GENERAL MANAGER’S REPORT
13.	CALIFORNIA PENSION REFORM LEGISLATION REPORT
Meeting Date:		January 30, 2013	Budgeted:	Yes
From:		David J. Stoldt,	Program/	N/A
		General Manager	Line Item:
Prepared By:		Cynthia Schmidlin	Cost Estimate:	None
General Counsel Review: N/A
Committee Recommendation: N/A
CEQA Compliance: N/A

On September 12, 2012, Governor Brown signed AB 340, the “California Public Employee’s Pension Reform Act” (PEPRA). The law was effective January 1, 2013. Most, but not all, of its provisions apply to “new members”, as opposed to current employees. The California Public Employees’ Retirement System (CalPERS) has explained the provisions of PEPRA on its website, in circular letters, and through training, such as a recent webinar conducted in conjunction with the California Special Districts Association. PEPRA creates a two-tier retirement system. The purpose of this change is to effect a reduction in what many have criticized as excessive and unsustainable retirement benefits for public sector employees. This will result in significant cost-savings for public agencies, particularly in the long-term.

The idea of two-tier systems is not new. The Federal Government instituted a two-tier retirement system in 1987. Many private and public sector organizations have been implementing reductions to retirement and other health and welfare benefits for new employees, especially since the 2008 recession, in order to remain financially stable. These second tier plans have instituted such changes as increasing the employee share of cost for health benefits, limiting the accrual and payout of accumulated leave, and reducing the payments for retiree health care.

The CalPERS pension reform team continues to analyze PEPRA provisions and the resulting impacts. They have stated that their interpretations may be revised somewhat, as the law is implemented. The following summary provides the current understanding of how the changes in the law will impact the Monterey Peninsula Water Management District (MPWMD) and its employees. As the MPWMD staff is comprised entirely of miscellaneous members (non-safety), the summary will focus on the provisions of the law that effect that class of public employee.

Provisions of the California Public Employee’s Pension Reform Act (PEPRA)

Must be applied to all “new members”, hired after January 1, 2013.

I. Definition of a New Member. A new member is defined as any of the following:

• A new hire who is brought into CalPERS membership for the first time on or after January 1, 2013, and who has no prior membership in any California public retirement system or eligibility for reciprocity with another California retirement system.

• A member who first established CalPERS membership prior to January 1, 2013 and who is rehired by a different CALPERS employer after a break in service of greater than six months.

It is important to note that if a member has a break in service exceeding six months, but returns to service with the same employer, the member would not be considered a new member under PEPRA. All service for current members, even if the individual becomes a new member with another agency, will be calculated separately from any service under the PEPRA formulas.

II. Benefit Formulas. The reduced benefit formulas and increased retirement-age provisions under PEPRA create new defined benefit formulas for all new miscellaneous members. These were effective on January 1, 2013.

New Members:

New MPWMD Formula: 2% at 62, with an early retirement age of 52 and a maximum benefit factor of 2.5 at age 67.

Current Members

Current MPWMD Formula: 2% at 55, with early retirement at age 50 and maximum benefit factor of 2.418 at age 63.

III. Cost-Sharing of Pension Contributions

New Members:

For public agencies, a new member’s initial contribution rate will be at least 50% of the total normal cost rate for their defined benefit plan. CalPERS defines “normal” cost as the “actuarial determined annual cost of one year of service accrual.” This estimates the annual employer-employee contribution needed to pay for pensions earned during the year, along with investment earnings expected to cover about two-thirds of the total cost for CalPERS. The District’s total normal cost for new members has been initially set at 12.5%. The normal cost rate is subject to change over time, as it will be impacted by risk pool demographics and the actuarial assumptions used in retirement benefit funding.

Current Members:

Beginning January 1, 2018, public agencies that have collectively bargained in good faith and completed impasse procedures will be able to unilaterally require current members to pay up to 50% of the total normal cost of the pension benefit, up to a maximum of 8% of salary for miscellaneous employees. The MPWMD total normal cost rate for fiscal year 2013/2014 has been set at 15.421%. The District presently pays 100% of CalPERS premiums.

IV. Employer-Paid Member Contributions (EPMC)

New Members:

PEPRA prohibits the EPMC for new members.

Current Members:

EPMC may continue for current members, subject to labor contract negotiations.

VI. Purchase of Service Credit

New and Current Members:

Buying up to 5 years of “air time” not actually worked is now disallowed.

V. Compensation Caps

New Members:

This provision caps the annual pensionable compensation that can be used to calculate final compensation. The 2013 cap is $136,440 for members, such as those at the District, that do not participate in Social Security. This represents 120% of the 2013 Social Security contribution and benefit base.

Current Members:

There is no cap on annual pensionable compensation.

VI. Defined Benefit and Qualified Retirement Plans

New Members:

Restrictions on Supplemental Defined Benefit (DB) Plans:

This measure prohibits employers from offering a defined benefit or any combination of defined benefits, including a privately provided defined benefit, on compensation in excess of the new cap.

Employers are prohibited from providing new members with a supplemental defined benefit plan.

Limits on Employer Contributions on Compensation above the Cap

Employers are prohibited from making contributions for new members to any qualified retirement plan on pensionable compensation above the amount specified in Section 401(a)(17) of Title 26 of the United State Code ($250,000).

This measure provides that a contribution made by an employer to an employee’s deferred contribution plan is not a vested right.

Limits on Employer Contributions to Defined Contribution Plans for Employees Above Cap

This measure authorizes employers to make contributions to a defined contribution plan for employees so long as the plan and contributions meet federal limits and requirements. However, there is a limitation on employer contributions for employees above the compensation caps.

VII. Three-Year Final Compensation

New Members:

PEPRA requires that a three-year final compensation period be used to calculate the average final compensation for a retirement calculation for all new members.

Current Members:

The District’s CALPERS contract provides a one-year final compensation for current members.

VIII. Working After Retirement

New and Current Members: District retirees may not be employed for 180 days after the date of their retirement unless the Board approves an exception to fill a critical position for a temporary period, or in an extra-help capacity. Such exceptions may not be approved as part of the Consent Calendar. Retired annuitants are limited to 960 hours per annual or calendar year, with no extensions allowed.

IX. Forfeiture of Pension

New and Current Members: If a public employee is convicted of a felony arising from the performance of public duties, or connected with obtaining salary or other benefits for public service, the employee forfeits the portion of his or her pension accruing after the crime.

EXHIBIT

None

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