Managing the Adverse Impact on PEPRA Employees
The Public Employee Pension Reform Act of 2013 (PEPRA) was intended to stop the increasing costs of the pension system. However, CalPERS and many other 37 Act pension systems changed the way they amortized unfunded liabilities with annual escalation to employer contributions until they hit their peak in 2026.
The rising costs of pensions are putting stress on local agencies. Mitigating the growth to the unfunded liability and managing the payoff create major hurdles in providing increases in compensation and benefits. All increases to salary and salary-related items for classic members increase the unfunded liability.
Overnight, PEPRA created different retirement formulas, contribution commitments, and the “pension-ability” of salary-related items, striking a blow of unity to recognized bargaining units to manage. Maintaining bargaining unit cohesion is difficult under the best circumstances, the imposed disparity immediately created an environment of the “have’s” and “have not’s”.
In addition, the PEPRA employees will be indirectly paying the legacy costs of classic member enhanced retirements for at least the next decade. This should be top-of-mind every time someone commences negotiations on a collective bargaining agreement.
So how do we negotiate salary increases without exacerbating the problem? Equally as important, how do we bridge the gap between the “haves” (classic) and “have nots” (PEPRA employees)?
First, we must acknowledge the disparity and identify ways to manage the interest of both groups without growing the unfunded liabilities. It is important to be thoughtful and transparent at the bargaining table and in the collective bargaining agreements to capture all efforts made to bridge the gap between the classic and PEPRA employees.
Some of the ways to close the gap between the two groups and mitigate increased liabilities include:
- Additional deferred compensation contributions for PEPRA employees.
- Retiree Health Savings Accounts for PEPRA employees.
- Increased classic member pension contributions.
- Classic member repayment of salary increases.
CalPERS also has tools to manage and pay down the unfunded liabilities: (You can find more information about these programs on the CalPERS website: https://www.calpers.ca.gov/page/employers/actuarial-resources/managing-unfunded-accrued-liability)
Additional Discretionary Payments (ADP): Aside from required employer contributions, many agencies elect to make additional contributions, either on an ad hoc basis or under the agency’s funding policy. Public agencies may make additional payments at any time and in any amount to reduce the agency’s Unfunded Accrued Liability and increase the assets earning an investment return within the fund.
Amortization Schedule Adjustments: Adjustments may be made to the amortization schedule, including a fresh start of the amortization schedule. Doing so can dramatically stabilize contribution requirements. Adjustments can be made independently of or in conjunction with an ADP. It can be initiated by the agency or by the actuary.
Section 115 Pension Trust: Public agencies can set aside assets in a tax-qualified trust that can be used for future pension contributions. CalPERS administers a Section 115 trust fund known as the California Employers’ Pension Prefunding Trust (CEPPT) Fund. The CEPPT Fund is dedicated to pre-funding employer contributions to defined benefit pension systems for eligible public agencies. By joining this trust fund, public agencies can use investment earnings provided by CalPERS to help finance pension benefits. Unlike an Additional Discretionary Payment to a specific rate plan, CEPPT assets can be applied to any rate plan, can be used to satisfy required Unfunded Accrued Liability or Normal Cost contributions, and can be invested following the agency’s risk tolerance.
The best way to navigate this crisis is through ACKNOWLEDGEMENT, EDUCATION, COMMUNICATION, and TRANSPARENT EFFORTS.