Frequently industrially disabled in their dangerous jobs, thousands of police officers, firefighters, and other safety employees invested large amounts of their retirement funds to purchase military/air time. CalPERS promised that the investment would increase Plaintiffs' retirement allowance. CalPERS' Demurrer fails because of its many unsupported assumptions:
(1) Plaintiffs' Right to Benefits. CalPERS assumes that Plaintiffs are not fully entitled to benefit from their (i) investments in military time, air time, and PVSC (hereinafter "military/air time"), (ii) vested industrial disability retirement ("IDR"), and (iii) other vested rights.
(2) Plaintiffs' Full Payment for Full Value. CalPERS ignores that (i) the Public Employees' Retirement Law ("PERL", Government Code, §§20000,requires Plaintiffs to pay the full cost of military/air time without subsidy to or from the employer or pension system at any time, and (ii) federal tax law deems military/air time to be "permissive service credit" that CalPERS must structure and price equivalent to the benefit to be received. Plaintiffs are entitled to value for their money, even if their benefit is not based in added "service credit".
(3) Military/Air Time: Characterization As Contributions in Job Not Supported. Instead of respecting the "corresponding" time that CalPERS required Plaintiffs to certify at the time of contracting, CalPERS assumes it can transform Plaintiff's military/air time investment into contributions in the job and with the employer where the Member worked at the time that he or she invested. CalPERS cites no specific legal authority to support this accounting. The PERL opposes it. The facts oppose it.
Under CalPERS' own reasoning and practice, Plaintiffs would be entitled to relief but for this false and undisclosed assumption. For example, disabled safety  Plaintiffs would be entitled to a 50% IDR allowance and an additional annuity for their military/air time investments under CalPERS' practice if CalPERS accounted for Plaintiffs' optional investments as contributions not in the employment where the Plaintiff bought the credit. (§21420.)
(4) Military/Air Time: CalPERS Violates the IRC. A basic question is whether the Internal Revenue Code (IRC) Section 26 U.S.C. §415(n) applies to limit CalPERS' treatment of Plaintiffs' investments in this case. CalPERS admits that military/air time are "permissive service credits" that are governed by the IRC. Ignoring its specific statutory duties (see §§21750, 21762, et seq.) CalPERS argues the subparts of §415(n) do not apply because (i) Plaintiffs rolled over 457 funds to invest, and (ii) the dollar value of the purchased "permissive service credits" fell within contribution limits. (Demurrer, p. 10.) Factually, not all purchases were roll-overs. Plaintiff Rachel Healy bought air time with $58,000 rolled over from her 457 funds and $19,000 after-tax dollars from mortgaging her home. (FAC, Exh. 7.) Many others did not roll-over funds.
In all cases,the statutes, IRS publications, Private Letter Rulings, and practice guides indicate the "permissive service credit" definitions and 26 U.S.C. §415 apply to this case.
"A permissive service credit is credit for period of service recognized by a defined benefit governmental plan, only if you voluntarily contribute to the plan an amount that does not exceed the amount necessary to fund the benefit attributable to the period of service and the amount contributed is in addition to the regular employee contributions, if any, under the plan." (IRS Publ. 571, Ch. 8, p 13 [Request for Judicial Notice ("RJN"), Exh. 6].)
Section 415(n) "limits participant contributions used to purchase permissive service credit (H-5950.2)". (RJN, Exh. 7, p. 1.)
CalPERS argues that §415(n) does not limit how CalPERS can price and treat military/air time investments. But 26 U.S.C. §415 is clear that both (i) the contributions limits and (ii) the subparts of §415(n) apply to this case:
a) Service credit investments must be recognized for purposes of calculating a benefit. (26 U.S.C. §415(n)(3)(A)(i).) However, for Plaintiffs retiring on an industrial disability retirement (IDR), CalPERS does not recognize Plaintiff's service credit investment for purposes of calculating their benefit, and provides little or no value for it.
b) The benefit must not be one that the participant has already received under the plan. (26 U.S.C. §415(n)(3)(A)(ii).) Here, disabled Plaintiffs purchased "service credit" after already fully vesting in IDR as part of their regular employed CalPERS service. As a result of CalPERS' treating the military/air time as "normal contributions" in the job held at purchase, CalPERS offsets or partially funds the already vested IDR with Plaintiffs' investment. CalPERS only provides disabled Plaintiffs the already vested IDR.
c) The participant must make a voluntary contribution which does not exceed the amount necessary to fund the benefit attributable to the service credit. (26 U.S.C. §415(n)(3)(A)(iii).) Plaintiffs pay a great deal for the military/air time and do not get an equivalent benefit. Instead of receiving an additional benefit equivalent to their money, disabled Plaintiffs suffer a loss. Plaintiffs' contributions exceed the benefit they receive.
The intent of the tax law opposes CalPERS' actions. In an effort to expand and to protect employee benefits, Congress intended the Pension Protection Act of 2006 to safeguard employee retirement funds, toallow participants to buy permissive service credit and to encourage portability of benefits for employees changing jobs from one government employer to another. (RJN, Exh. 8, p. 2) Instead of safeguarding the investments, CalPERS puts the funds at risk.
Plaintiffs alleged violations of the IRC and the PERL. CalPERS does not oppose the allegations that it violated the IRC. It argues that it did not violate the PERL. CalPERS has a duty to follow the IRC, specifically IRC section 415. (§§21750, 21762, 21701.)
(5) Military/Air Time: Overcharging. Although not specifically disclosed, CalPERS charges more for military/air time than necessary to fund Plaintiffs' future service (or annuity) benefit. The legislative history requires that CalPERS price the military/air time investments so that Plaintiffs pay only the full cost of the Member's expected future service (or annuity) benefit. (§§21050-21052) However, CalPERS includes unrelated employer costs (disability, unfunded liability, etc.) and surcharges in the purchase price, and assumes the right to seize the investment on IDR. Putting CalPERS on notice at the first filing of the claim at the Victim Compensation and Government Claims Board ("VCGCB"), Plaintiffs always asserted that CalPERS is overcharging Plaintiffs and that Plaintiffs are entitled to the benefit of all of their investment.
(6) IDR Vesting. Plaintiffs vested in their right to a 50% IDR on the first day of the safety job. CalPERS assumes that disabled Plaintiffs agreed to waive their statutory IDR rights and to offset their 50% IDR with some or all of their military/air time investments, without Plaintiffs' informed consent or waiver. CalPERS "directly or indirectly" charges disabled Plaintiffs who purchased "service credits" higher costs for IDR.
(7) Failure To Harmonize the PERL. CalPERS ignores that IDR, military/air time purchase programs, and service retirements are all integral parts of the PERL (i.e. the same plan). CalPERS must harmonize them when initially pricing and structuring the military/air time purchases for safety members. (Wheeler v. Board of Administration (1979) 25 Cal.3d 600, 606.) CalPERS is responsible for the IDR and purchase programs simultaneously, and clearly anticipates that the sections may interrelate, but fails to harmonize the purchases and coverages.
(8) IDR and Military/Air Time Purchase Contracts Breached. CalPERS breaches the purchase contracts and IDR policies, including by (i) "transforming" the certified corresponding time into regular work for a specific employer, (ii) failing to properly account for or seizing the investments, and (iii) failing to provide the "increased benefit" promised.
(9) Purchase Contract and IDR Policy Disclosures Insufficient. The purchase contract disclosures and IDR policies fail to sufficiently or meaningfully disclose (i) CalPERS' "transformation" of certified corresponding time, (ii) the limitations, offset, and exclusions that reduce already-vested IDR benefits, (iii) that the purchaser may lose his investment in addition to not benefiting from the service credit; and (iv) the risk of loss of the military/air time investment.
(10) All Causes of Action Survive. Plaintiffs maintain all causes of action in the FAC. For example, CalPERS violates equal protection in treating individuals who invested differently than others. CalPERS violates due process. CalPERS' policy and practice violates core elements of the PERL and IRS Code, especially 26 U.S.C.§415(n)(3).
Unless otherwise indicated, all statutory citations are to the Government Code.
Plaintiffs use "safety" and "safety jobs" to mean all positions where Members are eligible to take Industrial Disability Retirement ("IDR") if injured on the job.
 Because disabled Plaintiffs held the same job when they invested in military/air time as the one where they were later industrially injured, CalPERS uses the disability funding sections of the PERL to justify seizing or failing to credit those investments.
 The IRS Private Letter Rulings refer to a government retirement plan's administration of "permissive service credit" benefits in amounts below the limitation cap of Section 415. As 415 includes a definition, the benefits must met the terms of subparts. For example, the IRS does not allow funding a vested benefit (e.g. IDR). (RJN, Exh 1, p. 13.) "Permissive service credit" relates to an actual period of service for which the employee has not yet been credited with performing service. (RJN, Exh. 2, p. 6; Exh. 3, p. 7.) If the amount of the funds being transferred or rolled over purchases either more or less than the actuarial equivalent service credit, such purchase may raise other qualification requirements. (RJN, Exh. 4, p. 5.) Any transfers between plans must provide an additional benefit that is actuarially accurate. (RJN, Exh. 5, p. 7.) Except for roll-overs, contributions above the Section 415 cap are not authorized.
CalPERS apparently recognizes and accepts that the subparts of Section 415 apply to (i) limit who can buy service credit ("participant") (§415(n)(1)); (ii) limit the number of years of nonqualified service credit that may be purchased; and (iii) require that a Member have five (5) years of service credit before buying air time (§415(n)(3)(B)).
See VCGCB filing and attached Complaint for Damages, pp. 2:24-3:20, 8:2-5, 19:4-7, 20:1-20, 21:16-23, 34:9-23, and 54:13-21, attached as Exhibit 1 to the Declaration of John Michael Jensen filed herein on September 23, 2011, in support of an unrelated motion.