• California Legislature Adopts Comprehensive Pension Reform
  • September 4, 2012 | Authors: Allison De Tal; Isabel Cesanto Safie; John D. Wahlin
  • Law Firm: Best Best & Krieger LLP - Riverside Office
  • Today the California Legislature adopted Assembly Bill 340 and in doing so, has enacted comprehensive state-wide pension reform unlike anything seen before in California, or anywhere in the nation. While Best Best & Krieger LLP will be providing a detailed summary of AB 340 in the next few days, this legal alert offers an overview of key changes included in the bill, which are effective January 1, 2013.

    The more significant changes will apply only to new employees. However, many of the provisions intended to curb “pension spiking” will also apply to current employees. New employees are generally defined as: (1) any employee who has not been a member of a public retirement system prior to January 1, 2013, or (2) if an employee has been a member of a public retirement system prior to January 1, 2013, he or she was not subject to reciprocity, or (3) any employee that has experienced a break in service of more than six months.

    New Employees Only:

    • Caps pensionable salaries at the Social Security wage base for employees covered by Social Security, or 120% of that amount for employees who are not covered by Social Security. These caps will be adjusted annually.
    • Establishes mandatory retirement formulas. For non-safety employees, the formula is 2% at 62. For safety employees, there are three formulas: 2% at 57, 2.5% at 57 and 2.7% at 57. The applicable formula will be the one that most closely resembles an agency’s existing safety formula without exceeding it.
    • Establishes a mandatory 36 consecutive month final compensation period.
    • Limits pensionable compensation to base pay. Special compensation is generally excluded unless considered regular and reoccuring pay.
    • New members may not participate in existing supplemental defined benefit plans, including PARS plans.

    All Employees:

    • New members will be required to pay at least 50% of the normal cost of retirement benefits. A similar target is established for current employees of public agencies, subject to bargaining.
    • Establishes limitations on the employment of retirees within the same public retirement system.
    • Prohibits retroactive retirement benefit enhancements, the purchase of “air-time”, the adoption of new supplemental defined benefit plans, and the use of qualified replacement plans not already in place prior to January 1, 2013.
    • Expands the types of convictions that will cause the forfeiture of pension benefits.

    These reforms apply to nearly all public employers in California. However, the U.C. system, charter cities and charter counties are exempt unless these entities participate in retirement systems governed by state statute (e.g., CalPERS, CalSTRS or county plans adopted pursuant to CERL). Public employers that have adopted individual retirement plans will need to review their plans to determine the amendments that will be necessary to comply with AB 340. Public employers participating in retirement systems will need to monitor those systems to determine what actions will be necessary. All public employers subject to AB 340 will need to assess how the changes will impact their collective bargaining process.

    AB 197, a companion bill with technical amendments to AB 340, was also adopted today. We have reviewed the technical amendments and have determined that they do not make significant changes but rather clean-up what was considered to be an unintended loophole in the amendments made by AB 340 to the County Employees’ Retirement Law of 1937.