By: Jeff Chang
A recent matter that came to our firm involving interpretation of the California Public Employees’ Pension Reform Act of 2013 (PEPRA) brought to light yet another painfully confusing question. What exactly is a “new member?”
During a recent phone call with counsel for a local agency, we discussed whether a new manager that the agency was planning to hire should be treated as a “new member” for PEPRA purposes. The determination would have significant financial implications for both the agency and the new manager. If, for example, the new manager could be viewed as a “classic member” rather than a “new member,” he would (among other things):
- Be able to participate in the higher pre-existing pension formula used by the agency;
- Not be required to contribute at least one-half of the employer’s normal cost for his pension; and
- Be able to take advantage of the final pay provision of the pre-existing plan rather than be subject to the 36-months, highest average pay rule.
Conversely, if the new manager was a “new member” under PEPRA, the agency’s costs for providing regular retirement benefits presumably would decrease because of the various PEPRA limitations, but both the agency and the new manager could have a more difficult time negotiating an overall package of compensation and benefits that the parties felt were comparable to those for other similar managers.
In our case, the agency’s counsel informed us that the new manager:
- Had been employed by another California public agency over ten years ago;
- Had participated in a public retirement system during that time; and
- Had been employed by a private sector employer for the last ten years.
The agency’s counsel also informed us that his client had already determined that the proposed manager was a new member for PEPRA purposes. To this, we asked, “Has the agency looked into whether there is reciprocity between the manager’s original public retirement system and the one in which the agency participates?” His response was that the agency had concluded that the new manager must be a new member because he had not been employed by a public agency for over six months and, therefore, must have suffered a six-month break in service. We explained that the new law was not that simple and that the “six-month break in service rule” applied only to an individual who had participated in a public retirement system, such as CalPERS, had a six-month break in service, and then returned to the same retirement system, but with a new participating employer. This was not the case in our situation. So what was missed?
First, the agency had “relied” on information it had read in a summary of PEPRA. One that stated: In addition, if an individual has a break in service of more than six months, and then returns to a retirement system with a new employer, that individual will be considered a new member and must be provided the lower benefit formulas specified by PEPRA.
While this statement is on its face accurate, agencies must bear in mind that this description deals with only one of three ways an individual can be a new member and pertains only to participation and re-participation in the same retirement system. In our case, the new manager had participated previously in a pubic retirement system that was different than the one in which the hiring agency participated.
Second, there were two other ways that an individual could be a new member under PEPRA. Government Code section 7522.04(f) states (as relevant here):
“New member” means any of the following:
- An individual who becomes a member of any public retirement system for the first time on or after January 1, 2013, and who was not a member of any other public retirement system prior to that date.
- An individual who becomes a member of a public retirement system for the first time on or after January 1, 2013, and who was a member of another public retirement system prior to that date, but who was not subject to reciprocity under subdivision (c) of Section 7522.02.
- An individual who was an active member in a retirement system and who, after a break in service of more than six months, returned to active membership in that system with a new employer.
Even though the third basis for being a new member was inapplicable in this case, we still needed to look at clauses (1) and (2). Clause (1) clearly didn’t apply because the new manager had previously participated in a public retirement system prior to 2013. However, clause (2) could apply if there was no reciprocity between the retirement system in which he previously participated and the agency’s retirement system. The agency needed to determine whether such reciprocity existed. If it did, the new manager would not be a “new member.”
Painful PEPRA headache gone for now? Just wait.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at firstname.lastname@example.org