Triggering at least two lawsuits, CalSTRS has cut the pensions of hundreds of retired teachers because extra work or pay was misreported as earnings for pensions, not for a 401(k)-style individual investment benefit with a guaranteed minimum return.
An annual audit sample last year found overpayments to 87 retirees from 18 school districts totaling $237,854. The pensions of the retirees will be cut to the corrected amount and overpayments will be recovered by an additional 5 percent cut.
CalSTRS is an unusual “hybrid” that not only has a standard pension, providing monthly payments for life, but also a tax-deferred individual investment plan, the Defined Benefit Supplement, that has a minimum guaranteed return based on 30-year U.S. Treasury bonds.
Annual audits by CalSTRS, stepped up in recent years, are finding that the retirement contributions earned by teachers for extra work or pay is reported by some school districts as going to pensions rather than to the supplement, resulting in an overpayment.
In many well-publicized cases of improper pension increases called “spiking,” the final pay that helps determine the monthly pension amount has been padded by various means, often for managers.
But most of the overpayments for misreporting found in the California State Teachers Retirement System audits are for employees working on a pay scale bargained by unions. And in two publicized cases, employers made the error while trying to cut costs.
CalSTRS cut the pensions of 34 retired Yuba Community College instructors by 10 to 15 percent in 2011. In a Yuba cost-cutting plan begun in 2003, a lower salary for choosing a reduced workload was offset by extra pay, reported as earnings for pensions not the supplement.
Yuba said CalSTRS had approved the plan. After actuaries estimated restoring the cuts would cost $7 million, Yuba was considering legal options, the Marysville Appeal-Democrat reported. But the district decided to pay the cost of restoring the pension cuts, a Yuba spokeswoman said.
CalSTRS cut the pensions of two groups of teachers retired from the Salinas Union High School District after audits found that payments for teaching an extra class had been misreported as contributions to pensions instead of the supplement.
In a lawsuit filed by 11 Salinas retirees against CalSTRS, a superior court judge restored the pension cuts in 2015, ruling that a three-year statute of limitations had expired. A hearing for the CalSTRS appeal has not been set, a retiree attorney, Bob Rosenthal, said last week.
Cuts in the pensions of 33 Salinas retirees were temprarily restored by a superior court last May in a second lawsuit contending, among other things, the retirees had no chance to appeal the cuts. A hearing is scheduled April 7.
An attorney for Salinas retirees, Barry Bennett, said his office has had 18 similar CalSTRS cases, but he did not identify them. Asked to respond to Bennett’s claim of other suits, a CalSTRS attorney, Jill Lukins, said confidentiality and privacy laws exempt disclosure.
The annual audit last year suggests there may be a broad problem. Retirement contributions misreported for pensions (the “defined benefit”) rather than the supplement was the major cause of an estimated $1.6 million financial impact over 10 years. (see chart)
After the audit sample last year found overpayments to 87 retirees from 18 school districts, a dozen of the districts responded to a CalSTRS request to look for more reporting errors and found an additional 4,062 members with similar “systemic” audit problems.
“Extrapolating the financial data from our audit samples, we estimate that the potential financial impact is approximately $6,800 per member, or a total of $27,621,600 for the 12 districts,” said a staff report to the CalSTRS board last September.
The creation of the Defined Benefit Supplement by legislation in 2000 that emerged from a backroom deal, bypassed committees, and was given a brief and misleading floor analysis remained a sore point with some CalSTRS members.
A quarter of the teacher contribution to an underfunded CalSTRS (2 percent of pay from a total of 8 percent of pay) was diverted for a decade into a DBS for each teacher that served from Jan, 1, 2001, through Dec. 31, 2010, a total of $5 billion.
After decades of underfunding, a stock market boom had given CalSTRS a brief surplus. And as with the other big state pension system, CalPERS, the surplus was treated as a windfall to be spent by lowering employer contributions and raising employee pensions.
The floor analysis of AB 1509 in both legislative houses said: “No General Fund effect and no effect to the solvency of STRS, the STRS surplus will absorb the cost of the Defined Benefit Supplement Program.”
The CalSTRS surplus, only a projection not money in the bank, quickly vanished as the debt or “unfunded liability” ballooned after stock market drops. The diversion of a quarter of the teacher contribution continued for a full decade as authorized by the original legislation.
As the CalSTRS board, which lacked the power to raise employer rates, struggled to get legislation for a contribution increase a California Teachers Association representative who worked on pension legislation in 2000 vented her frustration about the DBS legislation.
“We didn’t see the side car rolling through the Legislature of a rogue member, who went to a legislator and asked that legislator to please pass a bill that would give that member his own private bag of money,” Lois Shive told the CalSTRS board in 2013.
“That was our 2 percent side car that established the DBS fund,” she said, “and short-funded this wonderful pension fund by a huge amount, building on to what we have now is a snowballing effect.”
Shive later declined to identify the “rogue member” and amended her view of the 10-year diversion of a quarter of the teacher CalSTRS pension contribution, saying it was a small part of the funding problem.
The CalSTRS consulting actuaries, Milliman, have said the 10-year diversion of a quarter of the teacher contribution had a “very small” impact on the CalSTRS funding level, barely visible on a bar chart showing drivers of the change.
The Defined Benefit Supplement was among a half dozen bills around 2000 that spent the CalSTRS surplus by cutting contributions from teachers and the state, while increasing retirement benefits in several ways.
For example, CalSTRS retirees were given a 1 to 6 percent pension increase, depending on when they retired. The bill (AB 429 in 2000) was said to be “equitable” with a similar increase for state worker retirees in CalPERS-sponsored legislation (SB 400 in 1999).
Milliman calculated in 2013 that if CalSTRS was still operating under the 1990 benefit structure, without the changes made around 2000, the funding level would have been about 88 percent instead of 67 percent.
With a smaller funding gap to close, major CalSTRS funding legislation enacted in 2014, which will more than double school district rates by 2020, would have taken a much smaller bite out of funding available for classrooms, if not further delayed.
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 13 Feb 17