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Initial Analysis of State Pension Reform

   Published on:  31 Aug, 2012

This inaugural post is to alert you to Assembly Bill 340, the California Public Employees’ Pension Reform Act of 2013, which will likely be passed into law sometime today. The statute is 60 pages and we are still analyzing its impact on bargaining and potential legal challenges. We will send out a further analysis early next week. Here is a summary of the most significant changes:

  • Cap pensionable salary for all new state and local members (hired after January 1, 2013) at the Social Security wage index limit ($110,100) for employees who participate in Social Security, or 120% of that limit ($132,120) if they do not. (The compensation cap can adjust annually based on changes in the Consumer Price Index (CPI).)
  • Gives the Legislature the right to modify the annual CPI adjustments to the compensation cap prospectively.
  • Requires new employees to pay for at least 50% of (normal) pension costs and encourages current employees to reach that level through collective bargaining.
  • Permits local employers to have their employees help pay for pension liabilities.
  • Permits employers to continue to offer plans with lower benefits and develop plans that are lower cost and lower risk if certified by the system’s actuary and approved by the Legislature.
  • Changes pension rates:
  • Eliminates all 3% safety pension rates for future employees.
  • For future local fire and police employees: 3 percent at 50 changes to 2 percent at 50 with a maximum of 2.7 percent at 57.
  • For future local miscellaneous employees: 2.5 percent at 55 changes to 2 percent at 62; with a maximum of 2.5 percent at 67.
  • Eliminates “pension spiking” by limiting post-retirement employment and requires 3 years final compensation to calculate benefits. Pensionable income for new employees is restricted and excludes non-recurring items, uniform allowance, vacation cashouts, etc.
  • Prohibits retroactive pension increases for all employees. Prohibits pension holidays for all employees and employers.
  • Prohibits service credit purchases (air time) for all employees submitting applications after January 1, 2013.
  • Felons convicted of certain crimes will forfeit pensions earned after the commission of the specified felonies.
  • Excludes Judges, the University of California and charter cities that do not participate in the California Public Employees’ Retirement System (CalPERS).
  • Prohibits employers from providing to managers or unrepresented employees a better retirement or vesting schedule for retiree health benefits than employees covered by an MOU.
  • Normal cost sharing for new state employees begins on January 1, 2013, and for existing employees a two-year phase in commences on July 1, 2013.
  • For local employees, MOUs in effect prior to January 1, 2013 cannot be impaired-required changes will not take effect until expiration of those agreements. Cost sharing will be negotiable, but changes cannot be imposed unilaterally (an agreement is required) until 2018. However, if no agreement is reached by January 1, 2018, which includes payment of at least 50% of the normal cost, the employer can unilaterally impose an even higher percentage of cost, after exhausting impasse procedures.

Click here to read an initial analysis prepared by CalPERS.