Peace officers, firefighters and other California public employees who serve our communities and risk their lives for our safety, can rest assured their pensions won’t be pulled from underneath them long after retirement. Kathleen Mastagni Storm, and Steven Welty, had the privilege of working on SB 278, which added Government (Gov.) Code section 20164.5 (Chapter 331, Statutes of 2021) effective January 1, 2022, to the Public Employees’ Retirement Law (PERL). 

SB 278 establishes provisions protecting CalPERS members from some of the adverse impacts of disallowed compensation items, as well as mitigating the effects of reduced retirements moving forward. Additionally, this bill establishes additional procedures within CalPERS to prevent future errors. 

Disallowed Compensation 

Under Gov. Code section 20164.5, disallowed compensation is compensation reported for a member by the state, a school employer, or a contracting agency that CalPERS subsequently determines is not in compliance with the California Public Employees’ Pension Reform Act of 2013 (PEPRA) (Article 4 [commencing with section 7522] of Chapter 21 of Division 7 of Title 1), Gov. Code section 20636 or 20636.1 of the PERL, or the administrative regulations of the system under California Code of Regulations (CCR), title 2, section 571 and 571.1. 

Overpayment and Penalty Obligations for Disallowed Compensation 

If a misapplication or miscalculation of retirement benefits occurs due to disallowed compensation and the conditions under subdivision (b)(3)(A) of Gov. Code section 20164.5 are met, the employer will be liable to pay CalPERS the full cost of any overpayment and pay the impacted retiree a portion of the actuarial equivalent of any reduced retirement benefit as a penalty. 

This provision defines disallowed compensation, stipulates what would occur if California Public Employees’ Retirement System (CalPERS) determines disallowed compensation has been reported, and identifies the impacts on the pension benefits of a retired member, survivor, or beneficiary. 

How the Bill Works 

PEPRA, took effect January 1, 2013 and eliminated certain compensation from calculation as part of an employee’s final compensation. This created an issue where members made contributions during their career into the system, that were later disallowed from counting as final highest compensation. This created a secondary issue—what happens with the contributions made on disallowed wage items? Do you get them back? And if so, how? For most employees, the value of the contributions made on later determined disallowed compensation items was negligible and not worth fighting over. But for others, the compensation made a significant difference. The employees then had to litigate whether the pay was properly disallowed and how to be reimbursed for their contributions. 

Now, SB 278 corrects and clarifies what happens. The contributions made on disallowed items are not lost for active members. Amongst other terms, the bill requires employees get credit against future contributions for contributions made on disallowed items. 

Here is an example of how the bill will work: 

You are retired and because of PEPRA, 5% of your retirement gets eliminated because certain compensation items get carved out. As a retiree on a fixed income, you suffer a real harm. You were promised an amount, made contributions on a certain amount, had been receiving it for xx years and then boom, the pension system does and audit and makes cuts. 

SB 278 mitigates the impact. 

The employing entity will be responsible for paying the overpayments back to CalPERS. The bill requires the employing entity to pay to the system the full cost of any overpayment of the prior paid benefit. 

In the example above, the employing entity has to pay the 5% that was determined to be disallowed and overpaid back to CalPERS. An actuarial evaluation will be done to determine the value of the 5% disallowed and what would have been paid through the retiree’s projected life. 20% of that actuarial amount will be a penalty imposed on the employing entity as a lump sum payout. Then, the employing entity will pay 90% of the lump sum to the retiree or survivor and 10% to CalPERS. The retiree will lose the 5% going forward, but they will get 90% of the lump sum payout penalty based off the actuarial. 

Why this is important: 

This is going to have state wide affects as many retirees will be affected by this legislation. This bill is important because the retirement system should not be allowed to benefit from contributions they were not entitled to. More importantly, dedicated employees that retired out and relied on what they were told their benefit would be and relied on receiving that amount, should not have the rug pulled out from under them. The lump sum, calculated as a percentage over the period of your life, is paid to compensate for part of the detrimental change. 

The bill also requires employing entities to submit memorandums of understanding (MOUS) to CalPERS. CalPERS then has to go through the items of compensation and make a determination if the items are allowable or not under PEPRA to eliminate surprises years down the road when retirees are living on a fixed income. 

While this bill only applies to CalPERS members, it is safe to anticipate similar legislation for 1937 Act retirement systems, like Sacramento County. This bill and the addition to the government code are also likely to be followed as persuasive authority if similar disputes arise in a ’37 Act jurisdiction. 

California Professional Firefighters sponsored this legislation and continue to work in partnership with peace officer associations and lobbyists to better working conditions and pension benefits for all public safety. 

Steven Welty has been a part of Mastagni Holstedt, APC, since 1998 and is a key player in our Labor Department. Steve handles all of our disability retirement cases. He routinely finds himself before the Office of Administrative Hearings and superior courts litigating allowable compensation and denied disability retirements. 

Kathleen Mastagni Storm is a managing partner at Mastagni Holstedt, APC. She regularly is privileged to draft and testify on public safety bills.