Hundreds of California school administrators hired decades ago are collecting retirement incomes that are too big to qualify as public pensions under federal tax law.
The California State Teachers’ Retirement System issued payments last year for 359 pensions over the IRS public pension limit, according to the retirement system’s data.
CalSTRS sends the retirees and beneficiaries on the list two checks each month: one for the maximum pension disbursement and another that is classified and taxed as wages according to a process outlined in IRS code.
Some payments stood out for going to administrators at small districts that have struggled financially. Four went to former administrators from Stockton Unified School District, whose budget struggles were well-publicized a decade ago when the district cut programs and laid off hundreds of teachers.
Today, pensions for teachers and administrators hired after Jan. 1, 2013 are less generous. California that year capped public pensions at a limit the IRS sets each year. The IRS limit varies per person based on retirement age, years worked and a range of benefit decisions, but is based on a benchmark annual amount that in 2018 was $220,000.
School employees today are paying more money toward their retirement plans, too. Teachers pay about 10 percent of their salaries toward retirement, while school districts pay about 17 percent of salaries. Since the contributions are all pooled together, workers are helping pay for their predecessors’ more generous benefits.
CalSTRS is the nation’s largest pension fund for educators. It has assets worth $238 billion, which represent about 64 percent of what it would need to pay all its current and future obligations.
The 359 pensions averaged about $210,000 last year. They make up only a small fraction of the 300,000 pensions in CalSTRS, which average about $50,000. But the above-limits pensions, administered through a workaround under federal law, underscore the challenges of paying for pre-recession promises with a post-recession fund balance.
Among the retirees and beneficiaries whose pensions exceeded limits, 151 received $220,000 or more last year. The rest made less but still exceeded the limit based on other factors. Pensions for 343 of them were above $100,000.
CalSTRS issued $11.5 million in above-limits payments to the group last year, on top of $64 million for their regular pension payments, according to the data. CalSTRS pays the employer’s share of Medicare taxes on the above-limits payments, adding to the cost.
Schools, teachers paying more
For most of their careers, the retirees on the list were paying 8 percent of their wages to CalSTRS — the rate that was in effect from 1972 until 2014. The school districts they worked for contributed 8.25 percent from 1990 until 2014.
Next year, teachers and administrators will pay about 10.2 percent of their wages to CalSTRS. The CalSTRS funding schedule calls for school districts — funded by tax dollars — to pay 19 percent toward pensions on top of wages next year, but a cash infusion in this year’s state budget is expected to reduce that to about 18.4 percent.
The pre-2014 contributions were sufficient to keep CalSTRS in good financial health amid the big investment returns of the dot-com boom two decades ago, when the fund had more than 100 percent of the assets it would need to pay all its current and future obligations. In those “super-funded” years, the state boosted retirement benefits and reduced employers’ required contributions, in part to attract and retain talented staff.
After the dot-com bubble burst and the Great Recession hit, CalSTRS’ funded status sank to around 60 percent. The more generous retirement benefits remained, protected by California law.
In 2013, the California Public Employees’ Pension Reform Act, known as PEPRA, scaled back some of the benefits for new hires. The law capped the amount of public salaries that could count toward pensions and capped total allowed pensions at the federal limit. In 2014, CalSTRS started requiring employees and school districts to pay more each year under a plan to return to 100 percent funded by 2046.
Since the 2013 law applies only to people hired that year or later, the list of extra-large pensions probably will continue to grow for decades, before it begins to decline.
CalPERS does it differently
At Stockton, four retired administrators on the list received a total of $878,000 in pension payments in 2018, including about $180,000 in above-limits payments.
The largest pension among the four belongs to Jack McLaughlin, who led the district from 2006 to 2008.
McLaughlin, 77, worked as an administrator for about 32 years in districts around California after working for eight years as a teacher. He also was the state superintendent of schools for Nevada.
He said he didn’t know before retiring that his pension would exceed the federal limit.
“That was the system that was there and I was in it for a long, long, long time,” he said. “That’s what it was.”
Like McLaughlin, many of the administrators on the list worked in schools for decades. One hundred and thirty eight of the retirees on the list worked for at least 40 years before retiring.
Among them is former Modesto City Schools superintendent James Enochs, who retired in 2007 with 49 years of service. Enochs’ pension was about $275,000 in 2018, with about $27,000 paid above the IRS limit, according to CalSTRS. A high school in the city is named after him.
Since administrators are typically the highest-paid employees of school districts and there aren’t very many of them at each district, the impacts of their pensions on school budgets are limited.
“While pensions represent one of many fixed cost pressures for school districts, the impact of paying benefits above the (Internal Revenue Code) limit is largely de minimis due to the small number of affected employees,” said Derick Lennox, a lobbyist from Capitol Advisors Group who represents California school districts.
The former employers of the 359 retirees contributed to their pensions while they were employed, but don’t pay for them beyond salary contributions now.
That’s different from how CalPERS administers above-limits payments for about 1,200 of its members. The California Public Employees’ Retirement System bills above-limits amounts to workers’ former employers, who pay that money from their general funds.
That approach places more responsibility for the pensions with the districts that employed the retirees, rather than spreading it around the system.