Battle over pension spiking bill

CalSTRS and CTA want Simitian bill changed
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The California Teachers Association and the state teachers retirement system are pushing for significant changes to SB 27, Sen. Joe Simitian’s bill that would prevent “spiking,” the practice of larding on compensation near retirement to boost a public employee’s pension – a practice that is drawing increasing scrutiny. It also would limit the types of compensation that would be used in calculating a standard pension.

The late-in-coming amendments pose a new challenge to the bill, which raced through the Senate without opposition, and could spur a larger discussion on pension changes. A similar bill by Simitian passed the Legislature last year but was vetoed by Gov. Arnold Schwarzenegger because it was tied to another pension bill that troubled him.

Simitian’s bill would apply to all current and future public workers. Any employee who received a pay increase of 25 percent or larger over the final five years of employment would automatically have the raise audited by the public pension system: CalSTRS in the case of educators. (Educators whose pay rose more than 25 percent in taking a job in another district would be excluded from an audit.)

Another provision, to thwart double-dipping – receiving a public paycheck and a pension simultaneously – would ban an employee from returning to work as a contract or full-time worker for 180 days after retirement.

The board of CalSTRS and the CTA want to limit SB 27 to future employees arguing that current workers have inviolable vested rights to benefits that have already been negotiated. Doing so, however, would substantially reduce immediate savings to the system at a time that CalSTRS is looking to the Legislature for a sizable boost in taxpayer subsidies because it has yet to recover from the stock market meltdown in 2008.

Proposed cap on pension benefits

CalSTRS and the teachers union are calling for a simpler – and more encompassing – way to deal with spiking: capping the amount of compensation that can be counted toward a defined benefit pension at $147,000 instead of requiring reviews. CalSTRS reports that, statewide, 1,600 administrators not covered by bargaining agreements earn more than $147,000; their compensation above that would be credited toward their individual defined benefit supplement accounts, which work like a 401(k) with a lower guaranteed rate of return, thus saving taxpayers money.

Doing it this way would exclude teachers, who rarely make as much as $147,000 and don’t get the kinds of perks that have led to spiking. SB 27 is aimed, in part, at school boards that have boosted the salaries of superintendents and high-ranking administrators through short-term promotions. A report in the Sacramento Bee found that nearly half of the 225 Sacramento retired educators with pensions above $100,000 got at least a 10 percent pay raise in one of their last three years. Depending on how long they’ve worked, employees’ pensions are based on either their highest-paying year or the average pay in their final three years.

Spiking has been an issue in municipal and county governments as well. In Contra Costa County, for example, two fire chiefs, ages 50 and 51, retired with pensions greater than their highest salaries.

Restrictions on qualifying compensation

Under Simitian’s bill, the value of non-salary income, like car allowances, life insurance, and unused vacation pay, would not count in determining a standard pension. This money would, however, be credited toward the supplemental program. To no surprise, the administrators’ lobby, the Association of California School Administrators, opposes the bill.

The only significant change for teachers is that unused sick pay would no longer boost years of sevice in pension calculations. It too would now be credited in the supplemental program. (Some readers will no doubt argue that, as in most private companies, unused sick pay shouldn’t count toward retirement benefits at all.)

The Pacific Research Institute estimated four years ago that pension spiking cost California taxpayers $100 million each year. CalSTRS estimates that SB 27 would yield savings of $10 million annually, but it also said that it would have to hire a dozen people to do the audits and spend $5 million to update a system to flag potential violations.

CalSTRS has been criticized recently for its failure to crack down on alleged spiking. This issue became public after CalSTRS executives fired Scott Thompson, a whistle blower whom they claimed lowered a pension without authorization and refused to restore it. Pension administrators recently told the CalSTRS board they planned to establish a new unit to review questionable compensation cases,  regardless of SB 27’s fate.

Simitian, a Palo Alto Democrat, told me that the existing system that permits padding “isn’t fair to taxpayers and to most employees who aren’t in a position to have their incomes spiked and rely on pension systems to be solvent. The status quo undermines public support for appropriate pensions that retirees rely on.”

A newly retired teacher last year earned an average pension of $49,000. Educators receiving six-figure pensions remain a small proportion of the 852,000 teachers and administrators served by CalSTRS, but the focus of public ire – or envy.

CalSTRS this month reported an impressive 23 percent return on investments for the year ending June 30, the best  in a quarter century. And it followed a 2010 return of 12.7 percent. But even so, CalSTRS, with $154 billion in assets, remains $25 billion below its peak in October 2007 – and only 70 percent funded. To become fully funded could require more than $2 billion in taxpayer subsidies, between additional school districts’ benefits contributions and the state general fund’s portion of retirement contributions.

Anti-spiking legislation, Simitian notes, “is the low-hanging fruit of pension reform. It should be easy.” He said he has not taken a position on the CalSTRS amendments.

Update: Education Week reports that other Legislatures are also curbing “double-dipping.”

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10 Comments

  1. Thank you, Senator Simitian. This is good common sense for our state. Now if we could get 120 of your colleagues to see things your way….

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  2. No pension benefits should be given that don’t reflect the value of contributions and the averaged earnings resulting from the contributions made on behalf of a pensioner, which make up pension funds assets. Whenever pension benefits, reflecting actuarial standards, don’t represent the time-value of contributions, they must represent the taking of assets of other people, either other pensioners, or as the government employees prefer, private taxpayers, who overwhelmingly have a pittance of pension benefits in comparison. Pension given on the basis of final salary violate this rule. Spiking is but a more egregious expression of this.

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  3. The narrow focus of this on CalSTRS obscures the bigger problem Simitian is addressing.  The much bigger problem is all the many different retirement plans that have the same problems and all combined leave a far bigger unfunded liability than mentioned here.  CalSTRS is the second biggest pension fund but the one bigger govt. employees’ system and the dozen or so smaller funds add up to an enormous liability and will take much more money to pay for (and generate much more resentment).
     
    The cries for more money for schools or universities will be completely ignored when people see the high pensions for some public and school employees.  They will think “If they have enough money to give those kind of pensions then they don’t need any more.”
     
    That CTA represents the administrators at the expense of the average teacher is shown in how vigorously they defend the pension abuses which benefit so few but will be blamed on so many and cost the average teacher a lot when the bills really come due.  $4B of tax money going to teachers and administrators pensions is $4B that won’t go to schools.  There will be more layoffs and cuts to pay for this because no one, I mean NO one is going to want to increase taxes to pay for spiked pensions.  The cap at $147K is a small step.  Why not cap it at the Social Security limit?
     
    And for g*d’s sake PUH-LEASE don’t count on these good investment returns continuing for even another year or more.  After any big drop like the Great Recession there is a bounce back as companies feel comfortable rebuilding inventories and realize they overdid it on the layoffs.  After that????  No one I know of sees a vigorous economy returning soon, and there are a lot of things that can go wrong.
     

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  4. If you are serious about spiking, then here is the solution:
    Change the state pension law.  Charge the agency for the full actuarial cost of the spike in the year it occurs.
    That does not interfere with participant rights, but it does hold the decisionmakers accountable.
    Further, it is already in place in Illinois, where they dealt with any pay increase over 6% as a spiked benefit.
    If the spiked pay increases a pension by $100 per month, then the agency pays $15,000 that year to the pension fund.  An increase of $1,000 per month would then cost $150,000.  (The $150 multiplier is just for illustration purposes.  It depends on the age of the retiring worker and the survivor benefit provided.)

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  5. “A newly retired teacher last year earned an average pension of $49,000. Educators receiving six-figure pensions remain a small proportion of the 852,000 teachers and administrators served by CalSTRS, but the focus of public ire – or envy.”
    Let’s keep this in perspective. The MAXIMUM social security benefit is $31,000 per year. And teachers who worked 30 years, then retired, had an average pension of $67,900 per year. Since I’ll work at least 45 years unless I die first, I’m not impressed with a 30 year career yielding a pension that is more than twice what the maximum is under social security. And the figure of $49,000 is probably based on average service of 25 years, which means they are retiring very young.
    Sorry. No sympathy. Let the whole system implode. The irony is that these public sector unions, by being unyielding on their pension benefits, are the reason their pension funds are making such aggressive, high-risk investments. That is, the mutual pressure – unions who won’t reduce pension benefits, pension funds who won’t lower their earnings projections – are the reason we will see another market crash. Yet they will blame Wall Street, when they have been in bed with Wall Street, gaming they system all along through the pension funds.

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  6. Jack T: It is important to note that teachers contribute 8 percent of their paycheck to CalSTRS, a third more than workers contribute to Social Security (6.2 percent). And this year the payroll tax has been cut to 4.2 percent. Districts contribute 8.25 percent of pay (compared with 6.2 percent under Soc Sec and the state adds 2 percent through the General Fund.

     

     

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  7. John, first of all, the payroll tax for those of us who are self employed has been reduced from 12.4% to 10.4%. And in my opinion that was an extremely irresponsible, pandering decision to reduce that assessment. Social security is not in serious danger of insolvency, because it collects a 12.5% payroll assessment and pays out, on average, about 30% of what a retiree’s average salary was when employed. Since the ratio of workers to retirees (given social security doesn’t kick in at the 30% or so rate until age 68) will remain well over 2-1 even with people living longer, social security can pay its way.
    But if you think that an 8% of payroll contribution is going to come anywhere close to funding a 75% pension after 30 years (i.e. at around age 60), you are misinformed. The biggest con job, which unions leaders and workers alike have all been taken in by, is the notion that CalPERS and CalSTRS and other gigantic pension funds are going to be able to continue to earn 7.75% (4.75% after inflation). This will not happen.
    Public sector pensions are not affordable because you can’t depend on Wall Street to deliver those kinds of returns. And even if you could, it would be at the expense of small investors, and why on earth should taxpayer funded government workers bear the upside of Wall Street investing via their pensions, while taxpayers cover the downside through higher taxes when Wall Street can’t keep their fanciful promises?

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  8. John – I just realized you were the author, not just a commenter responding. Read some of these posts (links to related posts at the end of the article) for numerical analysis that backs up my contention that CalSTERS and CalPERS can never sustain their current ROI projections:
    http://civfi.com/2011/07/23/what-percent-of-payroll-will-keep-pensions-solvent/
     

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  9. I’ll check our the link, Jack.

    I don’t disagree with you; CalSTRS staff  recommended lowering the annual expected rate of return, but the board rejected the proposal, because it would put more pressure on the Legislature to increase taxpayers’ subsidy. And even with two years of great returns, the Legislature still faces the need to increase the state’s contribution to CalSTRS by at least $2 billion to $3 billion annually — this at a time when schools are laying off teachers.

    My only point was the people tend to forget that teachers are contributing substantially more to retirement than other employees who pay into Social Security.

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