The nail that apparently can’t be hammered down, pension spiking, popped up again last week when a divided CalPERS board approved union-backed pay regulations for new hires, despite objections from Gov. Brown and the League of California Cities.
Brown said the vote “undermines” his pension reform two years ago, and he asked his staff to determine what protective actions can be taken. State Controller John Chiang’s office said his audit of CalPERS spiking controls will be issued soon.
The governor objected to pensions boosts from a “temporary upgrade” to a higher-paying job. Much of the media focus has been on pension boosts from regular extra pay for nearly 100 things, some seeming like part of the job and others of little value.
The CalPERS board approved “pensionable compensation” regulations for calculating pensions for new hires under the governor’s reform, which among other things aimed to curb “spiking” or the improper manipulation of pay to boost pensions.
In the 7-to-5 vote, only one of the six board members elected by workers and retirees, George Diehr, voted with Brown appointees in opposing the new regulations. He is not running for re-election this year.
“It’s been suggested that I am either pro-employer or negative employee on this,” said Diehr, “and I don’t think that is a correct characterization.”
Diehr said he was “pro-system” and not persuaded that the new regulations are good for workers, who might make contributions for pension increases they don’t receive, or that the regulations are too costly for cities.
“I think it opens the door to abuse, and therefore bad optics,” he said.
No estimate of the cost of the new regulations has been issued. CalPERS said in a written statement the regulations, developed in public with comment from employers and employees, follow the legislation.
“Today’s decision by the CalPERS board brings much needed clarity to the definition of what is pensionable compensation for new CalPERS members,” said Rob Feckner, the CalPERS board president. “If the law is ever changed, CalPERS will of course amend our regulations accordingly.”
New legislation may be among the options considered by the governor. A union-backed state constitutional amendment, Proposition 162 in 1992, gives CalPERS and other public pension boards complete control of their funds and administration.
“Today CalPERS got it wrong,” Brown said in his statement. “The vote undermines the pension reforms enacted just two years ago. I’ve asked my staff to determine what actions can be taken to protect the integrity of the Public Employees’ Pension Reform Act.”
The Brown administration argued that a “temporary upgrade” to a higher-paying job should not yield a higher pension because the reform bill, AB 340, prohibits higher pensions for “ad hoc” short-term positions for a specific purpose.
“Contributions on these ad hoc pay items increase costs for employers and employees, and they are susceptible to manipulation,” Eric Stern, an analyst for Brown’s Finance department, told the board earlier this week.
Board member, J.J. Jelincic, a former union leader, said management has control of temporary upgrades. He said the regulations only apply to persons hired after Jan. 1, 2013, leaving plenty of time to correct the regulations if they are wrong.
“If people are working out of class, they ought to get paid for it,” said Jelincic, “and part of their compensation is pension benefits.”
The Brown administration did not object to the nearly 100 extra pay items that are pensionable compensation and a “normal monthly rate of pay” under the new regulations, similar to the benefits received by workers hired before the reform took effect last year.
But the League of California Cities, agreeing with Brown’s position on temporary upgrades, urged the CalPERS board to narrow the scope of pensionable compensation and review the extra pay items to see if they still serve a public service.
Chris McKenzie, the League executive director, told the board hundreds of California cities are still in financial distress and facing six years of increasing CalPERS rates.
One unidentified city manager expects his city to go “into the red seriously” in three years, McKenzie said, largely driven by the CalPERS rate increases. He said three cities (Vallejo, Stockton and San Bernardino) have experienced bankruptcy.
“None of us, and I know you as well, want to see any more experience it,” McKenzie said. “So we believe we need to show extra care in proceeding down this road.”
Board member Henry Jones said reviews of the bankruptcies point to allocating one-time funds for ongoing expenses and other factors. “The pension impact on those cities is very, very small.”
Brown’s reform bill listed pay that cannot be used to calculate pensions, such as unused sick leave and vacation time, overtime, bonuses and allowances for housing, uniforms and vehicles. CalPERS said the bill was unclear on what pay was pensionable.
Danny Brown, a CalPERS lobbyist, told the board this week that during lengthy negotiations on the bill neither the administration nor legislative staff “gave the impression” pensionable compensation should only include base pay.
“I would be willing to state further that CalPERS, since we addressed pension spiking in 1993, that we were told our provisions of the PERL (Public Employees Retirement Law) were kind of used as a model for pensionable compensation and should not have impact on us,” he said.
Since CalPERS sponsored anti-spiking legislation, SB 53 in 1993, most of the spiking court action, as well as recent publicized spiking cases, has been in the twenty 1937 act county systems, for which similar anti-spiking legislation failed, SB 2003 in 1994.
A newspaper report of two fire chiefs in the Contra Costa County system retiring at ages 50 and 51 with pensions well above their salaries helped prompt anti-spiking legislation that was rolled into negotiations for Brown’s pension reform.
After a Contra Costa Times columnist, Daniel Borenstein, pointed out that a loophole in Brown’s reform bill could legalize pension spiking in all 20 county systems, legislators passed a quick fix, AB 197, now being contested in the courts.
Two years ago state Controller Chiang issued a report criticizing the spiking controls of the California State Teachers Retirement System, which was in a legal dispute with a fired employee, Scot Thompson, who complained of lax spiking controls.
The controller said CalSTRS did not adequately audit employers and cited examples of big pay raises shortly before retirement. CalSTRS said a new screening unit identified 270 instances of suspected spiking and some pensions were being cut.
Last year the controller’s office began an audit of CalPERS spiking controls. A Chiang spokesman, Jacob Roper, said yesterday the CalPERS audit is expected to be issued “soon.”
Originally posted at CalPensions.