CalPERS Contracting Agencies Face New World of Liability Woes

SB 278 was signed into law on Sept. 27, adding Government Code section 20164.5. Section 20164.5 imposes new liability on employers when CalPERS identifies an error in the reporting of compensation agreed upon between an employer and recognized employee organization that results in the reduction of a retiree’s, survivor’s or beneficiary’s (collectively retirees) pension benefits. While SB 278 goes into effect on Jan. 1, 2022, it will apply to adverse determinations about reportable compensation rendered on or after Jan. 1, 2017, if an appeal has been filed and the retiree has not exhausted administrative or legal remedies.  

CalPERS reviews compensation reported to the system through periodic compliance reviews, upon receipt of anonymous tips or at the time of an employee’s retirement. When CalPERS determines the reported amounts do not qualify as reportable for pension purposes, the disallowed compensation must be removed by the employer from all impacted pay periods in the my|CalPERS system. After corrections, all contributions paid on the disallowed compensation are credited back to the employer for active employees and retirees. This results in a minimal impact to active employees. However, this can have a substantial adverse impact on the pension allowance received by retirees requiring a reduction to the pension benefit they receive retroactively to the date of retirement. This reduction takes two forms: an overpayment based on the excess pension benefits received from the date of retirement and a decrease in future pension benefits. Under current law, CalPERS can collect 3 years of overpaid pension benefits from retirees—irrespective of the retiree’s length of retirement.

SB 278 shifts significant liability to the employer. Specifically, SB 278 imposes a statutory obligation on employers to repay the overpayment to CalPERS on behalf of the retiree and pay a lump sum penalty equal to 20% of the present value of the lifetime loss of pension benefits attributed to the disallowed compensation. Of this penalty, 90% is paid to the retiree and 10% is paid to CalPERS as an administrative fee. SB 278’s risk to employers is magnified by the fact that any review or determination focused on a single individual identifying disallowed compensation by CalPERS can be expanded into a global audit spanning multiple years and impacting numerous retirees. Therefore, employers should focus efforts on ensuring compliance for employees who have a high risk of triggering a global review.

Further, SB 278 allows employers to request a compliance review of proposed language regarding compensation items to be contained in a memorandum of understanding or collectively bargained agreement that will be entered into or adopted on Jan. 1, 2022 or later. While CalPERS is required by the new law to provide guidance within 90 days of receiving all information required to make a review, SB 278 does not identify what qualifies as guidance, how long CalPERS has to continue requesting information or what happens when CalPERS provides inaccurate or incomplete guidance.

With the implementation of SB 278 looming, employers should consider auditing the compensation they are reporting for their represented employees. Further, while SB 278 is limited to compensation that is the subject of negotiations between an employer and a recognized employee organization, it is prudent for employers to assess risk across all employee groups, as new legislation that extends the scope to non-represented employees is likely to follow. As such, we recommend conferring with legal counsel experienced in CalPERS to review relevant documents to assess risk and exposure as well as to formulate resolution strategies.

Disclaimer: BB&K Legal Alerts are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.