Senator Simitian’s SB 27 would create changes to the state’s public pension systems to reduce incidents of pension spiking – the inappropriate inflation of retirement benefits. Recently CalSTRS’ position on this important bill – as well as our own internal efforts to police pension spiking – have been mischaracterized.
The Teachers’ Retirement Board recently voted to support SB 27 as long as it is amended to 1) cap the amount of allowable compensation for those members at 60 percent – or $147,000 – of the amount allowed by the IRS; and, 2) apply provisions that reduce benefits only to individuals who first become a public educator on or after July 1, 2012.
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.
We take spiking seriously and support Senator Simitian’s efforts. However, we must recognize as a practical matter that legal precedent and contractual obligations make it impossible to change the contract terms for current employees without negating decades of constitutional protections. Our practical position is by no means a signal that we condone behavior that can be construed as spiking. We simply do not think it makes sense to enact something that is legally infeasible and may never be implemented because of the protracted legal battle that would ensue.
CalSTRS has a history of working against the status quo. Beginning in 2006, CalSTRS adopted a package of regulations and policies to set the gold standard for ethics to ensure conflict-free investment decisions. These included disclosure of third-party relationships and payments, regulation of placement agent fees and activities, and restrictions on campaign contributions to board members. Additionally, when the Legislature enacted benefit enhancements to address a teacher shortage, we advocated some not be permanent and include a sunset date. Continuing those enhancements, which ended last December, would have cost $12 billion over 30 years.
Along those lines, in 2001 CalSTRS created a hybrid-like plan structure to ensure contributions made on compensation that is determined to be spiking, or for summer school or other extra-pay assignments, are credited to a cash balance account that acts like a 401(k) and does not figure into final compensation, a factor in setting pension benefits. Additionally. CalSTRS has inherent defenses against spiking in its plan design, because the vast majority of CalSTRS members are paid in accordance with strict salary schedules established through collective bargaining, and the employees do not negotiate individual employment contracts. In fact, $100,000 pensions are rare at CalSTRS. Members making $100,000 or more in retirement are only 2 percent of the nearly 214,000 CalSTRS retirees.
Over the last fiscal year, an anti-spiking task force within CalSTRS has further strengthened the organization’s efforts to be more effective in preventing, detecting and correcting spiking. CalSTRS is now working to create a compensation review unit to identify and resolve potential benefit-spiking cases and plans to establish a toll-free hotline for the public, members, school district and county office of education employees to anonymously report suspicions of pension spiking to CalSTRS.
These efforts will bolster CalSTRS’ existing processes and systems that identify and conduct thorough and deliberate reviews of suspected cases. Automated programs flag salary bumps of 15 percent or more from one year to the next. In those instances, CalSTRS staff pulls records and conducts a review to determine whether the increase appropriately reflects changes in duties or were provided in order to spike the pension.
CalSTRS also has a robust, risk-based school district audit program. The program uses assessment tools that identify employers whose members received large pay increases during their final compensation period. Other risk factors include large amounts of special compensation and inconsistent salary increases throughout a members’ career, or within a class of employees.
These reviews frequently identify cases in which spiking has occurred, and CalSTRS responds by reducing the member’s benefit to the appropriate level, and collecting amounts that have been overpaid. In 2009-10 50 school district audits identified nearly $2.2 million in overpaid monthly allowances which is now being recovered.
It is important to note that these reviews must always afford a member due process because a resulting action could have significant implications. We want to get it right.
Further, while it is an unscrupulous practice and must be aggressively dealt with, pension spiking has little to do with CalSTRS’ long-term funding issue, which was created by twin market declines and requires a thoughtful long-term solution. The recent market rally, which resulted in CalSTRS’ 23.1 percent 2010-11 investment returns, is welcome news but not enough to fully restore funding health. CalSTRS cannot close its $56 billion funding gap without additional contributions, which can only be changed by the Legislature.