California Supreme Court Ruling and Impact on VCERA Members
On July 30, 2020, the California Supreme Court issued a ruling clarifying the inclusion or exclusion of certain pay items in employees’ compensation for the calculation of their pension benefits since the Public Employees’ Pension Reform Act (PEPRA) and related CERL amendments (AB 197) became effective on January 1, 2013 (“PEPRA amendments”). The Court’s decision was also fairly clear in stating that retirement systems do not have discretion to include in compensation earnable the value of in-kind benefits, which would include flexible spending allowance amounts that are paid to third parties for health insurance premiums. For clarity, this interpretative guidance will be referred to as the “Alameda amendments.”
The narrow issue before the Court was in determining the constitutionality of the statutory amendments which require exclusion from final average compensation (1) payments for services beyond normal working hours, such as on-call and stand-by pay, and (2) annual leave/vacation cash-outs beyond what is both earned and payable in the final compensation measurement period. However, in a broader sense, the decision addresses the doctrine of the “California Rule” which asserts that legislative changes to disadvantage current members of a California retirement system “must” be offset by comparable new advantages. Here, the Court held that when a change in law results in disadvantages to employees, it “should,” and not “must,” be accompanied by comparable new advantages. The Court, however, limited the types of permissible purposes that will justify a disadvantageous change in pension rights.
In determining that the statutory amendments it considered were constitutional, the Court upheld the California Rule’s strength while also opining that the legislative modifications at issue did not require comparable new advantages. The PEPRA amendment that limits annual leave/vacation cash-outs to what is both earnable and cashable in the measurement period was deemed not to be a change in the law, but merely a clarification of what had always been the law, so no disadvantage to members was found. The PEPRA amendment that required exclusion from compensation earnable of payments beyond normal working hours, e.g., stand-by and on-call types of payments, was considered a change in the law. The Court opined, however, that comparable new advantages were not required because the change serves a constitutionally permissible purpose and providing a comparable advantage would undermine, or otherwise be inconsistent with, the modification’s constitutionally permissible purpose. More specifically, the Court concluded that the PEPRA amendments of CERL were enacted for the constitutionally permissible purpose of conforming pension benefits more closely to the theory underlying “compensation earnable” by closing loopholes and proscribing potentially abusive practices.
Impact for VCERA Members
VCERA members hired prior to January 1, 2013, may ask if this recent Court opinion impacts how VCERA calculates the amount of annual leave cash-outs that are included in final average compensation. Our reading of the decision is that VCERA’s methodology for what is included in final average compensation may need to be revised to limit what is earned and payable in “each 12-month period during the final average salary period,” consistent with Government Code section 31461(b)(2). More specifically, the VCERA Board’s Resolution on “compensation earnable” limits inclusion of the cash redemption of accrued annual leave to be used for the measurement of final compensation to the amount accrued during the measurement period, less the number of hours the member was required to use in order to qualify for the redemption. At the September 14, 2020 Board meeting, the Retirement Board will be considering a revision to this policy to limit inclusion of annual leave redemptions to what may be redeemed in each 12-month period, consistent with the PEPRA amendment and the Alameda opinion.
Also as to the Alameda amendments, it is likely that VCERA will need to begin excluding from compensation earnable the portion of the flexible spending allowance that is paid toward health care premiums, as of July 30, 2020, the date the Supreme Court issued its decision. Members should be on notice that these excluded amounts will likely not be used to calculate retirement benefits for members retiring on or after 7/30/20. More information will be provided as VCERA develops its plan to implement the Alameda case and will be presented to the Board at the September 14, 2020, meeting.
Update from September 14, 2020 Board meeting
The VCERA Board of Retirement met on September 14th, and heard a presentation by fiduciary counsel regarding the impact of the Alameda ruling on the VCERA Plan and its members. Following the informational session, the VCERA Board heard public comment and went into Closed Session. The matter is currently scheduled for formal action on October 12, 2020.