At its Board meetings on August 6, 2020, and September 3, 2020, the SBCERA Board of Retirement adopted resolutions 2020-5 and 2020-6, respectively, to address the California Supreme Court’s decision issued on Thursday, July 30, 2020 in the case known as Alameda County Deputy Sheriffs’ Association et al. v. Alameda County Employees’ Retirement Association and Board of Retirement of ACERA (S247095, also known as “the Alameda case”).
SBCERA is one of 20 California county retirement systems governed by the County Employees’ Retirement Law of 1937 (CERL). The issue in the Alameda case is the inclusion of several pay items in compensation earnable for “legacy” members of CERL retirement systems. At SBCERA, this “legacy” group includes retired, active, and deferred members of our Tier 1 retirement plan. The issues in the Alameda case date back to the implementation of the Public Employees’ Pension Reform Act (PEPRA) on January 1, 2013.
The Supreme Court’s decision has an effect on the manner in which SBCERA calculated retirement benefits for certain SBCERA retirees, which will result in a recalculation and reduction of benefits for some retirees. The decision also affects how SBCERA must calculate retirement benefits for some active and deferred members who may retire now and into the future.
Although a relatively small portion of SBCERA’s total membership will be affected, we recognize the impact this has on those who will be affected. We want you to know we’re here to help and available to answer any questions you have. We’ll outline the affected groups below.
Current Retirees: The Supreme Court’s decision said that retirement systems like SBCERA did not have the authority to use certain pay items in the calculation of your retirement benefits after PEPRA became law on January 1, 2013. The excluded pay items include standby pay, on-call pay, and call-back pay (also known as “PEPRA Exclusions” in Resolution 2020-5). In effect, this means if you retired on or after January 1, 2013 and your “compensation earnable” used to calculate your Final Average Compensation (FAC) period includes pay items excluded by PEPRA, then SBCERA must recalculate your benefit. The recalculation will result in a reduced benefit going forward.
If you are a retiree and you are part of the group affected by this decision, SBCERA will contact you directly by mail with more information and direct contact information to your respective Retirement Specialist. We’re currently working to identify this affected group and we will reach out to you as soon as we can.
What does it mean if you are part of this affected group and you have been receiving retirement benefits based on a Final Average Compensation (FAC) period which includes pay items that should have been excluded based on the Supreme Court’s decision? It means two things:
- You received an overpayment of benefits since your benefit calculation at the time of retirement included PEPRA excluded items. However, based on the Board’s adoption of Resolution 2020-6, SBCERA will not recoup benefit overpayments directly from you from the date of your retirement through July 31, 2020—unless so directed by the Internal Revenue Service (IRS) or a court of law.
- SBCERA will make a “corrective distribution” to you if the contributions you paid on the affected pay items exceed any retirement benefit you may have received associated with those same items. If you are eligible for a corrective distribution, we will calculate the amount owed to you and provide you with details in a future correspondence.
Importantly, if you are a retiree and your compensation earnable used to calculate your FAC period did not include any of these pay items, you will not be affected by this decision.
Active and Deferred Members: If you are still working as an active member of SBCERA or if you are no longer working but not yet retired, you may be affected by the Supreme Court’s decision. That’s because the Supreme Court’s decision said that retirement systems like SBCERA do not have the authority to use certain pay items in the calculation of your retirement benefits.
If you are an active or deferred member, there are two types of pay items in question that SBCERA must not include in your “compensation earnable” used to calculate your Final Average Compensation (FAC) period:
- PEPRA Exclusion: Any pay item for additional services rendered outside of normal working hours, such as standby pay, on-call pay, and call-back pay, etc.
- Alameda Exclusion: Non-compensation items such as employer-paid premiums to a third-party (e.g. insurance providers) or in-kind cash.
Additionally, if you are part of this affected group, you may be entitled to a refund, in the form of a “corrective distribution”, on payments you may have made on the excluded pay items noted above. The following section provides more information on these refunds.
What happens to the contributions I paid to SBCERA—will I get a refund?
If you are an active or deferred member (or if you retired on or after July 30, 2020), the contributions you may have made on either the Alameda or PEPRA excluded items will be handled differently, depending on the type of the excluded item. Resolution 2020-6 outlines the approach for the administration of these corrections. In short, here’s how these will be handled:
- Corrective Distributions to active and deferred members (and those who retired on or after July 30, 2020): You will receive a “corrective distribution” to you on contributions you may have made from January 1, 2013 through August 29, 2020 on the excluded types of pay items in this category of additional services rendered outside of normal working hours, which include items such as standby pay, on-call pay, and call-back pay. Contributions made prior to the implementation of the enactment of PEPRA on January 1, 2013 will not be refunded, because those contributions were eligible for inclusion in compensation earnable for members who retired prior to the implementation of PEPRA.
- Refunds for active and deferred members (and those who retired on or after July 30, 2020) on Non-compensation items such as of employer-paid premiums to a third-party (“Alameda Exclusions”): The SBCERA Board of Retirement determined that you should receive a corrective distribution to you on all contributions you may have made prior to July 30, 2020 on certain types of employer-paid premiums to a third-party. That’s because these pay items are not eligible to be included in your compensation earnable used to calculate your Final Average Compensation (FAC) period.
Who’s Not Affected
You are not affected by the Supreme Court’s recent ruling in the Alameda case if you have not received any standby pay, on-call pay, call-back pay, or employer paid premiums made to a third-party. Other common items of compensation, service time and benefits are not at issue in the Alameda case—including base pay, vacation, annual leave, holiday pay, and service purchases.
While PEPRA is applicable to all SBCERA members, most members are not directly affected by the Supreme Court’s ruling in Alameda.
Additional Frequently Asked Questions (FAQs)
What is the Alameda case all about?
In Alameda the California Supreme Court addressed two issues. First, the court addressed whether retirement systems were prohibited by prior settlement agreements from implementing statutory changes to retirement systems. Second, the court addressed the constitutionality of legislative changes to the retirement law that excluded certain pay items from compensation earnable for legacy members of the retirement systems.
These issues first arose when the Public Employees’ Pension Reform Act (PEPRA) became effective on January 1, 2013. PEPRA mostly affected people who were hired after the effective date. Some parts of PEPRA, however, affect retirement system members who were hired prior to the effective date. These members are referred to as “legacy members.”
PEPRA changed the definition of compensation earnable for legacy members. Compensation earnable is the compensation SBCERA uses to calculate retirement benefits. PEPRA excluded from compensation earnable pay for services rendered outside of normal working hours and pay that was provided in order to increase a member’s retirement benefit, and it also placed limits on the inclusion of leave cash-out payments in compensation earnable. Retirement system members in Alameda, Contra Costa, Merced, and Marin counties sued their retirement systems claiming that exclusion of these items from compensation earnable was prohibited, because the retirement systems previously entered settlement agreements that included the items in compensation earnable—and the exclusion of the pay items was not compensated by a benefit of equal value. Three of the four cases were consolidated into the Alameda case.
What did the Supreme Court say in Alameda?
The Supreme Court upheld the exclusion of the pay items from compensation earnable. First, the court said that the retirement systems were not prohibited from excluding the pay items by the settlement agreements because the California Legislature passed a new law that changed the definition of compensation earnable. The Supreme Court said that the retirement systems must follow the law that the Legislature provided when it enacted PEPRA, and the retirement systems do not have the authority to disobey the law despite the settlement agreements. Second, the Supreme Court held that the changes to compensation earnable were constitutional and did not interfere with the contract between employers and employees because the changes were related to the ongoing health of the retirement systems. The court also excluded payments to third parties such as medical premium payments.
Which counties does this decision affect?
The Supreme Court’s decision affects all 20 of the county retirement systems that operate under the County Employees’ Retirement Law of 1937 (CERL). SBCERA is the retirement system for San Bernardino County and other employers in the county. SBCERA is one of the retirement systems that operates under the CERL.
If I am an active employee, and I retire now, will I be able to keep on-call and stand-by pay in my compensation earnable?
No. The court said that the retirement systems must follow the statute and do not have the authority to disobey the statute once it became law. The SBCERA Board of Retirement adopted a resolution that requires SBCERA to immediately comply with the Alameda case and the PEPRA changes to compensation earnable.
Why did SBCERA previously include these items in compensation earnable?
PEPRA raised many questions when it became law. The constitutionality of several provisions in PEPRA has been challenged. The Alameda case is one of those challenges. Because of the challenges, the SBCERA Board of Retirement decided to continue to include the pay items until the issue was settled in the courts.
My former spouse is receiving a portion of my retirement as a result of our divorce. Will my former spouse’s payments be recalculated too?
Yes, if your former spouse is receiving a percentage of your benefit pursuant to a Domestic Relations Order. Your former spouse will continue to receive the same percentage, but the dollar amount will be reduced due to the recalculation.
Do I owe any money to SBCERA?
SBCERA is exploring this issue. SBCERA will take action consistent with state and federal law, including IRS rules.
I am retired, and my compensation earnable included medical premium payments. Does the Alameda decision affect me?
The SBCERA Board of Retirement determined that the mandatory exclusion of medical premium payments from compensation earnable is a new interpretation of the law. Therefore, the exclusion of medical premium payments from compensation earnable will not affect any retirees who retired before July 30, 2020.
I am an active employee, and I have been paying contributions on medical premiums with the understanding that the premium payments would be included in my compensation earnable. What is SBCERA going to do with my contributions if the medical premium payments are no longer included in compensation earnable?
The SBCERA Board has directed staff to refund all contributions made on medical premium payments. For current employees, the refunds will be made through your employer. For deferred members, the payments will be made directly to you. You should consult with a tax professional to determine the tax issues of this refund.