SB 278 Partially Shifts Financial Burden of Erroneous CalPERS Reporting to School Employers

10.19.2021

In recent years, CalPERS (like CalSTRS) has increased its scrutiny of compensation reported by school employers and contracting agencies (including K-12 and community college districts, and county superintendents of schools) (collectively referred to herein as “school employers”), largely by issuing audit findings, which have the effect of reducing retiree pensions, including imposing repayment obligations on retirees.

SB 278 Applies to CalPERS Audit Findings Retroactive to January 1, 2017

Senate Bill 278, which was signed into law on September 27, 2021, shifts some of the financial burden of erroneous reporting to school employers, with respect to CalPERS determinations to disallow compensation made on and after January 1, 2017 (provided administrative and legal remedies have not already been exhausted). It is important to note, however, that CalPERS determinations issued on or after January 1, 2017, may apply to compensation paid (and reported) well prior to that date.

In particular, where compensation reported by school employers is “disallowed,” meaning it is found (following an administrative appeal and/or legal challenge, if any) not to be consistent with the Public Employee Retirement Law or its implementing regulations, reporting of that compensation must be discontinued, and any portion of a retiree’s pension which is predicated on the disallowed compensation will no longer be paid.

Erroneous Employer and Employee Contributions May Be Credited Or Refunded

When compensation reported to CalPERS is disallowed, school employers will receive a credit towards future contributions in the amount of all employer and employee contributions made on the disallowed compensation, except that, in cases where reported compensation is disallowed for active employees, those employees will receive a refund of all employee contributions made on the disallowed compensation (and the school employer will, in such cases, only receive a refund of the employer contribution).

In contrast to the rule for active employees, SB 278 specifies that disallowed employee contributions made by, or on behalf of a retiree, will be credited directly to the school employer, and not refunded to the retiree.

School Employers May Have a Lump Sum Payment Obligation

Retired CalPERS members who were not in collective bargaining units do not appear to receive any benefit by virtue of SB 278. However, retired employees in collective bargaining units will qualify to receive a lump-sum payment directly from the school employer if all of the following circumstances apply:

The compensation was reported during active employment.
The compensation was agreed to in an MOU or collective bargaining agreement “as compensation for pension purposes,” and the employer and union did not “knowingly agree to compensation that was disallowed.”
CalPERS’ determination that the compensation was disallowed was made after the date of retirement.
The member was not aware the compensation was disallowed at the time it was reported.

If these circumstances apply, the school employer will be liable for the following:

The full cost of any pension overpayment to date — this amount is paid to CalPERS; and
A penalty of 20-percent of the actuarially-determined present value of the disallowed pension amount — 18-percent is paid directly by the school employer to the retiree and 2-percent is paid by the school employer to CalPERS.

Some portion of this liability will be offset by the aforementioned credit for employer and employee contributions. However, SB 278 does not fully clarify whether the above amounts will include responsibility for interest payments or whether any statute of limitations will apply. These issues may need to be clarified through regulation or adjudication. If, however, CalPERS refunds employer and employee contributions on the disallowed compensation going back to the first such contribution, the refunded amount may offset a significant portion of the school employer’s liability.

Asking CalPERS to Review New MOUs/CBAs

In an effort to avoid mistaken reporting in the future, SB 278 also allows school employers to submit proposed and adopted MOUs and collective bargaining agreements — which are “intended to form the basis for a pension benefit calculation” — to CalPERS for its review, beginning on or after January 1, 2022. CalPERS then has 90 days to respond, and CalPERS is additionally directed to publish the results.

This process may assist some employers in avoiding mistaken reporting — and school employers may wish to submit, as a matter of routine, all collectively bargained compensation increases to CalPERS for its review.. Of course, CalPERS should be expected to issue erroneous determinations from time to time, as they do now, and employers may wish to challenge these determinations either through an administrative hearing process or in court.

CONCLUSION

SB 278 creates substantial liability risk for employers who have mistakenly reported compensation to CalPERS, whether in the past, present, or future. Even narrow audit findings, if applied to employees already retired, may result in substantial liability. School employers are advised to consult with legal counsel at the outset of any CalPERS audit.

In consultation with legal counsel, employers are also advised to carefully review all MOUs and collective bargaining agreements for consistency with CalPERS requirements.

School employers with questions regarding SB 278 or CalPERS audits may contact the authors of this Alert, or their regular AALRR attorney.