RE: The Supreme Court of California Decision on Exclusion of Terminal Pay, On Call and Stand By Pay Codes in Retirement Allowance Calculations
On July 30, 2020, the California Supreme Court published a unanimous ruling on the use of terminal pay, on call and stand by pay codes in retirement allowance calculations after the legislature enacted the Public Employees’ Pension Reform Act of 2013 (“PEPRA”), effective January 1, 2013. The ruling is called the “Alameda” decision. Per the Alameda decision, the Merced County Employees’ Retirement Association (“MercedCERA”) cannot include the up to 160 hour vacation cash out (“terminal pay”), or “payments for additional services rendered outside normal working hours” (e.g., “on call” or “stand by” pay codes) (collectively, “standby pay”) in any retirement calculations effective immediately. The ruling also remands the Alameda case back to the Trial Courts to vacate prior court decisions on this topic and to give direction to the pension system(s) on any outstanding issues. There is currently no “grace period” for implementation and MercedCERA is working with their attorneys and actuaries on the impact on those who retired on and after January 1, 2013. Separate communications will be sent to retirees potentially impacted by this ruling.
Court History on the Alameda Case:
Prior to the passing of the California Public Employees’ Pension Reform Act (PEPRA) in 2013, MercedCERA members were allowed to include up to 160 hours of additional vacation payout hours when terminating employment (“terminal pay”) in their retirement allowance calculations under a Settlement Agreement that MercedCERA entered into in 2001. PEPRA prohibited the inclusion of that terminal pay in the retirement allowance calculations of people it defined as “new members” (“PEPRA members”). Other amendments to the law that governs MercedCERA enacted at that time, known as “AB 197,” also prohibited the inclusion of that terminal pay in retirement allowance calculations of people who already were members of MercedCERA (“legacy members”). As a result of AB 197, and developments in litigation over the law, on July 12, 2014, MercedCERA ceased including that terminal pay, as well as standby pay, in retirement allowance calculations for all tiers. MercedCERA already had excluded the terminal pay from the retirement allowance calculations of PEPRA members as of January 1, 2013.
In January 2018, a court of appeal ruled in the “Alameda Sheriffs” case that AB 197 could not be applied by MercedCERA to exclude terminal pay from the retirement allowance calculations of legacy members. The court of appeal further ruled that a trial would need to be held to determine whether standby pay could, or could not, be excluded from retirement allowance calculations.
As a result of Alameda Sheriffs, on February 8, 2018, the Merced County Employees’ Retirement Association Board of Retirement adopted Resolution 2018-1 which made terminal pay pensionable for MercedCERA legacy members (Tiers 1, 2 and 3), capped at the lesser of a member’s annual vacation accrual amount, the leave hours actually included in the member’s vacation pay-off, or 160 hours. The Board subsequently adopted Resolution 2018-3 to further clarify certain aspects of its earlier Resolution. For Tier 1, 2 and 3 members who retired on or after July 12, 2014, the adoption of both Resolutions means that a maximum of 160 hours of vacation leave, a maximum of one year’s vacation leave accrual, or the number of vacation hours actually included in the member’s vacation pay-off, whichever is less was added to such retiree’s final average compensation, unless an exception applied.
MercedCERA took action pursuant to the decision in Alameda Sheriffs, because, notwithstanding review by the Supreme Court, a court of appeal had ruled that MercedCERA was illegally excluding terminal pay from retirement allowance calculations, and the MercedCERA Board determined that it had a fiduciary obligation to correct that error in a timely way for its members. However, MercedCERA was unable to know with certainty the outcome of the Supreme Court review at that time and advised recipients that any benefit increases associated with the inclusion of terminal pay could be reversed, including retroactively. Nevertheless, as noted, the MercedCERA Board determined that it was more important that its retirees receive the full payments that Alameda Sheriffs stated were due, than that the Board wait for final word on that legal determination from the Supreme Court.
Going forward, the MercedCERA Board of Retirement is legally bound to implement the Supreme Court’s Alameda decision. Staff expects that on August 13, 2020, the MercedCERA Board of Retirement will rescind the Resolutions previously adopted (2018-1 and 2018-3) and will adopt new Resolutions on how to proceed forward. Effective immediately, no new retirement benefit will include the terminal pay (up to 160 hours vacation) cash out or stand by pay codes. MercedCERA Staff and the Board will be meeting MercedCERA’s legal counsel and actuary on how to implement the Alameda decision for those that have already retired.
Please feel free to contact MercedCERA at 209-726-2724 or email MCERA@co.merced.ca.us should you have any questions.
Merced County Employees’ Retirement Association