Educators' late-career pay raises strain CalSTRS pension system

Published: Sunday, Jul. 10, 2011 - 12:00 am | Page 1A
Last Modified: Sunday, Jan. 29, 2012 - 7:43 pm

Pay raises of 10, 20, even 45 percent.

These are the kind of year-to-year bumps many workers dream about but never see. They are also the kind of pay raises many of the region's highest-paid educators do get, just before retirement.

Nearly half of the 225 Sacramento-area retirees drawing six-figure pensions from the California State Teachers' Retirement System received at least a 10 percent pay increase in one of their final three full years on the job, according to a Bee analysis of state retirement data.

Those last-minute boosts will have lasting impact. CalSTRS bases the lifetime pensions of workers with more than 25 years of service credit on their highest-paid year.

For an experienced superintendent making $200,000, every percentage point increase to the final salary means an extra $1,200 or more in annual pension.

"It can be very costly for the system," said Scott Thompson, a former CalSTRS pension program analyst who was recently fired – he says for blowing the whistle on large pay bumps; the state says for improperly lowering a pension.

"If you get a 30 percent raise in your last year," Thompson said, "the pension fund can't catch up. That translates into 30 percent more for the rest of their lives in retirement."

A Bee analysis detailed in a story last month found that the number of six-figure retirees in the CalSTRS system has increased sevenfold since 2005. Most $100,000 pensioners are former school administrators, and large pay bumps in the final years of their employment are a primary reason for the trend.

The question is whether some increases constitute "pension spiking" – giving employees a last-minute raise with the intention of increasing their pensions. Persistent stories of such practices have become a rallying cry for those seeking an overhaul of public employee pensions.

The state Education Code explicitly lays out what compensation can and cannot be counted toward pensions, giving CalSTRS guidelines for catching spiking.

The law says pay increases should be broadly consistent throughout a career. Employees shouldn't get raises out of whack with their peers in similar jobs. And no one should get extra pay just to enhance their retirement.

In practice, identifying pension spiking can be tough. A last-minute raise might be the result of a legitimate promotion, or a boost given to multiple workers in the same job classification, or a consequence of someone temporarily filling a higher-paying position.

When asked if the 104 six-figure retirees from the Sacramento region who got at least a 10 percent bump late in their careers benefited from spiking, CalSTRS spokesman Ricardo Duran said, "A 10 percent bump in salary, by itself, would not constitute spiking. Spiking could occur at any amount."

The system has challenged late-career raises before. In a highly publicized case, CalSTRS auditors determined that the $15,000 raises obtained by two San Ysidro school administrators before their retirements in 2002 should not count toward their pensions. The administrators lost a 2008 appeal, with appellate court Associate Justice Patricia Benke writing that evidence showed the raises "were for the principal purpose of enhancing their retirement benefits, a practice known as 'spiking.' "

CalSTRS automatically flags any year-to-year raise of 15 percent or more for review, Duran said. The system looks at 10-year salary trends to see if there was a raise or series of raises inconsistent with prior pay increases. It also audits school districts that have regularly given large salary increases, or extra compensation such as car allowances, to retiring employees.

System leaders are considering creation of a whistle-blower hotline and a special compensation review team to catch spiking.

Also, reacting to complaints and reform proposals, the CalSTRS board recently recommended that the Legislature institute several measures for future hires to guard against spiking, including a cap on the amount of pay that can count toward a retiree's pension benefit.

"We are not in favor of spiking," said Rich Zeiger, who was sitting in for state Superintendent of Public Instruction Tom Torlakson when the recommendations were adopted. "We are looking for ways to stop it."

'Good, bad or indifferent'

CalSTRS is responsible for policing the system to make sure no one is gaming their co-workers or the state. But the specter of pension spiking wouldn't be raised if school districts didn't approve big late-career raises and employees didn't push for them.

At Marysville Joint Unified, a district with 9,850 students, five of seven $100,000 pensioners received at least a 10 percent pay increase in one of three years prior to retiring. The other two got a big raise four years prior to retirement.

Marysville Joint Unified has more six-figure pensioners than most districts twice its size. The district employed a math instructor who, until recently, was credited with so many service years that, to truly earn it, she would have had to start teaching when she was 8 years old. After The Bee pointed out the error, CalSTRS officials said they had flagged it, and that the teacher's benefits would be lowered.

Addressing late-career raises, Ramiro Carreon, Marysville's assistant superintendent for personnel services, said, "good, bad or indifferent, it's a product of their salary step and column increases," as well as promotions and a 2007 negotiated salary increase.

At the Sacramento County Office of Education, 11 of 14 six-figure retirees got at least a 10 percent pay raise in one of their last three years. The office educates several thousand children – many of them "at-risk" youth – and is vested with ensuring the financial viability of school districts in the county.

Sacramento County schools chief Dave Gordon, who runs the office, distanced himself from the increases, saying they occurred on a predecessor's watch.

"That happened before my time," Gordon said. "We looked at it when I got here. They offered a bunch of retirement incentives. We've not done any since I've been here."

Before it became part of the Twin Rivers Unified School District, Grant Joint Union High officials awarded large, late-career raises to several highly paid employees. More than half the district's six-figure pensioners retired after getting one-year raises of at least 10 percent.

For instance, Patricia Newsome was named interim superintendent of Grant three months before voters approved the district's merger. Her final pay, as reported to CalSTRS, was $246,121, compared with $170,263 in her next best year. Newsome retired at age 59, with 31 years in the CalSTRS system and receives an annual pension of $152,800.

Reward down the line

Dozens of former administrators statewide will similarly reap higher lifetime benefits due to their one year as an "interim" boss, said Thompson, the former CalSTRS employee.

"Interim – it's a magical word if you can get it attached to your name," Thompson said. "There is absolutely no reason they should get that pay increase the rest of their life."

Thompson said he thinks interim appointees should be given a one-year bonus that is not included in the calculation of their pension.

Susan Miller served as Sacramento City Unified's interim superintendent during the tumultuous 2008-2009 school year, when the district closed four schools to help balance its budget. Her pay that year was $218,225, compared with $169,443 in her next-best year.

With 27 years in the CalSTRS system, Miller retired at 58 with an annual pension of $102,000.

Her pension was calculated on her highest paid year, which was when she served as interim superintendent. If not for her one-year stint, her annual pension would likely be about $25,000 less.

"As you climb in experience, in most cases you climb with salary," Miller said. "That's not unlike any system. It just so happened I was tapped on to be an interim."

Miller said the CalSTRS system promotes longevity among dedicated educators. She has talked up the pension system when counseling young and midlevel teachers considering leaving education for a higher paying private industry job.

"There has to be something down the line to say you will be rewarded for your long-term commitment," Miller said.

Contributions fall short

Regardless of the reason, end-of-career raises can impact the pension system's bottom line.

Among the 104 six-figure retirees in the Sacramento region who got major pay raises at the end of their careers, the biggest year-to-year bump – on average – was $18,000. In total, they could get about $30 million in additional pension payouts if they receive benefits for 20 years.

That and other late-career raises are a potential problem for CalSTRS, which is funded through contributions from teachers, school districts and the state.

In determining the system's future financial health, CalSTRS assumes employees will receive a 4 percent pay increase annually.

"Anything that exceeds that is going to leave the system in the red a little bit," Thompson said.

CalSTRS was hit hard by the recession and, officials said, will be unable to fund benefits in roughly 30 years if the Legislature does not increase contribution rates.

In making their recommended pension changes last month, CalSTRS board members said they were trying to get ahead of even more drastic changes that may soon be proposed. They were largely echoing a reform bill weaving through the Legislature and join a chorus calling for change that includes Gov. Jerry Brown.

The board asked that stipends such as car allowances and pay for supplemental assignments go into a separate, 401(k)-like plan that would reduce benefits. Currently, those stipends can count toward members' compensation used to determine pensions.

Board members also called for a cap of roughly $147,000 on compensation that can go toward calculating pensions. The cap would float with inflation, and compensation above it would be placed into a 401(k)-like plan.

But the board recommended that the new provisions apply only to new hires. If that happens, the full impact of the measures wouldn't be felt for decades.

"You can't change the rules in the middle of the game," Zeiger said. "That's a moral and legal imperative."

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