Bloomberg News

California Teacher Fund Targets Pension-Inflating Spiking

April 24, 2012

Nurses, teachers, students and firefighters demonstrate against education budgets cuts, increases tuition fees and billions of dollars in pension funds over to Wall Street.  Photographer: David McNew/Getty Images

Nurses, teachers, students and firefighters demonstrate against education budgets cuts, increases tuition fees and billions of dollars in pension funds over to Wall Street. Photographer: David McNew/Getty Images

(Corrects spelling in fourth paragraph of story published on April 11.)

The California State Teachers’ Retirement System cut payments to a former San Francisco Bay Area superintendent after concluding that a $61,000 raise in his final year of work was intended to boost his pension.

Yet in another case, plan managers didn’t touch a charter school founder’s retirement pay after finding that a 67 percent increase spread over her last three years of service wasn’t designed to inflate her post-employment income.

The two episodes show the difficulty in restraining public worker pensions in the U.S., which often derive from earnings in the final years on the job. The challenge is particularly acute for the California fund, also known as Calstrs. The nation’s second-biggest public-retirement plan had assets to cover just 69 percent of liabilities in June, compared with the 75 percent state average in 2010, according to Bloomberg Rankings.

“Calstrs has not yet developed a systematic method of identifying and verifying extraordinary late-career salary surges already being used to calculate retirement benefits,” Scott Thompson, a former analyst at the fund, said in a 2010 internal memo. “We should do so without further delay.”

The $152 billion teachers’ system based in West Sacramento set up a panel in September to probe for abuse such as pension spiking. However, none of the 190 cases picked for review have been resolved, with no rollbacks.

Trying for Thoroughness

“We try to be as thorough as possible because whatever determination we make is going to affect a person’s income for the rest of their life,” said Ricardo Duran, a fund spokesman.

Across the nation, widening deficits may force greater taxpayer contributions to public pensions, as the average so- called funded ratio has fallen from 83 percent in 2007, the Bloomberg Rankings show. The California plan had a projected $64.5 billion unfunded liability in June, up from $56 billion a year earlier. Estimates put the projected deficit for all U.S. public pensions at about $1 trillion to $3 trillion.

In previous years, the California fund lacked a methodology to spot potential abuse, according to Thompson, whose job included identifying such cases. He was fired last year for insubordination, according to information presented to the State Personnel Board, where an appeal is pending.

Thompson was dismissed after he rolled back a retiree’s pension and defied orders to reinstate the cut, the teachers’ plan indicated in personnel board filings. He has told the board he was fired for complaining about unchecked abuses. He declined to comment for this report.

Review Tomorrow

The Teachers’ Retirement Board, which oversees the fund serving more than 856,000 members and beneficiaries, plans to review the effort to crack down on spiking at a meeting tomorrow. The state controller and Governor Jerry Brown, 74, both Democrats, have taken on spiking to ease taxpayer burdens.

The practice of inflating pay rates in the last years of employment to boost retirement income helps drive pension costs higher. It was so pervasive in San Francisco, a grand jury concluded in 2009 that one in four retiring police officers and firefighters in the previous decade got raises of at least 10 percent in their final year on the job, pushing up pension costs by $132 million or more.

With John Bayless, who left the Cabrillo Unified School District near San Francisco in 2007, the fund took action.

Payment Cut

In his final full year of nine as superintendent of the 3,500-student system (25656MF:US) 25 miles (40 kilometers) south of San Francisco, Bayless got a $61,000 raise. When he retired in 2007 at 56, his annual pension topped $154,600 -- exceeding his salary before the 45 percent increase, retirement system records show. After its review, the fund cut the payment by 26 percent last year to just under $114,600.

The teachers’ fund determined that the raise to almost $197,700 was designed to inflate his pension, Duran said, without providing details to avoid tipping off abusers.

Bayless declined to comment, saying by e-mail that he has appealed. Kirk Riemer, now president of the Cabrillo board and a member since 2006, denied any attempt to pad Bayless’s pension.

“The compensation and decisions on that were based on what we felt was due,” Riemer said by telephone, citing “deferments and forward-looking things.”

By contrast, plan managers didn’t reduce Yvonne Chan’s pension, even though her salary rose $100,000, or 67 percent, over her final three years at the 2,000-student Vaughn Next Century Learning Center in a low-income corner of Los Angeles. She started the San Fernando Valley charter school in 1993.

Her pay climbed to $250,000 when she left in 2008 from $150,000 in the 2004-2005 academic year, plan records show. The documents don’t explain the increases. The top figure determined her pension.

Chan was traveling in China and couldn’t be reached to comment, Eugene Chan, her husband, said by telephone. He said she didn’t have access to e-mail.

Both cases predate the efforts begun last year to curb spiking, Duran said. The initiatives include analysis, an anonymous hotline to report suspicious pay increases and the six-person review panel.

To contact the reporter on this story: James Nash in Los Angeles at Jnash24@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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