The State Worker

Audit: CalPERS lacks strong pension spiking controls

California’s largest public retirement system lacks a routine method for detecting pension spiking, according to a new report released by state Controller John Chiang, and the pace at which it does check employers’ payroll is glacially slow.

The report also blasted a pay tactic that auditors estimate will allow some public employees to legally boost their pay and increase their pension payouts by up to $800 million over the next 20 years.

Chiang’s report focused on 11 employers that contract with the California Public Employees’ Retirement System to administer their pension benefits. While auditors found no instances of spiking – a practice that inflates an employee’s salary through promotion or other means specifically to hike their retirement benefits – the review did reveal CalPERS’ auditing unit is understaffed and doesn’t use advanced technology to ferret out spiking.

In a statement accompanying the report, Chiang said CalPERS has a “generally passive approach to the problem” that invites abuse.

CalPERS President Rob Feckner countered that the $300.7 billion fund is deterring spiking with information drawn from its 3-year-old computer system.

“That is one of the reasons why the (controller’s) report ‘did not identify pension spiking’ among the 11 agencies they reviewed,” Feckner said in a statement that also highlighted a developing “business intelligence program” intended to find suspicious payroll reports that could indicate spiking. In addition, the fund has hired more auditors and is using its still-limited resources to target the highest-paid employees.

The critical report comes as the termed-out Chiang ramps up his run for state treasurer. It also hits on a politically sensitive topic for CalPERS, where he sits on the governing board.

Auditors looked at how the fund screened for pension spiking from July 1, 2010, through June 30, 2012. They also reviewed retirement information for the California Department of Fish and Wildlife; CalPERS; the California State University Chancellor’s Office; the city of Oakland; the city of Colton; Riverside County; Placer County; the Grossmont Healthcare District; the Inverness Public Utility District; the Metropolitan Water District of Southern California; and the Woodside Fire Protection District.

Although none engaged in spiking, auditors found that CalPERS didn’t use any automated controls to flag unusual salary bumps in monthly payroll data it collects from more than 3,000 employers. The fund, which spent more than $500 million on a computer system that launched in 2011, has the capacity to run automated checks of all payroll data, the report says, but CalPERS prefers to focus on higher-compensated individuals, which “can create situations in which a high-risk (employer) does not get reviewed.”

CalPERS has a unit that determines benefits due retiring employees, but it doesn’t audit active workers’ compensation for telltale signs of spiking unless asked to do so, auditors said, and resources were so limited that the fund completed 45 reviews per year. At that rate, employers can expect their payroll reports to be audited once every 66 years.

The fund has added staff to its auditing unit and last year more than doubled its agency audits to 99, CalPERS said. That does speed up the employer-audit rate, the controller’s office noted – to about once every 33 years.

When the CalPERS Board of Administration meets next week, Chiang “will request that staff regularly update the board on its progress in aggressively guarding the system against pension spiking,” Chiang spokesman Garin Casaleggio said, and will recommend to his successor that she do a follow-up audit a year from now.

The report also highlights a legal pension spike that the controller estimates will add up to $796 million in extra pension costs for 97 audited agencies over the next 20 years. The practice can occur when a collective bargaining agreement requires an agency pay both the employer’s share and the employee’s share of pension contributions. Instead of allowing the employer to continue paying both, the employee converts his or her share into salary shortly before retirement. That money – usually between 6 percent and 9 percent of pay – is counted as income for pension purposes.

CalPERS disagreed with Chiang’s figures, saying they “do a grave disservice to all public employees by vastly inflating the value of projected pensions” and criticized the analysis of the additional benefit as “outside the stated scope of the audit.”

Public pension reforms signed by Gov. Jerry Brown two years ago ended so-called “employer paid member contributions” for workers hired Jan. 1, 2013, and later.

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