, the court issued an extraordinarily strong opinion rejecting a challenge to MCERA’s action and to the California Public Employees’ Pension Reform Act (PEPRA) itself.

Management practitioners are applauding the court for its comprehensive and courageous analysis. On the other hand, union attorneys and plaintiffs’ lawyers are characterizing the court’s decision as a significant and erroneous reformulation of long-standing California rules governing vested rights in pension systems. If the decision isn’t reversed by the California Supreme Court, it will facilitate further reform efforts by the California legislature and local pension systems.

MCERA’s Compliance with PEPRA Results in Litigation

Hundreds of billions of dollars in unfunded liabilities have shined a nationwide spotlight on the generous retirement benefits that public employees receive from their pension systems. The California legislature’s response to this crisis—the enactment of PEPRA—affected the entitlements of employees covered by almost all California pension systems.

In addition to reducing pension benefits for newly hired employees, PEPRA forbids pension systems from including a variety of spiking-related pay in the calculation of employees’ “final compensation.”

Struggling with its own pension difficulties, MCERA was one of the first pension boards to implement changes under PEPRA. In compliance with PEPRA, specifically, the recently amended Government Code Section 31461(b), MCERA adopted a new definition of “compensation earnable” that excluded standby pay, administrative response pay, callback pay, cash payments for waiving health insurance, and other pay from the calculation of members’ final compensation earned after January 1, 2013. The changes would affect only employees who had not yet retired.

Continue reading for more on the case and the bottom line for California employers.

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