While debate rages over how to reign in spiraling public pension costs without stomping on workers’ rights and eviscerating lawful contracts, most everyone agrees that a good place to start is curbing a practice commonly known as pension spiking.

Pension spiking occurs when changes are made in an employee’s compensation package shortly before retirement, which dramatically increase the worker’s retirement payout. And State Controller John Chiang doesn’t think the California State Teachers’ Retirement System (CalSTRS) has done nearly enough to stop it.

In a report published this month, a review of CalSTRS behavior for two-years ending June 30, 2011, revealed that the pension fund’s current practices would result in audits of the state’s various school districts on a 48-year cycle. Considering that 40% of CalSTRS audits of its 1,900 reporting units turn up pension spiking, the controller gently suggested that “more audits could detect additional instances of pension spiking.”

CalSTRS is the largest teachers’ retirement fund in the country, with more than 850,000 members and $148.2 billion in assets. A pension reform bill passed by the Legislature last week at Governor Jerry Brown’s urging would increase employee pension contributions, cap their payouts and increase the retirement age. But pension spiking still remains an elusive legislative target.

A close review of three school districts, a community college district and a county office of education turned up pay increases that were granted without sufficient approval or performance justification. As of September 2011, CalSTRS had a backlog of 33 uncompleted audits.

CalSTRS uses electronic monitoring to identify potential spiking, but the controller’s office found it did not review or verify results unless a specific issue was raised by another CalSTRS division.

The controller also found a built-in disincentive in the system for identifying pension spiking. CalSTRS used an outside contractor, Mayer Hoffman McCann P.C. (MHM), to conduct some of its internal reviews but paid it a flat fee that discouraged the company from pursuing leads on further spiking.

The controller’s office noted, throughout its report, a lack of transparency and cooperation by CalSTRS and the separate entities it reviewed. For instance, employees were granted large salary increases that were not formally approved or justified by the San Diego and San Francisco school districts. Inquiries made by the controller to the San Diego school district were not satisfactorily answered because documents were missing, making it impossible for millions of dollars in pay increases to be properly evaluated.. 

“This lack of transparency in justifying pay increases and the failure to maintain adequate supporting documents, coupled with the small number of audits that CalSTRS completes each year, creates an environment where pension spiking may easily go undetected,” the report concluded.

CalSTRS’ said in its response that it “takes pension spiking very seriously” and acknowledged many of the controller’s observations. But CalSTRS Executive Officer Jack Ehnes said true reform would only come when the Legislature “sets hard and fast limits on compensation that can be treated as pension eligible.”  

–Ken Broder

To Learn More:

Pension Controls and Mechanisms (California State Controller) (pdf)

Calstrs Failing to Uncover Pension “Spiking”—Controller (Reuters)

Teacher Retirement System Fails to Curb Spiking, Controller Finds (by Patrick McGreevy, Los Angeles Times)

Legislature Sends Brown Cost-Cutting Pension Bill (by Patrick McGreevy and Chris Megerian, Los Angeles Times)

Report: Teacher Fund Lax on Anti-Spiking Efforts (by Judy Lin, Associated Press)