Tag: pension spiking

Pension reform’s impact on teachers

Under Gov. Jerry Brown’s plan to rein in pension costs, future teachers would work years longer before they could retire with smaller pensions. Current teachers and administrators would soon pay about 1 percent more out of their paychecks toward their retirement. And both current and future educators would be unable to retire, then turn around and return to the classroom full time.

Brown’s pension reforms would uniformly apply to all public employees, state and local, municipal and school. They would significantly decrease benefits, especially for new workers, and lower the risk for governments, by raising the retirement age from as early as 55 to 67 for all new non-safety employees, and by replacing a significant portion of a defined benefit plan with a defined contribution plan similar to a 401(k).

“This is a decisive step forward,” Brown said at a press conference. “The plan will make the pension system more sustainable and fair to taxpayers and the employee.”

Brown’s plan would reduce the state’s pension costs by billions of dollars over the next 30 years. What it would not do, because it applies primarily to new workers, is solve the current huge unfunded liability facing most pension plans. That  includes CalSTRS, the nation’s largest pension fund for educators, which is currently only 71 percent funded and could run out of money in 30 years unless the state pays in hundreds of millions of dollars more per year. Nothing in the plan would address the unfunded liability issue, and Brown indicated he doesn’t intend to do so next year.

Here’s how Brown’s 12-point plan would appear specifically to affect to CalSTRS members. The governor has presented only an outline; details aren’t clear on a lot of important aspects, such as terms of early retirement. Brown also indicated he favors a cap on defined benefits, affecting higher-paid administrators and superintendents, though he didn’t specify what the level would be.

  • A shift to splitting the contributions of annual normal pension costs between educators and the state/school districts. Current teachers pay 8 percent of their pay toward retirement; districts pay 8.25 percent, and the state 2.017 percent. That adds up to 18.25 percent. (The state pays another 2.5 percent into a cost-of-living fund.) But the key word is normal costs, says Ed Derman, CalSTRS Deputy Chief Executive Officer for Plan Design. That means ­the annual contributions needed to meet actuaries’ assumptions of pension payouts and revenues not funded by investment returns. That, he says, is currently 17.7 percent. A split of that would be 8.85 percent, so CalSTRS members can expect to pay about 1 percentage point more of their pay, phased in. (Update: School employees who pay into CalPERS– non-classified workers like custodians and secretaries – would be affected more, Sheila Vickers, Vice President of School Services of California, reminds me. They current pay 7 percent of their pay to retirement, while the district contributes 13 percent. Under the 50-50 split, which would be phased in, districts would save money, while employees would pay more.)

However, if the CalSTRS board lowers its expected rate of return on investments, now 7.75 percent, as critics have called for, the contribution rate would increase. Again, this doesn’t take into account the additional payments needed to meet a $56 billion unfunded liability. Based on court decisions, that would be entirely the state’s burden and could raise the state’s contribution by 14 percentage points to 32.25 percent of payroll – a whopping extra burden on taxpayers.

  • A new hybrid plan for new teachers that introduces a defined contribution component. Because CalSTRS members do not pay into or receive Social Security, the defined benefit plan would cover two-thirds of the pension benefit and the defined contribution would cover a third. The target pension that teachers/administrators would receive would be 75 percent of their salaries after 35 years of work (with a cap for some higher-paying jobs). That would be less than currently received under CalSTRS. Teachers who retire at age 64 with 35 years in now can retire with 84 percent of final pay, with an additional 2.4 percent for every year beyond that.
  • A higher retirement age for new teachers. Saying, “We have to align retirement ages with actual working years and life expectancy,” Brown’s plan would raise the retirement age to 67, the current age for full benefits under Social Security. Currently, teachers who retire at age 60 after working 35 years  receive 70 percent of full salary (2 percent times 35 years). Under Brown’s  plan, they could not draw full retirement for another seven years, saving the system $364,000 for a teacher who made $70,000 a year.
  • Anti-spiking protections for new employees. To avoid perks thrown in during the final year to boost pensions, pensions would be based on the average of an employee’s final three years. Bonuses, unused vacation, and sick pay would no longer count toward compensation.
  • No more double dipping. Raising the retirement age will discourage a revolving door of having public employees, including teachers and superintendents, retiring one day and returning the next in a new full-time job. Brown would restrict retirees on public pensions to working 960 hours or 120 days per year for a public employer – about two-thirds of a school year.
  • Bans on retroactive pension increases and the purchase of additional retirement service credit for time not actually worked., known as “airtime.” Districts had offered this as a way of encouraging early retirement.

Hurdles, resistance in Legislature

Brown wants to put the uniform changes on the November 2012 ballot as a constitutional amendment. That would require a two-thirds vote of the Legislature – a formidable hurdle, given expected union opposition to the biggest changes, like raising the retirement age, and to circumventing negotiations via the ballot.

“We simply cannot stand for imposing additional retirement rollbacks on millions of workers without bargaining,” Dave Low, representing a coalition of public employee unions, said. The California Teachers Association, still examining the plan, didn’t issue a statement Thursday.

But Sen. Joe Simitian, D-Palo Alto, one of three senators chosen to serve on a new conference committee to deal with pension reforms, called Brown’s plan “substantive and significant” and credited him with making it comprehensive.

Simitian worked for two years, without success, to get an anti-spiking bill passed, and that should have been the easy piece. Now, he said, “with more moving parts, it will be more difficult to develop consensus.” The two-thirds requirement to get it out of the Legislature will be difficult but doable, he said.

Brown will have to thread the needle to win over Democrats who will side with labor and Republicans who will charge he didn’t go far enough with his reforms. Reacting to the proposed hybrid plan, Senate President pro Tem Darrell Steinberg told the Sacramento Bee, “I believe in defined benefit, because I don’t think that retirement should be based on the ups and downs of what occurs on Wall Street.” (Never mind that when Wall Street tanks, and public pension plans don’t make 7.75 percent returns, taxpayers are left holding the bag.)

But Brown cautioned that voters want pension reform, and implied that a failure to put it on the ballot will hurt chances to pass higher taxes. “Legislators would be well advised to take (pensions) seriously, get it all enacted and get it on the ballot when there are things they will be particularly interested in,” he said.

Battle over pension spiking bill

The California Teachers Association and the state teachers retirement system are pushing for significant changes to SB 27, Sen. Joe Simitian’s bill that would prevent “spiking,” the practice of larding on compensation near retirement to boost a public employee’s pension – a practice that is drawing increasing scrutiny. It also would limit the types of compensation that would be used in calculating a standard pension.

The late-in-coming amendments pose a new challenge to the bill, which raced through the Senate without opposition, and could spur a larger discussion on pension changes. A similar bill by Simitian passed the Legislature last year but was vetoed by Gov. Arnold Schwarzenegger because it was tied to another pension bill that troubled him.

Simitian’s bill would apply to all current and future public workers. Any employee who received a pay increase of 25 percent or larger over the final five years of employment would automatically have the raise audited by the public pension system: CalSTRS in the case of educators. (Educators whose pay rose more than 25 percent in taking a job in another district would be excluded from an audit.)

Another provision, to thwart double-dipping – receiving a public paycheck and a pension simultaneously – would ban an employee from returning to work as a contract or full-time worker for 180 days after retirement.

The board of CalSTRS and the CTA want to limit SB 27 to future employees arguing that current workers have inviolable vested rights to benefits that have already been negotiated. Doing so, however, would substantially reduce immediate savings to the system at a time that CalSTRS is looking to the Legislature for a sizable boost in taxpayer subsidies because it has yet to recover from the stock market meltdown in 2008.

Proposed cap on pension benefits

CalSTRS and the teachers union are calling for a simpler – and more encompassing – way to deal with spiking: capping the amount of compensation that can be counted toward a defined benefit pension at $147,000 instead of requiring reviews. CalSTRS reports that, statewide, 1,600 administrators not covered by bargaining agreements earn more than $147,000; their compensation above that would be credited toward their individual defined benefit supplement accounts, which work like a 401(k) with a lower guaranteed rate of return, thus saving taxpayers money.

Doing it this way would exclude teachers, who rarely make as much as $147,000 and don’t get the kinds of perks that have led to spiking. SB 27 is aimed, in part, at school boards that have boosted the salaries of superintendents and high-ranking administrators through short-term promotions. A report in the Sacramento Bee found that nearly half of the 225 Sacramento retired educators with pensions above $100,000 got at least a 10 percent pay raise in one of their last three years. Depending on how long they’ve worked, employees’ pensions are based on either their highest-paying year or the average pay in their final three years.

Spiking has been an issue in municipal and county governments as well. In Contra Costa County, for example, two fire chiefs, ages 50 and 51, retired with pensions greater than their highest salaries.

Restrictions on qualifying compensation

Under Simitian’s bill, the value of non-salary income, like car allowances, life insurance, and unused vacation pay, would not count in determining a standard pension. This money would, however, be credited toward the supplemental program. To no surprise, the administrators’ lobby, the Association of California School Administrators, opposes the bill.

The only significant change for teachers is that unused sick pay would no longer boost years of sevice in pension calculations. It too would now be credited in the supplemental program. (Some readers will no doubt argue that, as in most private companies, unused sick pay shouldn’t count toward retirement benefits at all.)

The Pacific Research Institute estimated four years ago that pension spiking cost California taxpayers $100 million each year. CalSTRS estimates that SB 27 would yield savings of $10 million annually, but it also said that it would have to hire a dozen people to do the audits and spend $5 million to update a system to flag potential violations.

CalSTRS has been criticized recently for its failure to crack down on alleged spiking. This issue became public after CalSTRS executives fired Scott Thompson, a whistle blower whom they claimed lowered a pension without authorization and refused to restore it. Pension administrators recently told the CalSTRS board they planned to establish a new unit to review questionable compensation cases,  regardless of SB 27’s fate.

Simitian, a Palo Alto Democrat, told me that the existing system that permits padding “isn’t fair to taxpayers and to most employees who aren’t in a position to have their incomes spiked and rely on pension systems to be solvent. The status quo undermines public support for appropriate pensions that retirees rely on.”

A newly retired teacher last year earned an average pension of $49,000. Educators receiving six-figure pensions remain a small proportion of the 852,000 teachers and administrators served by CalSTRS, but the focus of public ire – or envy.

CalSTRS this month reported an impressive 23 percent return on investments for the year ending June 30, the best  in a quarter century. And it followed a 2010 return of 12.7 percent. But even so, CalSTRS, with $154 billion in assets, remains $25 billion below its peak in October 2007 – and only 70 percent funded. To become fully funded could require more than $2 billion in taxpayer subsidies, between additional school districts’ benefits contributions and the state general fund’s portion of retirement contributions.

Anti-spiking legislation, Simitian notes, “is the low-hanging fruit of pension reform. It should be easy.” He said he has not taken a position on the CalSTRS amendments.

Update: Education Week reports that other Legislatures are also curbing “double-dipping.”