The State Worker

More than 1,000 public pensions in California are so big they exceed IRS limits

Nine years ago Lee McDougal retired as the manager of a small Southern California city and started collecting the pension he earned over 38 years in public service.

Today, his retirement earnings top a list of 1,200 public pensions in the California Public Employees’ Retirement System that exceed federal limits, according to data kept by CalPERS, which administers the plans.

Last year McDougal’s pension was about $337,000 — nearly a third more than the federal maximum for public pensions. The excess portion comes out of his former employer’s annual budget instead of the state’s public retirement system.

Taxes on the above-limits portions of the pensions cost cities and counties extra, consuming taxpayer money that could go toward street maintenance, parks, police or firefighters.

The list of extra-large pensions, which last year totaled $197 million, is growing despite a 2013 change to state law that capped the pensions at the federal limit.

Four years ago, just 684 retirees were on the list, according to CalPERS data. Since the 2013 law applies only to workers hired after Jan. 1 of that year, the list is expected to continue growing for years to come before it eventually tapers off.

Many of the retirees on the list held management positions in cities, counties and special districts that now pay money out of their operating budgets for their pensions. To comply with tax law, the agencies provide benefits above the federal limit by paying the remainder as wages.

“A government’s obligation should end at the federal limits,” said Dan Pellissier, president of California Pension Reform. “If you want to do more, do more, but the government shouldn’t be responsible for subsidizing luxury spending in retirement.”

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The 1,200 pensions are outliers among the 596,000 public pensions in the state, which average about $35,000 per year — well below the IRS’ base 2018 limit of $220,000.

“This doesn’t apply to anybody but the highest-level folks in these organizations, those most responsible for the organizations being fiscally responsible and not taking advantage of the taxpayers,” said Pellissier.

Local governments pay

In 2018, 774 of the 1,205 retirees on the list had retired from local governments, many from top management positions.

McDougal, 68, is receiving the largest supplementary payment of all the retirees on the list, although his overall pension isn’t the largest CalPERS pension in the state. That designation belongs to Michael Johnson, a former Solano County administrator who gets $402,000 per year.

McDougal said the city of Montclair, which is located between Los Angeles and San Bernardino, boosted retirement benefits during the dot-com boom of the late 1990s.

CalPERS at the time was “superfunded,” with more than 100 percent of what it needed to pay all current and future retirement benefits, and its board supported legislation to increase benefits while giving state and local governments breaks on their contributions.

The bubble burst and CalPERS’ funded status worsened, dropping even further in the Great Recession. But the rich benefits remained, protected by a set of legal precedents known as the California Rule, which doesn’t allow governments to reduce any promised benefits for workers or retirees without offering them additional compensation.

CalPERS, which is now 70 percent funded, has been increasing what local governments pay into the fund to improve the system’s durability for when the next recession arrives.

“What they’re paying me is peanuts compared to the increase in rates,” McDougal said of Montclair.

CalPERS charged Montclair, which had an operating budget of about $42 million last year, about $4 million to go toward the city’s long-term pension debts, according to budget figures. On top of that, Montclair was paying between 10 percent and 22 percent of its payroll for its current workers’ retirement benefits.

McDougal said he didn’t know about the IRS public pension limit until he was about to retire.

“It was all news for me,” he said. “And I would imagine that’s the case for most people who are under this plan.”

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Many adjustments and exceptions go into CalPERS’ complex calculation for which retirees’ pensions exceed the limit, including that a lower limit applies for workers who retire before age 62.

Also affecting the number are what benefits retirees select, such as whether to dedicate a survivor to keep receiving payments after a retiree dies. Those factors mean some retirees with pensions under $220,000 last year still exceeded the IRS limit.

Some plans have higher limits under older rules.

Former Sacramento Police Department Chief Sam Somers Jr., who retired in 2016, is on the list. He received $205,000 in annual pension benefits that complied with IRS limits and $14,000 in payments above the cap. Former Public Works Director Jerald Way receives $152,000 in benefits from CalPERS and $14,000 as wages.

Eight Sacramento Metropolitan Fire District retirees are on the list, with a total of $1.97 million in annual pensions including $196,000 in above-limits payments. Four Sacramento Municipal Utility District retirees have pensions worth a total of $973,000 per year, with $157,000 in benefits above the IRS limits.

Sacramento leader reduces pension

Apart from local governments, 431 people on the list of 1,205 retirees used to work for the state, with 333 of them retiring from the Department of Corrections and Rehabilitation, where benefits are geared toward retiring at an earlier age than most other departments.

CalPERS administers the above-limits portions of the pensions separately from the main portions, in what is known as a Replacement Benefit Plan. The federal government amended tax law in 1996 to enable governments to pay benefits in excess of the limit, just without the public pension tax benefits.

Of the $197 million public agencies paid to retirees with Replacement Benefit Plan pensions in 2018, $23 million was above IRS limits, according to The Bee’s analysis of CalPERS data. The average total payment was $163,000 for the year.

CalPERS charges the beneficiaries a fee — last year it was 2 percent — to administer the Replacement Benefit Plan, from which Social Security benefits and taxes are deducted. CalPERS pays beneficiaries each month after receiving the payments from employers, and issues W-2s for the pay.

The CalPERS Board of Administration in 2017 considered proposing legislation to stop administering the growing number of complex plans and let retirees’ former employers handle them. A CalPERS benefit specialist told the board it bills 450 to 500 employers in the plan. The board decided against the proposal.

Other public employers who don’t use CalPERS also pay benefits above federal limits. CalSTRS administers a similar fund for schools. The Los Angeles Times reported on the city’s “Excess Benefit Plan” for employees with pensions above the limit.

A few top employees at Sacramento Regional Transit received or were scheduled to receive excess benefits from SacRT in 2016. The agency’s former general manager, Mike Wiley, decided that year to put aside some of his $278,000 pension for his wife if she lives longer than him, reducing his benefit to close to the IRS limit. The agency’s chief attorney told The Bee he had asked the agency to remove the extra benefit from his contract.

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Wes Venteicher anchors The Bee’s popular State Worker coverage in the newspaper’s Capitol Bureau. He covers taxes, pensions, unions, state spending and California government. A Montana native, he reported on health care and politics in Chicago and Pittsburgh before joining The Bee in 2018.