Limitations when calculating pensionable compensation/anti-spiking

PEPRA makes several changes to the method by which pensionable compensation is calculated.

When calculating an employee's pensionable compensation, the average of the highest three years of the new employee's compensation is used. PEPRA also requires pension benefits for all new employees to be calculated based on the employee's base pay, defined as the normal monthly rate of pay paid in cash to similarly situated members in the same group or class of employment.

Compensation paid to enhance an employee's retirement benefit ("spiking") must be excluded.

Examples of compensation that cannot be included in pensionable compensation include overtime, bonuses, severance pay, cash-outs for unused leave time, vacation or sick leave, and payments for additional services rendered by the employee outside of normal working hours.

Cap on pensionable compensation

For new employees, in addition to a reduced benefit formula and limiting pensionable compensation to the three-year average of base pay, PEPRA sets a cap on pensionable compensation. For those who participate in Social Security, the cap equates to the Social Security wage index limit, approximately $113,000. For new employees who are excluded from Social Security, the cap equates to 120% of the value of the Social Security wage index limit — approximately $136,000. The amount of the cap is increased each year to reflect changes in the Consumer Price Index

Elimination of `air time'

Before PEPRA, agencies could offer members the opportunity to purchase up to five years of service credit, sometimes called "air time." PEPRA prohibits a retirement system from allowing employees to purchase air time service credit on or after Jan. 1, 2013.

Prohibition of contribution holidays

Contribution holidays occur when an employer decides not to fund the normal cost of the pension benefits in a given year. This normally happens when the pension benefits are determined to be "overfunded" (when CalPERS advises the sponsoring agency that adequate funds are in place to pay future pensions). PEPRA prohibits contribution holidays. With limited exceptions, employer and employee contributions together must equal or exceed the normal cost of benefits for the given fiscal year.

Prohibition of retroactive benefit enhancement

PEPRA prohibits a public agency from granting retroactive pension benefit enhancements that apply to service preformed before the date of the enhancement. This limitation applies to new and existing employee benefits.