The Public Employees’ Retirement Law (PERL) and State Teachers’ Retirement Law (STRL) provide defined benefit retirement plans administered by CalPERS or CalSTRS, respectively, for eligible employees of participating public agencies (“employers”). To fund these plans, public education agency employers report member compensation to either CalPERS or CalSTRS directly, or through their county offices of education. Within these retirement systems, a complex scheme of governing statutes, regulations, and administrative guidance sometimes leads to unintended compensation reporting errors. In addition, because the specific items of compensation at a given public agency are often the product of collective bargaining or other negotiations, the negotiating parties sometimes inadvertently agree to terms that result in certain items of compensation becoming non-reportable to the applicable retirement system on technical grounds.
Over the last two years, the state of California has signed two bills into law, Senate Bill (SB) 278 (CalPERS) and Assembly Bill (AB) 1667 (CalSTRS), which impact how CalPERS and CalSTRS will collect on overpayments made to retirees as a result of compensation reporting errors. While both Bills address overpayments of pension benefits, AB 1667 goes further, and includes additional transparency measures in an effort to promote collaboration between CalSTRS and public education agencies and ensure proper reporting before issues (and large invoices!) arise.
CalPERS Employers: SB 278 shifted financial liability from retirees to their employing agencies for misreporting employee compensation
If your agency is a CalPERS agency, your HR and payroll teams should already be aware of SB 278, which became effective January 1, 2022. Prior to SB 278’s effective date, if CalPERS determined that it calculated a retiree’s final compensation to include a nonpensionable item, the retiree would have to repay CalPERS for the amount that CalPERS overpaid them as a result of any over-calculation, and prospectively reduce their monthly pension benefit based on the corrected reporting.
SB 278 shifts this financial exposure for overpayments from retirees to the employer if certain conditions are met, including that the nonpensionable compensation reported to CalPERS was an item to which the employer agreed in an MOU or CBA. Specifically, under SB 278, local agencies subject to the PERL must pay CalPERS the full cost of any overpayment received and retained by the retiree, in addition to a twenty percent (20%) penalty equal to the present value of the projected lifetime and survivor benefits. Under recent cleanup legislation to SB 278, AB 1824, retirees receive 100 percent of the penalty. Liebert Cassidy Whitmore previously discussed SB 278 here and here.
AB 1667 takes a page from SB 278’s playbook by adopting similar cost-shift provisions, but adds additional transparency and due process protections for employers, exclusive representatives, and retirees
AB 1667, which largely became effective on January 1, 2023, is the most significant update to the STRL since 2015. AB 1667 contains four primary components:
- Implementation of Updated Audit Procedures and Member Due Process Protections (Effective: January 1, 2023)
Effective January 1, 2023, AB 1667 modified CalSTRS’s audit process. These modifications include,
- CalSTRS must now send an engagement letter to a public education agency employer alerting them of an impending audit. The engagement letter must include information regarding the audit’s purpose and scope. The engagement letter will also request that the employer provide the names and email addresses of all exclusive representatives that represent the employer’s CalSTRS members whom the audit could affect. Once CalSTRS is in receipt of this information, it will provide the exclusive representatives with a copy of the engagement letter.
- Like CalSTRS’s pre-AB 1667 audit process, CalSTRS will continue to issue preliminary audit findings to the audited agency. Now, however, CalSTRS will also issue the preliminary findings to the exclusive representatives. The preliminary findings will include a list of the members that CalSTRS knows will be affected by the findings (which is usually the members who were part of the audit sample). Both the employer and exclusive representatives will have 60 days to review the draft audit findings and provide CalSTRS with written responses to the draft findings. CalSTRS will consider the responses prior to finalizing its audit report.
- Under AB 1667, CalSTRS will issue the final audit report to the audited agency employer and the exclusive representatives. Notification to the audited agency employer of the final audit report will trigger:
- A 60-day window from the date of the final audit report for the employer to submit a complete list of members affected by the audit (“affected members”); and
- A 90-day window from the date of the final audit report for the employer to appeal the audit findings and request an administrative determination. Exclusive representatives do not have appeal rights; only members have such rights, as discussed below.
Once CalSTRS receives the list of impacted members, CalSTRS will notify them of the final audit findings, and provide all affected members with appeal rights, whether or not the affected members were part of the audit sample. This additional due process protection for all affected members is a new right conferred by AB 1667. Prior to AB 1667, CalSTRS only provided this due process protection to members who were part of the audit sample. Affected members will have 90 days to appeal the audit findings from the date they receive a copy of the final audit report.
- Implementation of Benefit Overpayment Clawback (Effective: January 1, 2023, but certain payments won’t be recouped from employers until July 1, 2024)
Similar to CalPERS’s pre-SB 278 process of recouping overpayments, prior to AB 1667’s effective date, STRS would generally deduct any pension overpayments made to retirees by (a) seeking reimbursement of certain overpayments from the retirees themselves and (b) reducing future monthly pension benefits after adjusting the retiree’s final compensation to account for the mistaken overpayments. In other words, retirees, and not the employers, would bear the financial burden of overpayments, whether or not the retiree’s own conduct caused the mistake.
As a result of AB 1667, effective January 1, 2023, the party responsible for the reporting error will be the primary person or entity responsible for repaying pension overpayments made due to such error. As AB 1667 is intended to apply prospectively, this means that this new provision will apply only where CalSTRS notifies the retiree of the overpayment after January 1, 2023.
It is likely that under these amendments to the STRL, employers will be responsible for reimbursing CalSTRS for overpayments in most cases. This is because, in practice, CalSTRS has identified employer-made errors as the most common source of misreported income. However, unlike SB 278, AB 1667 does not impose a 20 percent penalty on top of reimbursement of the overpaid benefits.
CalSTRS will continue to hold retirees responsible for overpayments only if the retiree reported inaccurate or untimely information or failed to submit information, thus causing the error, or in instances of fraud or intentional misrepresentation. Additionally, the new law makes clear that where CalSTRS is at fault for the error that resulted in the overpayment, the State will pay 85 percent of the cost of overpayments, with the employer responsible for the remaining fifteen percent (15%).
CalSTRS intends to begin billing employers for employer-caused overpayments no earlier than May 1, 2023, and will issue such invoices on a quarterly basis. CalSTRS will not begin billing employers for CalSTRS-caused overpayments until July 1, 2024. The law requires employers to pay invoices within 30 days of receipt; failure to do so could result in the State withholding certain funds intended for appropriation to the education agency responsible for the payment.
- Employers and Exclusive Representatives May Request Advisory Letters from CalSTRS (Effective: July 1, 2023)
Effective July 1, 2023, public education agency employers and exclusive representatives may request from CalSTRS formal written guidance regarding their questions about compensation that either is or may be included in a written contractual agreement (e.g., CBA, MOU, employment agreement). In response, CalSTRS will issue an advisory letter that addresses the proper reporting (or non-reporting) of that item of compensation.
Once issued, the advisory letter will provide guidance upon which the requesting employer or exclusive representative (on behalf of a member) may rely to determine reportable compensation. If the guidance in the advisory letter is later determined to be incorrect, CalSTRS will attribute any resulting overpayments to CalSTRS under the 85%/15% split described above. An employer may not rely on advisory letters issued to other agencies. In other words, if an officer of an agency is in receipt of an advisory letter directed to a colleague at another agency, the officer cannot rely on that letter in disputing a determination made by CalSTRS regarding the officer’s own agency.
CalSTRS will develop a specific form on which to submit the request for an advisory letter. Employers and exclusive representatives should generally expect CalSTRS to issue an advisory letter within 30 days of the date CalSTRS has all supporting documents it needs to complete its review, although it can extend that timeline for good cause.
- CalSTRS Must Provide Interpretative Resources (Available: By July 1, 2023)
In addition to specific advisory letters, AB 1667 mandates that CalSTRS must develop and update interpretative resources on an annual basis that clarify the applicability of creditable compensation and creditable service laws, as well as regulations promulgated under those laws. Like the advisory letters, if the guidance provided in these interpretive resources is later determined to be mistaken, recovery will follow the 85%/15% State/employer split described above. However, unlike the advisory letters – on which only the requesting employer may rely – all employers that report to CalSTRS may rely on the guidance in the interpretive resources.
Additionally, CalSTRS must issue notice when adopting new or different interpretations before those interpretations can take effect. New or different interpretations in these resources, regulations, employer information circulars, or similar items will not apply retroactively to compensation reported prior to the notice, unless state or federal law or an executive order of the Governor expressly requires retroactive application. However, this lack of retroactivity does not appear to apply to situations where CalSTRS takes the position that its guidance only clarified existing law. It also does not appear to apply to unofficial guidance from CalSTRS, e.g. guidance issued over the phone or in emails from CalSTRS staff members.
Responding to AB 1667 and SB 278
To avoid these unanticipated costs of employer-generated reporting errors arising from SB 278 and AB 1667, employers should examine their current reporting practices and determine if their reporting is compliant with the STRL or PERL, their implementing regulations, and retirement system guidance. On the CalSTRS side, agencies should certainly take advantage of the new advisory letter system and timely review CalSTRS’s anticipated official interpretive guidance resources.
Agencies should also be sure not to overpromise during negotiations. This includes not agreeing to a CBA, MOU, or employment contract provision that guarantees that certain items of compensation are pensionable, particularly if the employer has not received express guidance from the retirement system.
LCW is continuing to monitor implementation of these bills and will host a free webinar on SB 278 and AB 1667, on March 9, 2023, to discuss the scope of these laws, what risks they present, and how agencies can take proactive steps to mitigate against their impacts. You can sign up for the webinar here.