January 2023 marked a
decade of the California Public Employees’ Pension Reform Act (PEPRA), which
changed the way CalPERS retirement and health benefits are applied and placed compensation
limits on employees who entered the pension system as PEPRA members.
As
we have passed the ten-year mark since the implementation of PEPRA, we are
seeing the number of PEPRA employees in the workforce grow significantly. Many associations
are reaching a membership makeup of fifty percent or more of PEPRA-classified
employees, meaning the vote of the PEPRA membership is quickly becoming the
majority vote.
Why is this significant?
There are significant differences between the Classic and PEPRA
retirement benefits. PEPRA changed the retirement formula to require employees
to work till age 57 in order to maximize their retirement benefits. While some
employers contracted with CalPERS at a reduced PEPRA benefit, the maximum
benefit under PEPRA is 2.7% at 57. The minimum retirement age remained at 50.
However, PEPRA employees who retire at 50 with at least 29 years of service will
only receive approximately 58% of their 36-month average in retirement
payments. At the same time, Classic members who retire at 50 with 30 years of
service will receive 90% of the 12-month or 36-month compensation average. The
average for Classic members can vary from 12 months to 36 months, depending on
the employer’s contractual agreement with CalPERS. For PEPRA members to reach
the 90% range, an employee will have to work until they are 57 with 34 years of
service. For PEPRA employees to hit the 90% range and retire at age 57, as seen
with the Classic retirement formulas, a PEPRA employee will have to enter the
retirement system on or before their 23rd birthday.
Another significant difference between Classic
and PEPRA retirement benefits are the compensation limits. Gov. Code §7522.20
sets annual compensation limits for PEPRA members. The 2023 compensation limits
are $146,042 for employees who are Social Security participants and $175,250
for employees who are non-Social Security participants. This means any
compensation earned over the annual compensation limit is not reported to
CalPERS as compensable income to be calculated in the employee’s 36-consecutive
month employment period. Classic members’ reportable compensation limits are
set under IRC section 401(a)(17). The 2023 reportable compensation limit for
Classic employees is much higher than PEPRA members and stands at $330,000. Some
PEPRA public safety employees have or will start nearing the annual
compensation limits. Therefore, PEPRA members not only have to work longer with
a reduced retirement benefit, but are also more likely to hit the annual
compensation limits, which in turn further reduces their retirement benefits.
The
differences in retirement benefits can create a divide in interests within
association memberships. PEPRA public safety employees who are nearing the
annual compensation limit may begin to veer away from bargaining income
reportable to CalPERS in an effort to keep from exceeding the compensation
limit. However, this strategy negatively impacts the Classic employees, who
continue to benefit from increasing their reportable compensation.
Bargainable Solutions
One way to address the compensation limits and
equalize retirement benefits is to bargain supplemental retirement benefits
such as deferred compensation plans and Retiree Health Savings Accounts. In
scenarios where the PEPRA employees are nearing their annual compensation
limit, consider bargaining deferred compensation plans for PEPRA members only
to deposit retirement contributions beyond the compensation limits. This will
encourage PEPRA employees to continue to bargain for reportable compensation as
it will provide alternative solutions for PEPRA members once they reach the
annual compensation limit.
Another concept to consider is bargaining
enhanced benefits with CalPERS. Employers were provided multiple retirement
formulas to be adopted under PEPRA. Employers were required to adopt a formula
closest to, but lower than, the current formula offered to employees at 55
years of age (PERL § 7522.25 (e)). This resulted in a number of employers
adopting a retirement formula of less than 2.7% at 57. If your employer offers
a formula less than 2.7% at 57, you can bargain an increased benefit formula
prospectively. However, the retirement formula proposed and agreed upon must be
permitted under PERL Sections 7522.20 and 7522.25. The employer must request a
contract amendment with CalPERS, and CalPERS will ultimately determine if the
requested amendments are allowable.
Lastly, consider proposals supporting
long-term health for both Classic and PEPRA employees. For PEPRA employees,
extending the retirement benefits to 2.7% @ 57 prolongs employees’ exposure (or
years) to the risks of a job in public safety. This further increases the
probability of a public safety employee sustaining some job-related injury or
death. This increases the risk of Workers’ Compensation claims for the
employer, reduces the likelihood of employees being able to work till
retirement age to maximize their benefits, and increases the risk of early death.
This also prolongs an employee’s exposure to critical incidents, negatively
impacting their mental health and well-being. Additionally, it creates an
environment where public safety becomes a less attractive job. This can be
addressed by bargaining for wellness programs, annual health evaluations,
baseline health measurements, exposure monitoring, critical incident
de-briefing, and increasing employee assistance programs.
A
decade has taught us a lot about PEPRA’s short comings. It is important to remember
to stay united and that there are ways to strategically bargain benefits that
help all members.
