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Pension spiking could cost CalPERS nearly $800 million

An audit by Controller John Chiang, shown in 2011, concluded that CalPERS makes itself vulnerable to pension spiking by not aggressively reviewing payroll records.
(Associated Press)

SACRAMENTO — A legal way to increase pensions by boosting the final pay of retiring state and local government workers could drive up public employee pension costs in California by as much as $796 million over the next 20 years, the state controller said Tuesday.

The estimate was part of a new audit of the California Public Employees’ Retirement System, commonly known as CalPERS, the nation’s biggest public pension fund, with $302 billion in investments.

The audit, by Controller John Chiang, reviewed 11 state and local government agencies and concluded that the pension agency makes itself vulnerable to the practice, known as pension spiking, by not aggressively reviewing payroll records of its 3,100 member agencies.

In pension spiking, a public employee’s pay is often increased through a promotion, a raise, or overtime hours just before the employee retires.

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As a result, the monthly pension checks received, sometimes for decades afterward, can be significantly increased. Pension benefits are calculated using a formula based on the pay received by a retiree during the three years of his or her highest compensation, and the number of years worked.

The audit comes amid growing debate among policymakers, city officials and taxpayers about ballooning public pension obligations, whose costs they say are gobbling up funds needed to pay for police and fire protection, healthcare, education and other basic services. Public outrage over extremely high pensions reached a crescendo in 2010 after a corruption scandal in Bell revealed City Administrator Robert Rizzo was on track to be the highest-paid pensioner in California.

Two years ago the Legislature and governor overhauled public pension benefits for newly hired workers, but many critics called the legislation too little and too late.

Pension reform activists led by San Jose Mayor Chuck Reed hope to put an initiative before voters in 2016 that would allow cities to renegotiate their pension obligations for existing workers via collective bargaining.

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Since then, there has been greater scrutiny of CalPERS and its role in the growth of public pensions. Part of the problem, Reed said, is that CalPERS “has set out on a course to protect the existing system and level of benefits.”

Chiang’s staff raised concern over a special benefit that can fatten a worker’s final year’s pay. The audit points to 97 local governments that agreed with unions to pay both the employer’s and employee’s shares of the total pension contribution and count it toward the employees’ final salary.

The benefit, which is no longer available to people hired after Jan. 1, 2013, increased retirees’ pension benefits by $39.1 million a year. That adds nearly $800 million in additional pension costs over the next two decades, the audit said.

CalPERS disputed many of the controller’s findings. It maintained that the agency is aware of only 24 local governments that pay all of an employee’s retirement contributions.

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“It is paid for by employers, bargained with employees and publicly approved by the respective city councils or boards of supervisors,” said Brad Pacheco, a CalPERS spokesman. “The numbers used in the controller’s report are wrong and do a grave disservice to all public employees by vastly inflating the value of projected pensions.”

CalPERS staff also said it was impossible to accurately forecast the long-term cost of boosting compensation with the so-called “pick-up payments.”

But even a small increase in pay just before retirement can turn out to be expensive, pension reform advocates argue.

In a 2013 study, the San Diego Taxpayers Assn. looked at an employee earning $100,000 a year with 25 years of government service. According to the study, if that worker added just $7,850 to his salary in the year prior to retirement, he would receive an additional $118,000 if he lived until age 80.

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Chiang, an ex officio member of the CalPERS board, paid special attention to the alleged legal pension spiking issue, but he also criticized CalPERS’ auditing pace.

The agency, which provides benefits to 1.7 million state and local government workers, retirees and their families, has devoted so few resources to oversight, he complained, that each local government faces an audit just once every 66 years.

Overall, the audit, covering July 1, 2010, through June 30, 2012, contained a mix of good and not-so-good findings, the controller said in a statement released by his office. On the plus side, he said that his staff “found no incidences of pension spiking” in the 11 state and local government agencies audited.

The agencies were the state Department of Fish and Wildlife, the California State University Chancellor’s Office, Riverside County, Placer County, the city of Oakland, the city of Colton, the Grossmont Healthcare district, the Inverness Public Utility District, the Metropolitan Water District of Southern California, the Woodside Fire Protection District and CalPERS itself.

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But the “discouraging news,” added Chiang, “is CalPERS’ lack of robust auditing, underutilization of advanced technology and its generally passive approach to the problem invites abuse. The state’s largest pension system can and must be more vigorous in protecting taxpayers from this form of public theft.”

CalPERS officials, however, hailed the controller’s failure to find any illegal pension spiking as a vindication of current policies and procedures.

“As we expected, the controller’s review did not identify any pension spiking,” said President Rob Feckner, an employee of the Napa Unified School District. “We agree on the importance of a proactive and automated system to detect pension spiking.”

The agency “has significantly increased audit staff” in the last fiscal year, said Chief Executive Anne Stausboll. It’s doubled the number of public agency audits to 99 during the last fiscal year.

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marc.lifsher@latimes.com

melody.petersen@latimes.com

Twitter: @MarcLifsher

Twitter: @MelodyPetersen

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