Federal Legislation – PORAC Engages on PEPTA

Darryl Nirenberg
Eva Rigamonti
Lesley Brock
Legislative Assistant
Steptoe & Johnson LLP

In June, Representative Devin Nunes (R-22nd-San Joaquin Valley) reintroduced the Public Employee Pension Transparency Act (PEPTA), H.R. 6290. As the legislation could negatively impact the California Public Employees’ Retirement System (CalPERS), PORAC President Brian Marvel sent a letter to Nunes in August to make him aware of the organization’s concerns.

PEPTA would require state and local governments to report underfunded pension plans (known as unfunded liabilities) to the federal government, as well as establishing new reporting requirements. It would also change how unfunded liabilities are to be calculated.

The rate used to calculate these pension plans would be based on U.S. Treasury bonds, instead of the Government Accountability Standards Board (GASB) standards currently used. Changing the rate of calculation would artificially inflate a state’s unfunded liabilities to higher levels than what the plans actually face, resulting in an inaccurate representation of data. A state’s failure to comply with this inaccurate reporting would cause it to lose its ability to issue tax-free bonds. PEPTA also would prohibit the federal government from issuing bailouts in the event of a shortfall.

Nunes argues that enforcing these reporting requirements and changes in how the rates are calculated will allow taxpayers to see how much money they are paying toward state and local government employees, providing more transparency and reducing abuses in the system.

However, as President Marvel pointed out to Nunes, state and local government-sponsored pension systems are already subject to significant regulation and mandated transparency. He noted how (1) the systems are created by state statutes and local ordinances with robust open records and sunshine provisions, and (2) those who manage the plans are held to high fiduciary standards and are overseen by elected leaders and independent boards of trustees. The safeguards currently in place ensure that participants in these plans are adequately protected from fund misuse.

State and local government retirement systems are required to publish financial data on the plans they manage. This information is publicly available and searchable (at no cost to taxpayers) through databases such as the Annual Survey of Public Pensions. PEPTA’s reporting requirement merely duplicates what is already mandated at the state and local level — compelling plans to expend additional taxpayer funds to report duplicative information.

PEPTA will require plans to use accounting standards that the GASB, a nonpartisan independent body, has already determined to be inappropriate for government entities. In 2012, after a multi-year review and revision of public pension standards, the GASB rejected the assumptions and calculations proposed by the two versions of PEPTA previously introduced. The current version of the bill requires the same, rejected calculation.

In his letter to Nunes, President Marvel highlighted other areas for pension reform, including preventing governments from taking pension-funded holidays, irrespective of a state or local government’s ability to fund them.

In light of the tight congressional schedule, prospects for passage of PEPTA this year are questionable. However, PORAC will continue to oppose the legislation as well as other efforts with the potential to negatively impact CalPERS, and will keep educating members of Congress on issues related to pensions for public safety officers.

PERS Announces Greater Scrutiny of Industrial Disability Retirements

Timothy K. Talbot
Michael L. Rains
Seth Merrick
Rains Lucia Stern St. Phalle & Silver, PC

In a March 30, 2017, circular letter, CalPERS identified changes to the way industrial disability retirements (IDRs) are to be handled and processed by local agencies. In addition to auditing the IDRs processed by contracting local agencies, CalPERS has made clear that it intends to take a harder line on both approving and continuing IDRs for CalPERS members of local agencies.

The circular sets forth heightened standards for approving an IDR. The new standards outline changes that CalPERS expects from local agencies with respect to how they evaluate IDRs and the documentation needed from applicants and local agencies to process an IDR. In addition, the circular sets forth certain expectations for local agencies to aggressively scrutinize those who are currently receiving IDRs. CalPERS’ actions reflect a move to reduce or even eliminate the autonomy traditionally possessed by local agencies to determine if their employees should receive IDRs. These changes will serve to make an already difficult process even more onerous and confusing for disabled local agency employees applying for IDRs in the future, as well as for those employees who were previously granted IDRs.

The following is a general discussion of the new guidelines and requirements for IDRs.

Requirements for Submitting an Application

The circular establishes a new procedure for the IDR applicant and the local agency that provides greater involvement and oversight by CalPERS. Under existing law, the determination of whether to approve an IDR application for local safety members is left to the local governing body — not CalPERS. Under the new guidelines, CalPERS requires local agencies to send all medical records and, in certain situations, personnel records (see below) to CalPERS for review. Applicants are also required to provide or release all medical information relating to their disability to CalPERS. While not specifically removing all decision-making authority from local agencies, by requiring local agencies to provide this documentation, CalPERS is plainly indicating that it will become the final decision-maker and will no longer accept or rely solely on local agencies to determine if their employees are eligible for IDRs.

Twelve-Month Disability Duration and Continuous Disability Requirement

The circular requires CalPERS members to prove that their disabilities will last for 12 consecutive months from the date of their application, and to further prove the existence of a “continuous disability.” Proving “continuous disability” requires the applicant and local agency to provide medical substantiation of physical or mental incapacity to perform the employee’s job duties for a year from the last day of physical work. The exact details of how the information is to be provided or how it will be enforced are unknown.

Applicants Under Threat of Discipline and the Unlawful Disclosure of Personnel Records

CalPERS is directing the greatest scrutiny to IDR applications where: 1) a disciplinary process is underway against an employee, 2) the employee was terminated for cause, 3) the employee resigned in lieu of termination, 4) a settlement agreement between the local agency and the employee precludes the employee’s reinstatement in the future, or 5) the employee was convicted or under investigation for a work-related felony. The circular states that when one of these circumstances exists, the local agency/employer must forward all relevant personnel documents and obtain a determination from CalPERS that the employee is eligible to apply for an IDR before an employer may start the process of a disability determination. While the law is clear that CalPERS members cannot seek, and local agencies cannot grant, IDRs as a way to evade or escape employee discipline/termination (California Government Code section 21156[a][2]), CalPERS is now demanding that local agencies more faithfully adhere to this prohibition.

A particular concern is that CalPERS wants to obtain and review confidential and protected personnel information in order to determine if an employee is even eligible to apply for an IDR. This process requires local agencies and employees to provide CalPERS with documents that will, by definition, include internal affairs investigations and possibly disciplinary recommendations and/or findings. With respect to California peace officers, these “relevant personnel records” are confidential personnel records protected by California Penal Code section 832.7 and subject to disclosure, if at all, pursuant to a “Pitchess motion” in accordance with Evidence Code section 1043, et seq. We believe that “requiring” a local agency to provide these records may violate a peace officer’s statutory rights.

 Finally, those who are already receiving IDRs have cause for concern as well. In addition to the above, the circular requires local agencies to take a more aggressive posture toward those currently receiving IDR benefits. According to the circular, local agencies are required to “re-evaluate” former employees who were granted IDRs and to focus on those who are under 50 years of age and not yet eligible for a service retirement. CalPERS directs local agencies to, among other things, increase their scrutiny by investigating whether those receiving IDRs are currently employed and obtaining documentation as to the physical requirements of their employment. The circular further requires that local agencies demand updated medical evidence and require IDR recipients to submit to independent medical evaluations in order to retain their IDR benefits when a former employee’s continuous disability may be in question. If there is any doubt about an IDR recipient’s ongoing incapacity, CalPERS directs local agencies to conduct surveillance on their former employees.

Most IDR recipients are surprised to learn that their former employers have the right to subject them to re-evaluations to determine if they are still incapacitated and unable to perform the duties of their former positions. This is because CalPERS members are only entitled to IDR benefits while they are disabled from performing their former job duties. If the disability should resolve itself in the future, the former employee is expected to return to work with their former employer if they are otherwise ineligible for a service retirement. The ability to re-evaluate IDR recipients in order to determine if they are still disabled has existed in the law for a long time, but was seldom utilized in the past. CalPERS’ new insistence on verifying that IDR recipients have a continuing disability creates unnecessary angst and confusion for those rightfully receiving IDR benefits.

We do not know how all of the requirements set forth in the circular will be applied or enforced. Some aspects of the circular are ambiguous, and other parts may ultimately be rescinded. For now, the most important thing is to be aware of the requirements relating to IDR applications and the continuing entitlement to IDR benefits.

About the Authors

Timothy K. Talbot is a partner at Rains Lucia Stern St. Phalle & Silver, PC. Tim has practiced labor law for over 20 years and heads the firm’s Labor Litigation Practice Group and Sacramento office. He has extensive experience representing and advising public- and private-sector labor organizations in all aspects of labor relations.

Mike Rains is a principal and founding member of Rains Lucia Stern St. Phalle & Silver, PC. He heads the firm’s Criminal Defense and Legal Defense of Peace Officers Practice Groups. Mike is one of California’s top trial attorneys. He has over 30 years of experience representing peace officers and other high-profile clients in civil and criminal litigation.

Seth Merrick leads the Workers’ Compensation team in the Rains Lucia Stern St. Phalle & Silver Injury Resource and Litigation Group. Seth specializes in representing California’s injured peace officers and first responders, as well as both private- and public-sector union employees.