As most of you know, the California Legislature adopted and Governor Brown signed Assembly Bill 340 to comprehensively implement statewide pension reform. AB 340 goes into effect on January 1, 2013, and amends various provisions of the Public Employees’ Retirement Law (“PERL”), Teachers’ Retirement Law (“TRL”), and the County Employees’ Retirement Law of 1937 (“CERL”).
The extent to which AB 340 affects your agency will vary based upon the retirement system and any contracts like Memoranda of Understanding that affect retirement benefits. Below I have outlined, in simple form, some frequently asked questions that have come up over the last few days. Bear in mind, many questions and sometimes conflicting interpretations are arising every day. I will keep you posted on new developments as they come to light.
THE SUMMARY OF AB 340
Here is a summary of what AB 340 does:
(1) Equal sharing of annual normal costs of benefits;
(2) Compulsory reduced retirement formulas and increased retirement ages
(3) Limitations on pensionable compensation;
(4) Anti-spiking provisions;
(5) Limitations on post-retirement employment;
(6) Forfeiture of pension benefits upon the conviction of certain felonies;
(7) Equal health benefits;
(8) Prohibition of pension funding holidays for employers;
(9) Final compensation for local elective or appointed office; and
(10) Improved industrial disability retirement benefits.
WHAT AGENCIES DOES AB 340 AFFECT?
AB 340 affects all state, schools, and local government employers such as cities, counties, and special districts, excluding judges. AB340 also excludes the University of California and charter cities and charter counties that do not participate in CalPers.
DOES AB 340 APPLY TO CURRENT EMPLOYEES OR JUST NEWLY HIRED EMPLOYEES?
Parts of AB 340 apply to current members and parts apply to new members hired on or after
January 1, 2013. There are some exceptions for employees who move between retirement systems or had a break in service.
Attached please read a Preliminary Summary of Reform Provisions of AB 340 that CalPers has recently prepared.
DID AB 340 CHANGE THE DEFINED BENEFIT FORMULAS
Yes, for new members AB 340 created new formulas for both non-safety employees and safety employees.
DID AB 340 CAP RETIREMENT COMPENSATION?
Yes, for new members only. AB 340 would cap the annual salary that counts towards final compensation at $110,100.00 for employees in social security or $132,120.00 for employees who do not participate in social security. The compensation cap would be adjusted annually based on the CPI.
DOES AB 340 REQUIRE PENSION COST SHARING?
Yes, and it applies to current and new members. AB 340 would require all new members to contribute at least 50% of the total annual normal cost of their pension benefit.
For current employees, AB 340 allows employers and employee organizations to mutually agree through the collective bargaining process cost sharing between January 1, 2013 and December 31, 2017. Beginning on January 1, 2018, the employer may unilaterally require employees to pay 50% of the total annual normal cost, up to an 8% contribution rate for non-safety employees and an 11% or 12% contribution rate for safety employees
Note that in addition, AB 340 prohibits employers from paying any part of the required employee contribution.
HOW IS THE EMPLOYEE SHARE ACCOUNTED FOR UNDER AB 340?
Great question! AB 340 prohibits employers from paying any part of the required employee contribution. Over the years, many employee organizations have negotiated Employer Paid Member Contributions (“EPMC”) which now appear to be prohibited. It also appears that the employee contribution would be included to determine the annual normal costs. Here is an example: Let’s say a safety employee has an employee contribution of 9% and the employer’s normal cost is 11%. The total cost would then be 20%, half of which the employee could agree to pay through the collective bargaining process.
Please note there are different interpretations on how the employee’s share is accounted for. One leading law firm in California that represents employers is asserting that the employee’s contribution does not account toward the employer’s total annual normal costs and that the employee alone is responsible for the employee contribution under AB 340. Using the same example above, a safety employee with a 9% employee contribution would be responsible for the entire 9% employee contribution and up to 50% of the employer’s normal cost of 11%. So the employee’s total exposure could be 14 ½% (9% plus 5 ½%). But this exceeds the cap so the safety employee in the example would be responsible for 11% or 12%.
Many commentators are suggesting that the legislature will be required to pass clean-up legislation before the end of the year to aid in the interpretation on how to properly follow the cost sharing rules of AB 340.
WHAT IS THE ANNUAL NORMAL COSTS OF PENSION BENEFITS?
The “normal cost” is the amount of contribution, as determined by the plan actuaries, necessary to fund an employee’s benefits if certain investment and economic assumptions are met. When plan assets fall below this amount, such as when investment and economic assumptions are not met, an unfunded liability is created and the contribution rate must be increased. This is why the actuaries change annual normal costs almost every year.
ARE STATE EMPLOYEES REQUIRED TO DO COST SHARING?
Yes, both current and future members will pay a fixed increased contribution rate at specific dates beginning on July 1, 2013. Those rates increase and vary depending upon the bargaining unit.
DOES AB 340 CHANGE HOW A MEMBER’S FINAL COMPENSATION IS CALCULATED?
Yes, for new members. AB 340 significantly changes the definition of “pensionable compensation” for new members and specifically excludes many forms of compensation from that calculation. One time payments, severance payments, payments for unused vacation, annual leave, and sick leave, housing allowances, vehicle allowances, uniform allowances and specified overtime compensation, to name a few, will not be included as pensionable compensation.
Also, for new members only, final compensation would be determined based on highest annual compensation earnable averaged over a 3-year period of time.
WHAT ARE THE MOST SIGNIFICANT IMPACTS OF AB 340 ON CURRENT EMPLOYEES
It appears that the most significant and costly portions of AB 340 apply only to new members hired on or after January 1, 2013. The biggest impact on current employees is a sharing of pension costs, the elimination of employees’ ability to purchase non-qualified service or “air time, ” the prohibition of retroactive pension benefit increases and a significant limitations on post retirement public employment. Also, employees convicted of a felony would forfeit their pension benefits.
I hope this answers some of your questions. Feel free to contact me directly if you have follow-up questions. Again, we are keeping an eye on changing interpretations of AB 340 and will keep you posted. Hope to talk to you soon.
Paul Q. Goyette