CalPERS Weighs Role of Settlement Dollars in Pension Calculations

The California Public Employees’ Retirement System was asked by two retired police officers to include hiring discrimination settlement dollars in defined benefit pension calculations.

An interesting new publication from the California Public Employees’ Retirement System (CalPERS) dives into the mega-pension board’s thinking in a recent benefits appeal for increased benefits made by two long-serving police officers—an appeal which was ultimately denied.

By way of background, CalPERS explains the appeal was filed by two City of Riverside police lieutenants who, along with their employer, sought to include settlement pay stemming from an earlier lawsuit in the calculation of their final compensation, “thereby inflating the officers’ pensions” above what CalPERS would otherwise pay.

The CalPERS Board considered the officers’ benefits calculation adjustment appeal last week. The officers explained they had filed federal lawsuits against their employer, the City of Riverside, alleging that they had been wrongfully passed over for promotion to captain. The city settled the lawsuits by agreeing to award the lieutenants back pay at the higher rate paid to captains, and by placing the officers on administrative leave for a year (at the higher captain’s pay rate), at which point they would officially retire.

“The city reported the captain’s pay, more than $1,800 per month, on top of the officers’ base salary of $11,562.89 per month, as ‘special salary adjustment pursuant to a settlement’ and sought, with the officers, to include this increase for purposes of calculating the officers’ pensions,” the CalPERS Board explains. “CalPERS staff contended that the additional pay could not be applied toward the officers’ pensions because they had never actually performed the duties of a captain, and because they were not actually ‘promoted’ as that term is commonly understood.”

NEXT: CalPERS confident in denial 

CalPERS goes on to explain that the enhanced pay “was not provided to similarly situated employees and could not be found on a publicly available pay schedule, as California law requires.”

Considering all this, CalPERS notes the current case is “quite similar to the Richard Lewis case that the Board decided at its December 2015 meeting, also after a full hearing. In that case, the City of San Bernardino settled Mr. Lewis's employment discrimination suit, which alleged that the City had wrongfully failed to promote him from fire captain to battalion chief, by agreeing to pay him the difference between those two pay rates indefinitely, even though he was never promoted to the higher position. In that case, the Board also decided that the increased amounts the City paid to Mr. Lewis could not be used to increase his pension.”

Matthew Jacobs, CalPERS' general counsel, further describes the decision. “The settlement payments in these cases were just that—settlement payments,” he notes. “They were not pay for actual work performed at any level, and hence could not be used to inflate the officers' pensions. We simply cannot allow the pension fund to be used to finance cities' settlements of employee complaints. These cases exemplify CalPERS' efforts to ferret out potential abuse of the System.”

Jacobs highlights the importance of that second point—that allowing these settlements to be used for purposes of benefits calculations effectively puts CalPERS and the state’s taxpayers on the hook for settling city’s and municipalities’ potential wrongdoing. (An explanation of how to treat settlement funds under ERISA and other relevant law is here.)

A full explanation of the CalPERS Board’s thinking was also supplied, available here