City Violation of Wage Rules Pads Pensions of 15 Retirees : Audit: State inquiry seeks to close loopholes in the retirement system that have led to thousands of dollars worth of unfairly high pensions.

For more than a decade, the city of Bellflower has been over-reporting the wages of its employees in violation of state retirement regulations, according to a state controller’s audit made public last week.

As a result, 15 retired city employees have been receiving untold thousands of dollars in inflated pensions from the state Public Employees Retirement System (PERS), which administers retirement plans for state agencies, the controller’s office reports.

The audit, which focused on eight selected cities in Southern California, stems from a seven-month investigation aimed at closing loopholes in the retirement system that result in unfairly high pensions.

As of last May, 43 retired Bellflower employees were receiving pensions from PERS, according to the controller’s office; auditors concluded that the state is overpaying 15 a total of approximately $2,500 a month.

“We’re not trying to pull anything,” said Linda Lowry, Bellflower’s assistant city administrator and finance director, explaining that city officials did not believe their reporting system was improper. “It’s to benefit the employees.”

Sandra Lund, PERS assistant executive officer, said the agency has the authority to reduce the inflated pensions and to request repayment of excessive amounts already paid to retirees. However, she said the findings and recommendations of the auditors will be carefully analyzed before any action is taken.

“We want to proceed cautiously,” she said. “We don’t want to continue overpayment, but we don’t want anyone to lose a home or something else that can’t be recovered. We may ask for repayment and we may not.”

Auditors said the over-reporting could result in significant increases in city contributions to PERS to cover benefits that were improperly paid. The city also could be sued by employees if PERS chooses to reduce some retirement benefits as a result of the audit’s findings.

In a study of payroll reporting practices completed in October, auditors said that Bellflower improperly included as salary contributions the city made on behalf of employees to the PERS retirement system.

The city also permitted some retiring employees during their final year with the city to convert unused sick leave and vacation time into salary to boost their retirement benefits.

Assistant City Administrator Lowry said both procedures were halted last summer after field auditors analyzing city payroll records told her they were improper. Auditors have recommended that retirement benefits be proportionally reduced in cases of employees who received sick leave and vacation payments as salary.

The Bellflower case is not unique. The audit found violations of PERS rules in all eight cities selected for a pilot study after retirement abuses were uncovered in 1990 in the American River Fire Protection District in Northern California.

Violations in the various cities included improper reporting of salary for retirement purposes, poor record-keeping and failure to maintain internal payroll controls. In addition to Bellflower, the auditors looked at Anaheim, Culver City, Huntington Beach, Manhattan Beach, Torrance, Beverly Hills and Hawthorne.

The controller’s office also faulted PERS for failing to conduct its own audits of agencies within the retirement system and for problems with record-keeping and operational controls within the agency.

The findings prompted Controller Gray Davis to warn against “the potential for widespread pension abuses” in the state.

“At a minimum, PERS must overhaul its financial controls and local government must hold the line against pumping up pensions of their employees,” he said.

Lowry said that Bellflower officials believed their inclusion of PERS contributions and payment for sick leave and vacation time in salary reports were proper because they were benefits granted to employees by the city in lieu of salary.

She said that counting the PERS contribution as salary began in 1978 when the city began making the payment. Prior to that, it had been paid by employees.

A 1982 Bellflower City Council resolution allowed employees with 15 or more years with the city to take accumulated sick leave and vacation as salary during their last year. The specific intent was to enhance retirement pay.

Although acknowledging that the practices are prohibited by PERS, Lowry said the city believed the payments were “grandfathered” because they were employee benefits.

A spokesman for Davis said the pension problem is a combination of confusion over PERS regulations and calculated actions to give people larger pensions.

“The laws and regulations which apply to public retirement plans are in some cases confusing and unclear,” Davis’ press secretary Edd Fong said. “There also appear to be problems with ignorance on the part of local officials about what applicable laws and regulations are. In some cases, it appears that actions were deliberately taken to give retired employees bigger pensions than they were truly entitled to.”