CalPERS Employers Dodge a Bullet

Gov. Jerry Brown vetoed legislation that would have imposed significant liability on CalPERS employers for errors in their CalPERS reporting which result in post-retirement pension reductions.

Generally, when CalPERS determines that an employer has reported amounts that do not qualify as compensation for pension purposes, or “disallowed compensation,” the employer must correct prior reports to remove these amounts. While these corrections will have a minimal impact on active employees, they have a substantial effect on retirees, survivors or beneficiaries. First, CalPERS will determine the excess pension benefits that have been paid to the retiree, survivor or beneficiary as a result of the inclusion of the disallowed compensation in the pension calculation and demand repayment of the excess pension benefits, or “overpayments,” from the retiree, survivor or beneficiary. Second, pension benefits will be adjusted to remove the excess amounts from future payments.
 
SB 1124 would have passed on these costs to the employer, and ultimately the taxpayers. In particular, SB 1124 would have imposed a statutory obligation on employers to pay to CalPERS the overpayments owed by a retiree, survivor or beneficiary. The bill would have also required the employer to pay the retiree, survivor or beneficiary an amount equal to the lifetime reduction in future pension benefits as determined by CalPERS – a “make whole” provision so to speak. While the bill contained certain conditions that had to be met for the “make whole” obligation to apply, the risk to employers of being on the hook for the reduced benefits was substantial.

There were a number of significant flaws with SB 1124, which contributed to Brown’s decision on Sunday to veto the legislation — not the least of which was the perpetuation of reporting errors and the imposition of such costs on taxpayers. However, Brown’s veto message suggests the possibility of further attempts to impose liability on employers for their reporting errors, if the intent of the bill can be more carefully tailored to avoid abuses. Further, since retirees, survivors or beneficiaries bear the brunt of reporting errors that are generally out of their control, there is strong interest in the Legislature to shift the financial burden away from them.

Indeed, the Legislature is considering whether to override Brown’s veto. The likelihood of this occurring is extremely low given that a veto has not been overridden by the Legislature in well over 30 years and that a vote to override the veto would have to occur in a special session before the end of November. Far more likely is the introduction of a similar bill in the next legislative session.

While SB 1124 would have created a statutory obligation to make retirees, survivors or beneficiaries whole for an employer’s reporting errors, even with Brown’s veto, the risk of liability or costly litigation remains for employers that make reporting errors that result in pension reductions. In light of the potential for significant liability, employers should review labor policies, including memoranda of understanding, and CalPERS reporting practices to ensure compliance with CalPERS reporting obligations.

For more information about what your agency can do to avoid errors in CalPERS reporting, please contact the authors of this Legal Alert listed at the right in the firm’s Employee Benefits & Executive Compensation  practice group or your BB&K attorney.
 
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