A state controller’s review of CalPERS found no pension spiking among retiring workers in a sample of 11 employers, including CalPERS itself, but urged tighter automated controls and more anti-spiking staff.
Pension “spiking,” a decades-old problem, is the improper boosting of pensions, usually by increasing the final pay on which pensions are based along with years of service and age.
CalPERS established an anti-spiking unit in 1991, responding to state controller audits of local governments, and followed up by helping shape a bill (SB 53 in 1993) clarifying what types of pay count toward pensions.
Now odd as it may seem, the new review issued yesterday by state Controller John Chiang, who sits on the CalPERS board and is running for state treasurer this year, said the 1993 bill resulted in “legalized” spiking.
Many employers, in contract bargaining with unions, agree to pay the employee contribution to CalPERS, often around 8 percent of pay, in addition to the much higher employer contribution.
A provision in the 1993 bill allows this “employer paid member contribution” to be counted as pay during the final year on which pensions are based. The one-year pay shift significantly boosts the amount of the lifetime pension.
The controller’s auditors found that 97 CalPERS employers have labor contracts allowing the pay shift. The bankrupt city of Stockton is on the list that begins with the Bella Vista Water District and ends with the Western Contra Costa Transit Authority.
“The controller’s review concluded that the contract amendments increased members’ pay by $39.1 million in annual pensionable compensation for participating employees,” said Chiang’s news release. “This arrangement could provide as much as $796 million in this type of pension compensation over 20 years.”
In a response, CalPERS staff said the number of employers listed is too high, and the issue is “outside the stated scope of the audit” and would be better addressed in a stand-alone report.
The controller’s review said the list of 97 employers was checked by CalPERS, and the scope of the review “does pertain to publicly funded pension enhancement at the public’s expense.”
Chiang faulted CalPERS for not using its automated anti-spiking tools to check monthly payrolls instead of waiting until retirement, focusing annual checks on employers paying salaries of $245,000 or more instead of a broader sweep, and only having enough staff to audit 45 employers a year.
“The good news is that my office sampled 11 employers within the CalPERS system and found no incidences of pension spiking,” said Chiang. “The discouraging news is CalPERS’ lack of robust auditing, underutilization of advanced technology, and its generally passive approach to the problem invites abuse.”
“The state’s largest pension system can and must be more vigorous in protecting taxpayers from this form of public theft,” he said.
The California Public Employees Retirement System said the number of employers audited doubled to 99 last year and more auditors will be added. Data analytics is being used to develop a program for focusing audits on employers most at risk for reporting errors.
“As we expected, the controller’s review did not identify any pension spiking,” Rob Feckner, the CalPERS board president, said in a news release. “We agree on the importance of a proactive and automated system to detect pension spiking.”
Feckner said one reason the controller’s review found no spiking is a new CalPERS computer system that began operating three years ago. The anti-spiking unit has not been totally passive.
“Last fiscal year we issued 83 determinations where we found issues that led to the reduction of pensions because of improper use of compensation,” said Brad Pacheco, a CalPERS spokesman.
“However, this doesn’t account for the changes on a daily basis when we review an employer’s payroll, identify an error, and then they correct prior to our issuance of the final letter.”
Most of the recent well-publicized spiking cases, and related court action, has been in the 20 independent county systems, for which anti-spiking legislation similar to the 1993 CalPERS measure 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 two years ago.
As with the 1993 anti-spiking bill, Brown’s pension reform legislation put CalPERS in the spiking arena last month when the board, on a split vote, adopted union-backed “pensionable compensation” regulations for new hires under the reform.
Critics say CalPERS created “99 ways” to spike pensions by including a long list of extra pay items, some seeming like part of the job and others of little value. CalPERS said they have been part of normal monthly pay in the past and were covered by the bill.
Brown only objected to including one of the items, a “temporary upgrade” to a higher-paying job. His aides said it was not covered by the bill and would allow spiking, if a soon-to-retire employee is moved to an open slot mainly to boost the pension.
CalPERS board members argued that a temporary upgrade is covered by the bill, and that employees should be paid in full for the job that management gives them, even if it’s only temporary.
“The vote undermines the pension reforms enacted just two years ago,” Brown said. “I’ve asked my staff to determine what actions can be taken to protect the integrity of the Public Employees Pension Reform Act.”
Two years ago Chiang issued a review of the California State Teachers Retirement System, which was creating a new anti-spiking unit at the time and in a legal dispute with a fired employee, Scott Thompson, who complained of lax spiking controls.
The controller’s review of five education employers found that two unified school districts, San Francisco and San Diego, “lacked documentation to justify pay increases granted to their employees immediately prior to retirement.”
Last week the CalSTRS board adopted regulations, after negotiations with unions and the Brown administration, defining “creditable compensation” for members hired before the governor’s pension reform.
The new regulations, on track to take effect next year, are expected by actuaries to yield maximum savings of $56 million a year for employers and $22 million a year for the state.
“The regulations give employers and CalSTRS staff clear guidelines to ensure all members are being credited properly, consistently and fairly for their service,” Ed Derman, CalSTRS deputy chief executive officer, said in a news release.
“The regulations will also help CalSTRS identify, evaluate and determine instances of pension spiking — the boosting of pay at the end of a career to increase a pension benefit,” he said.
Originally posted at CalPensions.