CalPERS has denied membership to nine charter schools, saying a proposed IRS rule could end crucial tax advantages if “even a single non-governmental entity” is allowed into the giant pension system.
The California Charter Schools Association, seeking an explanation of the new policy, received about 9,000 CalPERS documents last month after filing a lawsuit to force compliance with the public records act.
The association said the California Public Employees Retirement System is the only public pension system in the nation to deny membership on the basis of an IRS rule, proposed in 2011, that may still be several years away from final adoption.
In contrast, said the association, the California State Teachers Retirement System obtained an IRS opinion saying charter school teachers are eligible for CalSTRS, which has not denied any memberships due to the pending IRS rule.
A CalPERS staff report in December said the new policy reflects the long-term goal of “sustainability,” risk reduction and IRS guidance and compliance. While nine charter schools were denied, said the report, five charter schools were accepted.
Charter schools, a variety of government-funded alternatives to traditional schools, often have no labor unions. The CalPERS board, dominated by employee-elected members and their allies, has used shareholder clout and other policies to aid unions.
The charter association did not accuse CalPERS of denying membership to aid unionization. Instead, charter advocates reportedly are worried that the new CalPERS policy seems to be aimed at excluding privately controlled charter schools.
Some charter schools are conversions from public schools, and the employees typically remain in the public pension systems. Two-thirds of the 1,130 California charter schools are independently incorporated, most with their employees in CalPERS.
“If CalPERS starts changing its policy and making their members ineligible, we are talking about thousands and thousands of employees,” Myrna Castrejon, the charter association senior vice president of government affairs, said last week.
A charter school can meet requirements by offering a 401(k)-style individual investment retirement plan. But most are said to want to offer public pensions to help recruit and retain top talent.
“It’s folly not to (offer a public pension),” said Castrejon. “It’s a huge competitive disadvantage in California not to.”
In December, Castrejon urged the CalPERS board to return to its prior policy of admitting all charter schools. She said nearly all of the public comment on the proposed IRS rules came from charter schools across the nation.
Castrejon said two dozen members of Congress from both parties share the concern of charter school that the IRS proposal overlooked the “hybrid entities” authorized in 42 states.
She said the association believes the new CalPERS policy is “contrary to IRS guidance” and to California law stating in at least five places that “California charter school employees are in fact eligible to participate in CalPERS.”
“This change is alarming and disruptive to the new charter schools that are starting now and going through the application process, but also potentially to the 1,100 and more charter schools that are operating right now,” Castrejon told the board.
A staff report to the CalPERS board in December said that although final adoption of the IRS proposal could take several years, past IRS guidance and statements by IRS officials “strongly suggest” the proposal reflects current tax law.
“The IRS has made clear that the inclusion of even a single non-governmental entity could jeopardize the governmental plan status of CalPERS,” said the staff report.
The board was told that the loss of the current status would be “devastating” to CalPERS, requiring taxes on employer and employee pension contributions and pension fund investment earnings.
The major factors determining a government entity under the IRS proposal are said to be:
Who controls the governing board (nomination and election), who is responsible for debt and other obligations, whether employees are treated like typical civil servants, and whether the entity has sovereign powers such as taxation and eminent domain.
Donna Lum, CalPERS deputy executive officer for Customer Services and Support, told the board that in many of the denials under the new CalPERS policy “not even one of the main factors has been satisfied.”
Of the 98 requests received by December, CalPERS approved 10 public agencies and five charter schools, denied seven public agencies and nine charter schools and 22 were canceled or did not respond to queries. Five charter schools appealed denials.
Lum said the denials were “made on the basis of the IRS guidance and our desire to protect our members, who are currently in our system, and not with any intention to exclude or deny any particular employer or potential members.
“We have told the charter school officials that if the IRS were willing to give further guidance or clarification that would allow charter school employers to be automatically considered as governmental agencies, we would then have the ability to admit them into our membership.”
As the charter school movement continues to grow, the new CalPERS policy is not its only challenge.
The private use of government charter school funds has been an issue in several well-publicized criminal cases such as the collapse of the 36-campus California Charter Academy a decade ago and the jury conviction of the Ivy Academia founders last year.
Last week the Orange County district attorney charged Jeremy Landau, a former board member of an online charter school, California Virtual Education Partners, with “stealing $750,000 in the largest charter school theft in California history.”
On the political front, a Turkish group with about 100 charter schools in 25 states is led by Fethullah Gulen, blamed by some for much of the current upheaval in Turkey. The new mayor of New York, Bill de Blasio, is attempting to curb the growth of charter schools.
Last year California added 104 charter schools with 48,000 students, bringing the total to 1,130 charter schools with 519,000 students, the National Alliance for Public Charter Schools reported this month.
In California 39 charter schools also closed last year, the report said, due to a number of reasons such as low enrollment, financial problems and poor academic performance.
“The closures provide evidence that the charter school bargain works,” said the report. “Schools that do not meet the needs of their students are closed.”
Castrejon said last week the charter school association is examining the CalPERS documents and “assessing our options.” A CalPERS spokesman, Brad Pacheco, issued this statement:
“We have been meeting in good faith with the Charter Schools Association and we hope to resolve this matter as soon as we can. We value the membership of our contracting employers but it is important as the administrator of the fund that we follow the laws and seek clarity where necessary.”
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 18 Feb 14