Steve Berliner is the chair of the Retirement, Benefits and Disability Practice Group at Liebert Cassidy Whitmore. John Z. LaCrosse is an attorney in the Retirement, Benefits and Disability and Litigation practice groups. They can be reached at sberliner@lcwlegal.com and jlacrosse@lcwlegal.com.

CalPERS and the Legislature have enacted several changes in recent years that expand the pension fund’s enforcement powers — including new financial penalties. Lawmakers have also proposed new legislation that would undo some of the reforms that were part of the Public Employees’ Pension Reform Act of 2013 (PEPRA). These changes place greater financial burdens and responsibilities on cities. Here’s what city leaders need to know.

Cities now face increased penalties for disallowed compensation

Government Code section 20164.5 of the Public Employees’ Retirement Law places financial penalties on local agencies that incorrectly report compensation on behalf of an employee that CalPERS later determines does not follow applicable law. Although the Legislature enacted this statute in 2022, CalPERS has only recently begun applying the penalties on a regular basis following what appeared to be a warm-up period.

Before the statute’s enactment, if CalPERS determined that a retirement allowance included disallowed compensation, the retiree had to pay back the overpayment to CalPERS. The retiree’s retirement allowance was then reduced prospectively based on what the retiree would have received without the disallowed compensation. 

Section 20164.5 transfers nearly all the risk of misreported compensation to the employer. It requires contracting agencies to pay CalPERS the amount of any overpaid benefits based on the disallowed compensation that was agreed to in a collective bargaining agreement, plus a penalty directly to the retiree equal to 20% of the present value of the projected loss in future benefit payments. 

Cities have reduced control over disability and industrial disability retirement procedures

In the past, employers could certify disability retirements for non-industrial causes and industrial disability retirements for safety employees (e.g., police officers and firefighters) based solely on their review of relevant medical information. Now, CalPERS takes a bigger role in the process. The changes began gradually over the last 10 years but accelerated in 2023 when CalPERS issued broad new procedures for contracting agencies to follow.

Agencies and applicants must now submit significantly more information to CalPERS about an applicant’s medical condition and job duties. CalPERS states that it needs this information to ensure that benefits go only to eligible members. It asserts that sections of the Public Employees’ Retirement Law give it broad power to compel the disclosure of such information from contracting agencies.

CalPERS appears to require this information so that it can more closely scrutinize contracting agencies’ decisions regarding local safety members’ applications. However, the Public Employees’ Retirement Law delegates that authority exclusively to the contracting agencies. This larger role could delay final decisions on the validity of these applications.

There is no clear answer on how a disagreement over such benefits between an employer and CalPERS should be resolved. Employees will likely argue that the law prohibits terminating an employee who a city perceives as disabled and unable to perform their job duties who CalPERS does not find to be disabled. Such a scenario would create a potential conflict between the employer and employee while the procedures drag on. 

The demise of PEPRA?

Cities could see even greater changes — and increased financial burden — in the years ahead. This year, Asm. Tina McKinnor introduced AB 1383, which would have significantly modified PEPRA. The bill, now on hold, proposed the following:

1. Bring the pensionable compensation limits in line with the federal maximum benefit allowed from a defined benefit plan.
2. Establish new retirement formulas for safety members that would be available to new members hired on or after Jan. 1, 2026, and existing PEPRA members for services performed after Jan. 1, 2026.
3. Allow an employer and unions (representing any PEPRA members) to agree in a memorandum of understanding to place members in a lower or higher formula and to agree for the employer to pay part of the employees’ contributions.

The bill is sponsored by the California Professional Firefighters and local union affiliates and opposed by a coalition of local government associations led by the League of California Cities.

One of the primary advantages of PEPRA for employers is that it created a level playing field for retirement benefits offered to new employees under PEPRA. Public agencies had to compete for employees on other aspects of their compensation package and working conditions.

If this legislation is enacted, retirement benefits will once again become a significant point of negotiations with unions. It also has the potential to spike agency retirement costs. The proliferation and cost of enhanced retirement formulas in the late 1990s and early 2000s were in part what triggered the need for PEPRA. This bill could erode the cost savings originally expected from PEPRA. Even though AB 1383 is on hold for now, it is common for CalPERS-related legislation to be put on hold and then resurrected, as happened with Government Code section 20164.5.

Contracting agencies should continue monitoring these developments and the resulting impacts on their agencies.