A Decade of PEPRA: Bargaining for Classic and PEPRA

      

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.