State Pension Reform FAQ

Roy Given, Department of Finance

General Questions

Who is affected?

Nearly all government agencies in California. The law mandated pension reform statewide, including local governments like us, for new members as of January 1 2013. (The law does exclude the University of California and some charter cities and counties). The law permits reciprocity for members who join the Marin County Employees Retirement Association (MCERA) from another eligible public employer within California after January 1, 2013 – or from MCERA to another system with reciprocity. (With reciprocity, a newly hired employee to Marin County from another public agency will be eligible to enroll in our pension tier that was available on December 31, 2012, even if a new lower benefit pension tier is already in place.)

Will this Act save the County money?

Generally speaking, the provisions apply to new – not current – employees. As a result, it did not change our unfunded liability at the time of passage, but it will reduce our costs over the long run.

There are three general categories of cost savings that should be realized in the County as a result of PEPRA, including (1) lower normal costs as a result of the lower tiers; (2) greater employee cost sharing of normal costs; and (3) limiting pensionable earnings to prevent pension "spiking."  Generally speaking, the estimated annual savings is small initially, but will substantially increase over the long term. Specifically, on a cumulative basis, we estimated with our actuary new tier savings of approximately $10.6 million over 10 years and approximately $41.3 million over 20 years.

Changes affecting New Employees

How will pension benefits change for new employees?

For new, non-reciprocal public employees as of January 2013, the formula is 2% at age 62 for all new non-safety employees, excluding teachers. The earliest an employee would be eligible to retire is age 52 with a 1% factor and the maximum retirement factor of 2.5% is provided at age 67.

Three retirement formulas apply to new, non-reciprocal safety employees, depending on which is closest to their existing formula. Since our legacy Fire and Sheriff plan is 3% at age 50, the applicable formula is 2.7% at 57.

What changes will be made to how pension benefits are calculated?

The cap is equal to the Social Security wage index limit ($117,020 in 2015) for employees who participate in Social Security, or 120% of that limit ($140,424) if they do not participate in Social Security. For the County of Marin, since we don’t participate in Social Security, it is the higher limit of $140,424 (in 2015).

Currently, most of our employees use the average of their highest three years of compensation to calculate their pension benefit. That method doesn’t change, but the average of the three years will now be capped.

Does the new law include a hybrid option (e.g. an option that allows a pension that is part defined benefit and part defined contribution)?

No, the act does not include a hybrid option.

Does the new law allow for a defined contribution plan?

Yes, it does allow public employers to provide an additional defined contribution (DC) plan for compensation in excess of the cap described above in compliance with federal law. Employees who receive an employer contribution to a DC plan would not have a vested right to the employer contribution.

Does it affect what new employees pay into their pension?

Yes. It requires new, non-reciprocal employees to share one-half of the normal cost of the pension benefit with the employer. However, if there is an existing contract concerning employee cost sharing as of December 31, 2012, this provision would be implemented when the contract expires. Marin County’s new bargaining agreements as of September, 2015 include elimination of the County’s contribution toward the employee’s share of cost over a three-year period.

The Act also authorizes local agencies, including counties, to negotiate cost sharing agreements that include the costs of the unfunded pension liability. Cost sharing must be by agreement between the employer and employee representatives; however, additional new authority provides that the agreement may be reached bargaining unit-by-bargaining unit, rather than requiring all safety or all non-safety employees to agree. These terms cannot be imposed on a bargaining unit.

Does it change the types of pay that can be used to calculate pension benefits?

Yes. The Act has a stricter definition of “pensionable compensation” and excludes payments that we now consider “pensionable” for new, non-reciprocal employees, for example vehicle or uniform allowance.

Changes Affecting Existing Employees

Does it affect what existing employees must pay into their pension?

It may but that would be subject to negotiated agreements with our bargaining units. For example, the Act includes a provision that sets a standard that employers will no longer pay any of the employees’ share of their pension costs (often called “employee pickup”). This cost-sharing would be subject to agreement with our bargaining units and could only be unilaterally implemented after 5 years. For Marin County, the employer pickup is 2% of salary for miscellaneous and 3% for safety. Again, Marin County’s new bargaining agreements as of September, 2015 include elimination of the County’s contribution toward the employee’s share of cost over a three-year period.

Does it change the types of pay that can be used to calculate pension benefits?

For existing employees, the Act restricts some items of pensionable compensation by allowing only the amount earned and payable in each 12-month period during the final average pay period.

If existing public employees move to other public agencies after January 1, 2013, do they receive the reduced benefits discussed above, the same as new employees?

No. Public employees who leave their current employer - while leaving their retirement contributions on deposit and within 6 months become a retirement member of another public agency with whom a reciprocal agreement has been established with MCERA - will receive the pension benefits that were offered as of December 31, 2012 in the new agency.

Changes Affecting Existing Retirees

Does it affect existing benefits for employees who are currently retired?

No, it does not affect existing benefits for current retirees.

Does it place greater restrictions on employment of retirees?

Yes. It prohibits any retiree who first returns to work after January 1, 2013 from returning to employment before 180 days (6 months) has passed unless the employer certifies the appointment is necessary to fill a critically needed position before 180 days and the appointment has been approved by the governing body of the employer in a public meeting. (The 180 prohibition does not apply to a retiree who is a public safety officer or firefighter.) For any questions, please contact MCERA directly.