The Governor signed Assembly Bill 340 (“AB 340”) on September 12, 2012, and the new law will bring changes to California’s public retirement systems. AB 340, formerly known as the California Public Employees’ Pension Reform Act of 2013, applies to public retirement systems, with the exception of the University of California system and charter cities and counties. The major changes mandated by AB 340 are set out below. However, this bill is highly technical and contains multiple ambiguities. The purpose of this Legal Alert is to provide a general update. Specific questions must be addressed on a case by case basis.
One major aspect of AB 340 is the imposition of new retirement formulas that apply to new employees, which are those hired on or after January 1, 2013. The maximum benefit allowable for new nonsafety employees is 2.5 percent at age 67. One of three formulas will be used for safety employees. According to the Legislative Counsel’s digest, the amount of pensionable compensation upon which a defined benefit could be based for employees who participate in the federal Social Security system will be $110,000 in 2012, and 120 percent of that amount for employees whose service is not included in the Social Security system. These amounts will be adjusted annually.
AB 340 prohibits a public employer from making contributions on behalf of new employees for that portion of their income that exceeds an amount specified by federal law, which in 2012 was $250,000. The bill prohibits taking into account for the purpose of determining the amount of retirement benefits any compensation or salary that exceeds the amount specified by federal law. A public employer is also prohibited from seeking an exception to this prohibition.
Under the new law, a public employer is prohibited from providing retirement benefits to a manager, employee, or officer who is excluded from collective bargaining, that are more advantageous than the benefits provided to the employer’s other employees in related membership classifications. AB 340 also defines “final compensation” for new employees as the highest average pensionable compensation earned during a period of at least 36 consecutive months, or if applicable, at least 3 school years.
For new employees who contribute to a defined benefit plan, AB 340 requires a contribution of at least one-half of the annual cost of pension benefits. The bill authorizes employee contributions of more than one-half if agreed to by collective bargaining. Employers, however, are prohibited from using impasse procedures to increase the rate of employee contributions. AB 340 not only affects new employees, but also requires equal sharing of normal costs between employees and employers for existing employees. However, current employees with employment agreements entered into before January 1, 2013, are “grandfathered” until the agreement is amended, renewed, or extended.
For members of the State Teachers’ Retirement Plan, AB 340 establishes for new employees a minimum retirement age of 55 and retirement formula of 2.4 percent at age 65. The bill also prohibits an employer from offering a supplemental defined benefit plan unless it offered one before January 1, 2013, and revises the definition of creditable compensation.
Another change affects the Teachers’ Retirement Law which limits the amount of compensation for certain creditable service activities by a retired member to $22,000, which is adjusted by the percentage change in the average compensation that an active member of the defined benefit program may earn. AB 340 changes that limit to one-half of the median final compensation of all members who retired from service during the fiscal year ending in the previous calendar year. However, it appears that Education Code section 22714, which authorizes the CalSTRS “Golden Handshake” (two additional years of service), will not be affected by AB 340. AB 340 prohibits members who receive the Golden Handshake or “any financial inducement to retire” from performing services that are exempt from post-retirement earnings exemption. Additionally, CalSTRS retirees under the normal retirement age (currently 60) and members who have received financial incentive to retire will not be able to earn compensation for performing creditable activities after retirement for the first one-hundred eighty (180) days after retirement without adversely affecting their retirement benefits; their postretirement earnings limitation is zero for the first 180 days after retirement.
AB 340 prohibits public retirement systems from allowing employees to purchase nonqualified service credits. The new law also provides that any enhancement to a public retirement system’s retirement formula or increase in benefits that occurs on or after January 1, 2012, will only apply to work performed on or after the date of the enhancement. If a change in an employee’s employment results in an increase in the retirement benefit or formula, the increase will apply only to service on or after the date of the change in employment.
This law also requires a public employee, including an employee who is appointed or elected to public office, who is convicted of a felony for conduct related to his or her official duties or in connection with obtaining his or her salary or benefits, to forfeit those retirement benefits earned or accrued from the date of the commission of the felony. Any contributions to the retirement system made by the employee on or after the date of the commission of the felony would be returned without interest to the employee, unless otherwise ordered by a court or pension administrator.
AB 340 authorizes a person who is first appointed to a part-time or nonsalaried position on a state board or commission on or after January 1, 2013, to serve without reinstatement, with some exceptions. AB 340 prohibits a person who has retired from a public employer from being employed by or through a contract with a public employer who participates in the same retirement system from which the retiree receives a pension benefit without reinstatement, with some exceptions.
AB 340 requires PERS’s board of administration to implement changes to make sure that a contracting agency, that creates a significant increase in actuarial liability where an employee has been employed by more than one contracting public agency, bears the associated liability for that increase. The law requires a system actuary to assess the increase in liability created by the employer and adjust that employer’s rates to account for the increased liability.
Current law defines “compensation earnable” in regard to counties and districts for purposes of calculating retirement benefits as the average compensation for a period time. AB 340 prohibits certain payments and compensation from being included in “compensation earnable.” Unscheduled overtime, payments made for unused sick leave, vacation, or other time off, which exceeds what may be earned and payable during each 12-month period used to calculate final average salary will be excluded as well as specified payments made at the termination of employment. The law also requires a board to establish a procedure to determine whether a benefit was paid to enhance an employee’s retirement benefit. The board will be required to provide notice of its decision regarding a benefit and give the employee or employer an opportunity to obtain judicial review of that decision.
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