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City of Huntington Beach v. Board of Administrators of the California Public Employees' Retirement System6/26/2002
Introduction
The City of Huntington Beach entered into agreements with several of its employee associations, which allowed the member employees to enhance their retirement allowances by converting benefits to salary. The Board of the Public Employees' Retirement System (PERS) adopted a policy authorizing the benefit conversions, but it required the City to pay PERS the increased cost of the enhanced retirement allowances. The City filed an action against PERS, claiming the benefit conversions violated the Public Employee Retirement Law, thus negating the City's agreement with its employees and its obligation to pay PERS.
Three of the employee associations, Huntington Beach Firefighters' Association (HBFA), Huntington Beach Municipal Employees' Association (HBMEA), and Huntington Beach Management Employees' Organization (HBMEO), filed a complaint in intervention denying the allegations of the City's complaint and seeking affirmative relief against the City and PERS. A fourth employee association, Huntington Beach Police Officers Association (HBPOA), filed a separate lawsuit against the City, which was consolidated with the City's action.
The trial court granted summary judgment in favor of PERS and the employee associations based on its determination that PERS' policy and the conversion benefits were lawful. The City appeals, and we affirm.
Background of PERS' Short-Term Policy
PERS, a retirement system for employees of the state of California and participating local public agencies, was established by the Public Employment Retirement Law (PERL) (Gov. Code, § 20000 et seq.). PERS is a prefunded, defined benefit plan that determines an employee's retirement benefit based on the factors of retirement age, length of service, and final compensation. (Oden v. Board of Administration of PERS (1994) 23 Cal.App.4th 194, 198 (Oden).) PERS is funded by both employer and employee contributions. Employee contribution rates are fixed by statute; employer contribution rates, on the other hand, are determined by compensation figures and actuarial assumptions, and are adjusted periodically by PERS. (Hudson v. Board of Administration of PERS (1997) 59 Cal.App.4th 1310, 1316.)
Under the Internal Revenue Code, employers' contributions are not taxable income to the employee until PERS benefits are paid upon separation or retirement, whereas employees' contributions are ordinarily taxable when made but not taxed at disbursement of benefits. Once contributions are designated as employee contributions, they are "generally forbidden from being favorably treated as employer contributions under federal tax law. (26 U.S.C. § 414(h)(1).)" (Oden, supra, 23 Cal.App.4th at p. 199.) An exception has been created, however, for state and local governmental employers so that "designated employee contributions to a qualified governmental pension plan are treated as tax deferred employer contributions where the employer `picks up' the employee contributions. (26 U.S.C. § 414(h)(2).)" (Ibid.) This "pick up" law allows PERS to treat contributions as employee contributions under state retirement law and allows the employee to treat the contributions as employer contributions for purposes of federal tax law. (Ibid.)
"Employees' contributions to PERS are currently made in two primary ways: (1) employee-paid salary deduction; and (2) employer-paid salary addition. In the first method, a pension contribution is withheld from the employee's stated salary. . . . The employee pays income tax on his reduced wages, less the amount of the pension contribution. [Citation omitted.] In the second method, the employer directly picks up and assumes the pension contribut
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