Bloomberg News

California Pension Failed to Stop Spiking, Audit Says

September 05, 2012

The California State Teachers’ Retirement System, the second-biggest U.S. pension plan, has failed to curb so-called spiking, state Controller John Chiang said in an audit released today.

Educators may have enhanced their pensions through measures such as late-career raises and overtime and vacation payments that count toward income from the retirement plan known as Calstrs, according to the audit.

The probe was announced in November after what Chiang called “a growing number of concerns inside and outside the fund’s administration.” At the time, the Democrat said the review would take about two months. The audit ended up taking nine months from the time it began in January.

“Calstrs did not provide adequate oversight of the reporting entities it monitors,” said the report by Jeffrey Brownfield, Chiang’s audit division chief. “At the rate at which audits currently are being performed, each district would be audited only once every 48 years. In addition, Calstrs’ audit process should have been more effective in detecting pension spiking at its member school districts.”

Calstrs responded that its Compensation Review Unit identified 270 suspected episodes of spiking since December 2011, investigated 175 cases and “confirmed 28 instances of inappropriate benefit enhancement,” Jack Ehnes, the fund’s chief executive officer, said in a statement.

Manipulating Pensions

Public employees can spike pensions by manipulating overtime, unused vacation and special compensation to inflate retirement payments. The practice was identified by Democratic Governor Jerry Brown as contributing to Calstrs’ unfunded liability of $64.5 billion as of June 2011.

Government pensions are driving up costs nationwide in states and cities that lost revenue in the longest recession since the 1930s. Calstrs had assets to cover just 69 percent of liabilities in fiscal 2011, compared with an average of 75 percent for all states in 2010, according to data compiled by Bloomberg.

California lawmakers, in a deal last week with Brown, approved measures to rein in costs in the most populous state. The measure, if signed by the 74-year-old governor, would calculate pensions for new employees based on three years of salary rather than one, and eliminate overtime, sick time and other special compensation as income that may count toward retirement.

Ehnes said Calstrs, with $152.1 billion in assets as of July 31, has taken measures to combat abuses, such as setting up a hotline to receive anonymous tips.

A new state law will augment Calstrs’ efforts, Ehnes said in a letter responding to preliminary audit findings.

“Calstrs takes pension spiking very seriously,” he said.

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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