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Commentary: How PEPRA has changed the rules for recent hires

April 17, 2014|By the Costa Mesa Pension Oversight Committee

Editor's note: Attorneys John Stephens and Tim Sesler, two members of Costa Mesa's Pension Oversight Committee, asked the Daily Pilot to publish the panel's findings and recommendations. The committee put together a series of three articles that seek to explain and simplify the complex subject matter to residents. This is the second installment.

This edition will discuss PEPRA, the Public Employees' Pension Reform Act. PEPRA was created to address structural concerns related to California public employee pensions.

Recognized as a positive step to help agencies better manage future pension costs, most provisions of PEPRA apply only to employees hired after Dec. 31, 2012, who don't have previous California Public Employee Retirement System (CalPERS) service.

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Thus, it will not provide immediate relief for the many cities, counties and public agencies that face increasing employee pension costs.

Summary of PEPRA

The Public Employees' Pension Reform Act was passed in 2012, and most of its provisions went into effect Jan. 1, 2013. PEPRA was designed to address a wide range of issues involving public employee pensions. Because PEPRA's new benefits formulas apply only to employees hired after Jan. 1, 2013, they will not provide material short-term savings, but they will result in savings in the long run as new employees are hired and ultimately retire.

In addition, PEPRA reforms many of the aspects of a public employee pension system that resulted in the current underfunding status, such as retroactively enhanced benefits, contribution holidays and "spiking" of pensionable compensation. PEPRA also creates negotiating tools that public agencies can use to achieve equal sharing of normal benefit costs with employees. Below is a brief description of the provisions of PEPRA that are most pertinent to the city of Costa Mesa.

Reductions in benefit formulas

PEPRA creates a reduced tier of benefits for new employees. PEPRA does not change benefit formulas for existing employees. Generally, lateral hires from other agencies or Costa Mesa employees who are rehired are not new employees under PEPRA. Any person who is a new employee may only be offered the applicable pension benefit plan specified in PEPRA.

Basic benefits formulas for non-safety employees

The formula for non-safety employees is called the "2% at age 62" formula. The normal age of retirement is 62, and the employee receives a benefit equal to 2% of pensionable compensation for each year of service.

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