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California Court of Appeal Decision Reminds CalPERS Employers to Ensure All Employee Base Salaries are Reported on a "Publicly Available Pay Schedule"

California Court of Appeal Decision Reminds CalPERS Employers to Ensure All Employee Base Salaries are Reported on a "Publicly Available Pay Schedule"

How can CalPERS employers help ensure that their employees receive their expected pension benefits from CalPERS? On June 29, 2016, the California Court of Appeal affirmed in Tanner v. California Public Employees' Retirement System, Cal.App.4th (2016 C.D.O.S. 6932), that only base salaries that are reported on a "publicly available pay schedule" are reportable compensation for purposes of calculating a retiree's pension benefits. The question is: what qualifies as a publicly available pay schedule?

In 2006, Joseph Tanner agreed to be City Manager for the City of Vallejo with a base salary of $216,000 per year, plus additional compensation for automobile allowance, deferred compensation, leaves of absences paid as salary, and employer-paid member contributions to CalPERS. In January 2007, CalPERS reviewed his written contract and determined that only $216,000 would be the reportable compensation for purposes of retirement benefits, while the other items would be excluded. Following receipt of this determination, the City of Vallejo and Mr. Tanner renegotiated his contract to provide for a new base salary of $305,844 per year, which included the costs associated with the prior benefits. Vallejo's mayor approved the new written contract, including the higher base salary, in March 2007, and it was published in the City's corresponding budget cost analysis.  Upon Mr. Tanner's retirement in December 2009, CalPERS decided that his retirement benefits would still be based on his original base salary of $216,000, and not his new base salary of $305,844. 

The Court of Appeal affirmed the CalPERS decision because neither the March 2007 contract nor the cost analysis, both of which listed the $305,844 base salary, qualified as a "publicly available pay schedule" under California Government Code section 20636(b)(1). The Court defined a "pay schedule" as "a written or printed list, catalog, or inventory of the rate of pay or base pay of one or more employees who are members of CalPERS." The March 2007 contract did not meet this definition, because it was 14 pages long and contained all of the terms and conditions of Mr. Tanner's employment, not limited to just his base salary information.  Further, the budget cost analysis did not meet the "pay schedule" definition because it contained several financial figures beyond just Mr. Tanner's base salary.

In reaching this conclusion, the Court examined the California Legislature's important policy necessitating a "pay schedule," which isolates a CalPERS employee's base pay from other employment information. First, a separate listing of base pay salaries more readily informs the public of the payrate that will be used in determining the amount of any employee's retirement benefit. Second, this requirement is necessary to prevent the practice of "pension spiking" (i.e., intentionally inflating the final compensation upon which retirement benefits are based) for a specific person to ensure that payrates would be stable and predictable among all employees and would be publicly noticed. To allow either the March 2007 contract or budget cost analysis to fulfill the definition of a "pay schedule" would frustrate the legislative purpose behind the law, and would deviate from the common meaning of a "pay schedule."

The requirement that base salary be paid pursuant to a publicly available pay schedule to be reportable for retirement benefit purposes has been a statutory CalPERS requirement since 1993.  Due to a lack of clarity about this requirement, however, the CalPERS Board of Administration adopted regulations in 2011 (well after the facts in Tanner took place) outlining the elements needed to meet the definition of a publicly available pay schedule. See California Code of Regulations § 570.5; CalPERS Circular Letter 200-050-12 (Oct. 25, 2012). If a CalPERS employer cannot produce a document on behalf of an employee that meets those requirements, CalPERS has the authority under regulatory guidance to make a determination about what constitutes base payrate for that individual.

Therefore, this case serves as an important reminder to CalPERS employers to make sure that they list the base salary (or salary range) for every job position on a publicly available pay schedule pursuant to the requirements of California Code of Regulations § 570.5, including top management employees. It is not sufficient to simply reference base salaries in their employment contracts or other agency documents along with budgetary figures.

Hanson Bridgett's Employee Benefits and Public Agency Groups have helped many government agencies in drafting such employment contracts and regularly advise on CalPERS rules, regulations, and compliance.

For More Information, Please Contact:

Madeline Chun
Madeline Chun
San Francisco, CA