State Auditor: CalSTRS is a high risk
Anti-spiking bill will test lawmakers' resolve
State Auditor Elaine Howle has added the teachers’ pension fund, CalSTRS, to the state’s high-risk list, adding urgency to the imperative to reduce taxpayers’ liability for the nation’s largest education pension fund. The release of Howle’s periodic update of financial worries comes on the eve of the final showdown on a significant pension reform before the Legislature, an anti-spiking bill sponsored by Sen. Joe Simitian, a Palo Alto Democrat.
Passage of SB 27 by itself won’t make a huge dent in the problem. But the bill deals with what Simitian calls “low-hanging fruit.” Spiking – the practice of jacking up employees’ pay in their final year with the intent of increasing their annual pensions – is an abuse of the system that harms taxpayers and other pensioners.
“If we (the Legislature) cannot come to grips with pension spiking, then how can we deal with larger reform issues?” Simitian said last night.
Though proposals and voter initiatives for major changes in public pension systems have been floated, none are live now. Gov. Jerry Brown may have come close to reaching a deal with Republicans in the Legislature on pension reform in exchange for a public vote on higher taxes, but Republicans walked away from it, and Brown hasn’t yet said what his ideas are – or when he will offer them.
The clock is ticking. At a time when K-12 schools and higher ed are desperate to restore money that’s been cut, the Legislature faces the prospect of raising additional subsidies of hundreds of millions to several billion dollars per year to make CalSTRS whole. That’s because CalSTRS’ defined benefit program – the primary retirement fund for its 852,000 members – has not recovered from the 30 percent drop in value of its portfolio in 2008, when the stock market tumbled. Though it has had two fine years, with returns of 13 percent and 23 percent, the defined benefit program “is currently funded at 71 percent, well below the 80 percent considered necessary to fund a sound pension program,” Howle’s report said. The formula for funding the program – taking 8 percent of an employee’s salary, matched by 8.25 percent from the district and 4.25 percent from the state and counting on investment returns to make up the difference – hasn’t been changed in 35 years. Unless it’s changed, or the Legislature cuts benefits by extending the retirement age and the payout, taxpayers will get socked. (Correction: The total state match is 4.5 percent of payroll, not 4.25 percent. This consists of two programs, 2 percent directly toward the defined benefit program and 2.5 percent toward a separate inflation adjustment program, the Supplemental Benefit Maintenance Account).
Last stop for SB 27
Simitian’s bill unanimously passed the Senate and the Assembly Committee on Public Employees, Retirement and Social Security. But at a hearing this week before the Assembly Appropriations Committee, the last stop before a full vote in the Assembly, a dozen or so public employee groups testified against either parts of or the full bill.
SB 27 has two primary provisions. One would would ban an employee from returning to work as a contractor or full-time worker for 180 days after retirement. The intent is to thwart double-dipping, receiving a public paycheck and a pension simultaneously immediately on retirement. Unlike private industry, in which executives train their successors before they retire, some districts and municipalities have rehired administrators at their pre-retirement salaries, saddling the public with triple pay: the salaries of the new executive and the previous one, along with the full retirement benefit. The bill wouldn’t prevent rehiring a teacher to be a mentor or sub, but that would have to wait for half a year.
The second provision would redefine what income qualified for determining a defined benefit pension (not car allowances, sick and vacation pay, or district-paid insurance premiums) and would exclude from pension calculations any raise exceeding 25 percent during the final five years of employment. That wouldn’t prevent promoting an administrator to a key position, with a fat pay boost; however, the excess amount wouldn’t count toward inflating a pension. (It, along with other non-qualified compensation, would count toward a supplemental program, which doesn’t involve a state match and is paid out as a lump sum amount – still a sweet deal.)
Simitian’s bill would apply to both current employees and new workers; that’s the only way to start getting real savings. The CalSTRS board and the California Teachers Association are opposing the bill unless it exempts current employees, who, they argue, have a vested right to all current benefits. They also want to replace Simitian’s spiking formula with what they argue is a simpler alternative that’s less expensive to administer: capping income qualifying for a defined benefit pension at $147,000. Remuneration in excess of that would count toward the supplement program only. Most if not all teachers earn less than $147,000.
“Unfortunately, the fact that CalSTRS specified that these amendments apply to future members has caused some to falsely assume that CalSTRS is only interested in protecting the status quo when our position is actually a function of recognizing the legal limitations of what can and cannot be done,” Ed Derman, Deputy Chief Executive Officer for Plan Design and Communication at CalSTRS wrote this week in a column in Capitol Weekly.
Whether any chance in benefits can be imposed by the Legislature on current CalSTRS employees is disputable. SB 27 would provide an early and important test. The bill has been written to continue to apply to new workers, even if a court overturns the application to current workers. That reduces the risk of litigation.
Simitian also said he is not enthusiastic about accepting an amendment that would sanction pension spiking for more modestly paid employees, such as lower salaried administrators and teachers who are rewarded with promotions with big pay in their final year before retirement. The amount may be smaller, but the principle is the same: It’s wrong and potentially expensive.
Derman also argues that a cap would not preclude CalSTRS from imposing additional oversight procedures to root out spiking; the CalSTRS board has ordered further safeguards. But Simitian said that the way to guarantee lasting oversight is through statute.
(Both Simitian and CalSTRS have points, so I say why not amend the bill to include both the cap on defined benefits for new employees and future earnings for current employees as well as the anti-spiking provisions for workers earning under the cap. That would yield the biggest savings.)
SB 27 is now “in suspense” in the Assembly Appropriations Committee, where many good bills die a silent, mysterious death. Whether it gets out and is sent to the Assembly, where it likely would pass, will be decided by Chairman Felipe Fuentes, or through horse trading between Speaker John Perez and Senate President pro Tem Darrell Steinberg, both Democrats.
They must decide by Thursday.
This is one of the great ironies in public education. Defined benefit programs are dependent on continued economic growth. They are not designed to work when the overall markets make 0% gains over 10 years. Just go to BigCharts and plot DJIA for the all the available data. So CalSTRS can only stay healthy if the billionaire boy’s club is highly likely making even more money. Sorry to say but, I think americans saving habits will have to change for the foreseeable future to account for more modest economic growth.
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Perhaps it’s time to consider simply shifting to a defined contribution system and outsourcing the administration to Fidelity, Schwab, Vanguard, and/or TIAA-CREF. Ditto for PERS.
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At the CalPERS web site you can find the annual rates of return.
http://www.calpers.ca.gov/eip-docs/about/facts/investments.pdf
Since 1985 they have averaged 8.0% but for the last 10 years they have averaged just less than 6%. Go to last 11 years and you are down to 2.8% which shows how volatile the numbers are. CalSTRS seems to do a tad better ( http://www.calstrs.com/About%20CalSTRS/fastfacts.aspx ) Either one you can choose your beginning point and your endpoint and argue pretty much anything you like. The sanest thing would be to get teachers onto social security and a 401K managed by CalSTRS and get the public out of the business of subsidizing their retirement. This current situation just breeds resentment at a time when they really don’t need it.
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Both changes, proposed by SB 27 & CTA, are needed. They should not be exclusive of each other, as they address different concerns – both legitimate.
1. Spiking has wide implications for reforming pensions, even outside of education.
2. CalSTRS covers administrators, as well as teachers. The differences in pensions are not due solely to ending salaries. CTA, representing teachers, is well aware of the players, the plays, and the holes that should be plugged, for the benefit of all.
While trust abuse by a minority of teachers has been given press, financial abuses by administrators can be mind boggling, and little known by taxpayers.
Board of Education members, not hip to administrative manipulation, can pad pension calculations in several ways. Outright perk”retirement contributions ” is one way. Sick day allowances are sometimes double that of teachers, without having a service year twice as long. Since most of these positions do not require a day-to-day sub, there is little incentive to sign an absence sheet -retaining more sick days to convert to pension service years. There may be additional “management days.” Golden handshake type- half-year salary perk to retire, may or may not be part of the pension.
I personally am not aware of how cars, communication devices & insurance, while part of an employment package, are converted to pensions.
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I think it was when STRS and PERS began issuing those credit default swaps and other fraudulent investment instruments that all the trouble in the economy began. It only makes sense then that teachers and other public employees be held accountable when the economy crashes. After all, all those pawns of the public employee unions working on Wall Street have had to pay significant penalties for their greed and malfeasance.
And the obvious solution to pension difficulties is to give even more direct control over to those same worthies at the investment companies and banks who were so demonstrably trustworthy.
Oh no, wait a second. That’s news from another universe I’m thinking of. It wasn’t the public employees, their unions, or their pension systems that crashed the economy. It was Wall Street sleaze artists who did it and then awarded themselves huge bonuses. There have been how many criminal cases brought for these acts? None you say? It’s still only right though that public employees pay up for all the bail-outs, shared sacrifice and all that. Wait, you say Warren Buffet says there has been no shared sacrifice. And without the adoration of the billionaires government wouldn’t be in such dire straits that they need to look at the “huge”‘ $35K a year average teacher retirements for a solution to their fiscal woes? But, after all, teachers should be grateful that there’s a possibility that they could have a 401K program that can easily become a 201K when “market forces” are manipulated by the titans of industry and finance.
The Auditor’s Office has certainly been making dramatic noises about less than dramatic issues lately. Are there political ambitions afoot here?
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Gary: We can agree on the causes of the implosion of the market in 2008 — and share exasperation on why the Obama administration and SEC have refused to prosecute the chief villains on Wall Street (finally, a Standard & Poor’s inquiry), but where does that leave things, other than asking for taxpayers to gin up potentially billions more annually because CalSTRS couldn’t meet a rate of return that was set too high (8 percent) in the first place? You have a disconnect between calling for more money for schools (your latest comment on ACT and the implication there is a need to spend more to counter the effects of poverty) and ignoring the distinct possibility that CalSTRS and CalPERS liability will suck up a big portion of any new money for schools.
I don’t recall CalSTRS and teachers advocates arguing to beware of the Internet stock bubble in the late 1990s, because the run-up in the market was unsustainable. To the contrary, they, along with prison guards and the state police (the worst offenders), were calling for bigger benefits that they claimed would cost taxpayers nothing.
BTW: Teachers retiring now on average will get closer to $50K per year, not $35K. Not sure about CFT’s stance, but CTA’s position calling for a ceiling for defined benefit pensions makes sense. CTA and CalSTRS say limit it to $147,000. Why not lower — would still exempt teachers.
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This is the nasty thing about fraud which makes it easier than it should be. People don’t complain loud enough and long enough if it is is temporarily working to their benefit, but wait until the pyramid collapses to cry foul. The overblown economy was obvious enough and those paying attention made money. It would have been a lot better to make money at the slow and steady pace, but sometimes the world doesn’t allow that.
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John:
A little short of $50K is the “average” for teachers that have retired in the last couple of years; however: you have to include teachers who retired 20 or so years ago retirement may be in the $25K range. I am pretty sure that if you take the total number of teachers receiving STRS benefits and divide that into the total paid out by STRS you come up with something in the range of $35K.
Then you have some very highly paid administrators who are in that mix and need to be sorted out.
I agree that spiking needs to be dealt with, but let’s remember that prior to the economic collapse public sector retirements were not a subject of great concern. The attack on retirement is part and parcel of the “shock doctrine” of diverting attention from the market manipulation that got us into this mess. Both the manipulations of economic policy and tax policy have vested huge amounts of the nation’s economic resources in the hands of a small segment of the population. (Again see Warren Buffett on this.) Creating an equitable labor, economic, and tax policy will do far more for the country, and for the average tax payer, than dealing with STRS and its expected fiscal problems expected to come to a head in 30 YEARS.
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