By Steven M. Berliner, Partner, and Danny Y. Yoo, Attorney, Liebert Cassidy WhitmoreIn California, increasing pension costs are already starting to crowd out any discretionary spending for many public agencies. Recent news from the California Public Employees’ Retirement System (“CalPERS”) offers little hope for relief for CalPERS agencies. In the last few years, actuarial changes at CalPERS will lead to even higher employer rates over the next few years. One significant change is reduction in CalPERS’ “discount rate” (i.e., assumed investment rate of return) from 7.5% to 7%, meaning that in order to pay for a defined benefit, employers must contribute more to the fund.
Legal Framework For public agencies, managing these cost increases is a daunting task. CalPERS agencies are bound by the Public Employees’ Retirement Law (“PERL”) and Public Employees’ Pension Reform Act of 2013 (“PEPRA”), which place limits on an employer’s options for reducing costs. CalPERS contracting agencies are also bound by the constitutional principles related to vested rights. On top of that, public agencies must further be cognizant of the Meyers-Milias-Brown Act (“MMBA”) and their obligations to notify and/or bargain with employee associations regarding changes to pension benefits.
With this backdrop, it is no wonder that public agencies have grown frustrated in trying to manage their increasing pension costs. However, while juggling all these obstacles is difficult, it is not impossible. It will require a lot of creativity and strong leadership.
Strategies
Have employees share more of the burdenTo some extent, PEPRA was a legislative attempt at this by eliminating employer-paid member contributions (“EPMC”) for new members (i.e., most of those who became CalPERS members on or after January 1, 2013) and requiring that these employees pay at least 50% of the “normal cost.” For classic members, agencies can start to reduce EPMC and have employees pay more of the employee contributions required by statute. This is usually one of the first things agencies do when trying to reduce costs, as it can be imposed upon represented employees after exhausting the meet and confer process. For both classic and new members, employers and employees can agree that employees will pay some of the employer’s portion as well (i.e. cost sharing under Government Code section 20516). Government Code section 20516.5, which was part of PEPRA, became effective on January 1, 2018. For the first time, it allows employers to impose, in limited amounts, the equivalent to cost sharing after meet and confer. It applies only to classic members.
Reduce “PERSable” items Employers can negotiate modifications to compensation and benefits with employees to reduce the amount that qualifies as “PERSable” compensation. For example, instead of more PERSable salary, employers could provide for more paid time off or health benefits. Another creative strategy is to purposely structure specialty pays so that they do not comply with CalPERS’ regulation on special compensation, making them non-reportable.
Restructuring retiree health benefitsPublic agencies could also attempt to lower their current and future retiree health benefit costs. Moving retirees into more affordable plans will reduce the costs for your agency. Reducing the amount contributed by the agency is also being considered by many public agencies. However, employers must approach either of these strategies with caution. A vested rights analysis should be done to determine whether these benefits are constitutionally protected in their current form. Agencies that participate in the CalPERS medical program have additional statutory constraints limiting their ability to reduce these benefits. You should work with legal counsel to analyze these specific issues to determine if this is a viable option for your agency.
Steven M. Berliner and Danny Y. Yoo are attorneys in the Los Angeles office of Liebert Cassidy Whitmore where they provide representation and legal counsel to special districts on a variety of labor and employment matters. Steven is the Chair of the Firm’s Retirement, Health and Disability Practice Group. For more information, contact info@lcwlegal.com.
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