State Auditor Elaine Howle has added the teachers’ pension fund, CalSTRS, to the state’s high-risk list, adding urgency to the imperative to reduce taxpayers’ liability for the nation’s largest education pension fund. The release of Howle’s periodic update of financial worries comes on the eve of the final showdown on a significant pension reform before the Legislature, an anti-spiking bill sponsored by Sen. Joe Simitian, a Palo Alto Democrat.
Passage of SB 27 by itself won’t make a huge dent in the problem. But the bill deals with what Simitian calls “low-hanging fruit.” Spiking – the practice of jacking up employees’ pay in their final year with the intent of increasing their annual pensions – is an abuse of the system that harms taxpayers and other pensioners.
“If we (the Legislature) cannot come to grips with pension spiking, then how can we deal with larger reform issues?” Simitian said last night.
Though proposals and voter initiatives for major changes in public pension systems have been floated, none are live now. Gov. Jerry Brown may have come close to reaching a deal with Republicans in the Legislature on pension reform in exchange for a public vote on higher taxes, but Republicans walked away from it, and Brown hasn’t yet said what his ideas are – or when he will offer them.
The clock is ticking. At a time when K-12 schools and higher ed are desperate to restore money that’s been cut, the Legislature faces the prospect of raising additional subsidies of hundreds of millions to several billion dollars per year to make CalSTRS whole. That’s because CalSTRS’ defined benefit program – the primary retirement fund for its 852,000 members – has not recovered from the 30 percent drop in value of its portfolio in 2008, when the stock market tumbled. Though it has had two fine years, with returns of 13 percent and 23 percent, the defined benefit program “is currently funded at 71 percent, well below the 80 percent considered necessary to fund a sound pension program,” Howle’s report said. The formula for funding the program – taking 8 percent of an employee’s salary, matched by 8.25 percent from the district and 4.25 percent from the state and counting on investment returns to make up the difference – hasn’t been changed in 35 years. Unless it’s changed, or the Legislature cuts benefits by extending the retirement age and the payout, taxpayers will get socked. (Correction: The total state match is 4.5 percent of payroll, not 4.25 percent. This consists of two programs, 2 percent directly toward the defined benefit program and 2.5 percent toward a separate inflation adjustment program, the Supplemental Benefit Maintenance Account).
Last stop for SB 27
Simitian’s bill unanimously passed the Senate and the Assembly Committee on Public Employees, Retirement and Social Security. But at a hearing this week before the Assembly Appropriations Committee, the last stop before a full vote in the Assembly, a dozen or so public employee groups testified against either parts of or the full bill.
SB 27 has two primary provisions. One would would ban an employee from returning to work as a contractor or full-time worker for 180 days after retirement. The intent is to thwart double-dipping, receiving a public paycheck and a pension simultaneously immediately on retirement. Unlike private industry, in which executives train their successors before they retire, some districts and municipalities have rehired administrators at their pre-retirement salaries, saddling the public with triple pay: the salaries of the new executive and the previous one, along with the full retirement benefit. The bill wouldn’t prevent rehiring a teacher to be a mentor or sub, but that would have to wait for half a year.
The second provision would redefine what income qualified for determining a defined benefit pension (not car allowances, sick and vacation pay, or district-paid insurance premiums) and would exclude from pension calculations any raise exceeding 25 percent during the final five years of employment. That wouldn’t prevent promoting an administrator to a key position, with a fat pay boost; however, the excess amount wouldn’t count toward inflating a pension. (It, along with other non-qualified compensation, would count toward a supplemental program, which doesn’t involve a state match and is paid out as a lump sum amount – still a sweet deal.)
Simitian’s bill would apply to both current employees and new workers; that’s the only way to start getting real savings. The CalSTRS board and the California Teachers Association are opposing the bill unless it exempts current employees, who, they argue, have a vested right to all current benefits. They also want to replace Simitian’s spiking formula with what they argue is a simpler alternative that’s less expensive to administer: capping income qualifying for a defined benefit pension at $147,000. Remuneration in excess of that would count toward the supplement program only. Most if not all teachers earn less than $147,000.
“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,” Ed Derman, Deputy Chief Executive Officer for Plan Design and Communication at CalSTRS wrote this week in a column in Capitol Weekly.
Whether any chance in benefits can be imposed by the Legislature on current CalSTRS employees is disputable. SB 27 would provide an early and important test. The bill has been written to continue to apply to new workers, even if a court overturns the application to current workers. That reduces the risk of litigation.
Simitian also said he is not enthusiastic about accepting an amendment that would sanction pension spiking for more modestly paid employees, such as lower salaried administrators and teachers who are rewarded with promotions with big pay in their final year before retirement. The amount may be smaller, but the principle is the same: It’s wrong and potentially expensive.
Derman also argues that a cap would not preclude CalSTRS from imposing additional oversight procedures to root out spiking; the CalSTRS board has ordered further safeguards. But Simitian said that the way to guarantee lasting oversight is through statute.
(Both Simitian and CalSTRS have points, so I say why not amend the bill to include both the cap on defined benefits for new employees and future earnings for current employees as well as the anti-spiking provisions for workers earning under the cap. That would yield the biggest savings.)
SB 27 is now “in suspense” in the Assembly Appropriations Committee, where many good bills die a silent, mysterious death. Whether it gets out and is sent to the Assembly, where it likely would pass, will be decided by Chairman Felipe Fuentes, or through horse trading between Speaker John Perez and Senate President pro Tem Darrell Steinberg, both Democrats.
They must decide by Thursday.