It is a common phrase that most in the public sector have heard of – a “PERS audit.”  However, despite having heard of CalPERS (“PERS”) audits occurring, many have not experienced an audit firsthand and are unfamiliar with what PERS audits entail.

CalPERS’ Office of Audit Services performs comprehensive reviews of public agency employers.  Part of that review function includes regularly conducting audits of public agencies.  These audits cover a wide range of issues such as reporting of special compensation, payroll processes, retired annuitant issues, part-time employee enrollment, and independent contractor designation.  There are multiple factors that prompt an audit by PERS.  PERS has an internal risk assessment ranking of agencies and may select an agency for an audit based on ranking.  Other factors may include media reports and “tips” provided to PERS.

If your agency is selected for an audit, PERS will provide a notice of the upcoming audit in writing.  PERS will then contact your agency to schedule on-site fieldwork visits and request various relevant documentation related to the audit, some of which will be produced before the visit and some of which will be produced during the visit.  Relevant documentation may include payroll records from a selected employee sample, labor agreements, employment contracts, and policies and procedures.  The on-site field work at your agency may last from a few days to a few weeks.

After PERS conducts its on-site field work and review of documentation, PERS prepares a draft audit report for the agency to review and respond.  It may take up to one year or more after the last on-site visit for the agency to receive the draft audit report.  The draft report will include each of PERS’ proposed findings on each issue audited, and the facts and documents that it relied upon to reach the findings.  The agency will then be allowed to prepare a comprehensive response to the draft audit report.  The response may identify errors and remedy any deficiencies in the draft report.  The response to the draft report is an important opportunity for the agency to address and comment on the audit report because the agency’s response will be included as an appendix to the final report.

Typically, within 3-6 months after receiving the agency’s response to the draft audit report, PERS provides the agency with a final audit report.  The final report is a public document and is posted on PERS’ website.  After the final report is issued, if the findings in the audit report demonstrate failings on the part of the agency, individual departments at PERS continue to work with the agency to develop a corrective action plan regarding the findings.  If PERS and the agency are unable to resolve the failings through a corrective action plan, PERS issues directives to the agency in line with the findings.  The agency may appeal the directives.  An administrative law judge hears the appeal and issues an advisory decision to the PERS Board for a final decision.  It could take several years from the date of filing the appeal to receive a final decision.  The agency may appeal the final decision in Superior Court.

With the complex changes that accompany the Public Employees’ Pension Reform Act of 2013 (PEPRA), it is important now more than ever for public agencies to be aware of potential issues that may arise if PERS conducts an audit.  Employers should consider reviewing its labor agreements, payroll practices, employee designations, and policies and procedures as part of an internal audit to ensure it is in compliance with the Public Employees’ Retirement Law.