State Controller John Chiang on Tuesday released a report on efforts made by the California Public Employees' Retirement System (CalPERS) to detect and prevent pension spiking practices at the 3,100 public agencies which contract with the system.
CalPERS officials said Tuesday that the system's monitoring efforts have increased in recent years while also finding shortcomings with Chiang's report.
CalPERS has more than 3,000 member agencies.
In Lake County, it covers several agencies including the city of Clearlake's safety and miscellaneous employee classifications; peace officer, fire and miscellaneous employee classifications for the county of Lake; the Clearlake Oaks County Water District; Hidden Valley Lake Community Services District; Konocti County Water District; Lake County Fire Protection District; Lake County Vector Control; Lakeport Fire Protection District; Lower Lake Cemetery District; Lower Lake County Waterworks District No. 1; and Northshore Fire Protection District.
The report, which covered the period from July 2010 to June 2012, found CalPERS's failure to use automated controls and more proactively review payroll data exposes the system to the manipulation of pay for the purpose of “spiking” retirement benefits.
Chiang's review found that CalPERS lacks sufficient audit capacity to cover all the state and local governments with which it contracts. On the current audit schedule, a local government that contracts with CalPERS, for example, would only face an audit once in every 66 years.
“The good news is that my office sampled 11 employers within the CalPERS system and found no incidences of pension spiking,” said Chiang. “The discouraging news is CalPERS’s 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.”
“As we expected, the controller’s review did not identify any pension spiking,” said Rob Feckner, president of the CalPERS Board of Administration. “We agree on the importance of a proactive and automated system to detect pension spiking.”
Fecker continued, “Long before the Controller’s Office began their current review, CalPERS saw the need for a 21st century, state-of-the-art technology system and we successfully implemented it in 2011. That is one of the reasons why the SCO’s report 'did not identify pension spiking' among the 11 agencies they reviewed. We further agree we need a larger audit staff, which is why we significantly increased it and plan to continue to increase it in the near future. We look forward to our continued partnership with the controller and California’s public employers to monitor and enhance compliance with the law.”
The Controller's Office review focused on audit oversight and internal controls at CalPERS aimed at identifying, preventing and eliminating pension spiking.
The controller also reviewed 11 CalPERS member agencies – three state agencies, two counties, two cities, and four special districts – to determine if any retirements occurring during the audit span included any inappropriate benefit enhancements.
Those 11 member agencies included a geographically diverse sample of public entities that included the California Department of Fish and Wildlife, the California State University Chancellor’s Office, the county of Riverside, CalPERS, the county of Placer, the city of Oakland, the city of Colton, the Grossmont Healthcare District, the Inverness Public Utility District, the Metropolitan Water District of Southern California and the Woodside Fire Protection District.
Although the controller's review of the 11 reporting entities did not identify an incident where a retiring employee received an inappropriate pension enhancement, it did discover that CalPERS doesn’t regularly run the monthly payroll data it received through automated controls to identify indicators of pension spiking.
At CalPERS, the controller found that the pension fund has developed a number of electronic risk assessment tools that can be used to detect pension spiking, but does not effectively use them.
Instead of applying these automated data mining tools to all payroll data received from its member agencies on a monthly basis to identify anomalies indicative of abuse, CalPERS only performs a risk assessment once per year and the primary driver of that assessment is whether that agency has employees compensated at greater than $245,000 per year, Chiang's office reported.
Compounding the deficiencies inherent in an approach that does not systemically screen data on a frequent basis, CalPERS generally only reviews pay data for spiking when an employee of a member agency is about to retire. This lack of up-front, real-time accuracy verification needlessly creates opportunities for abuse to occur, according to Chiang's report.
CalPERS has insufficient auditing resources to effectively oversee its more than 3,000 member agencies. Available resources limit its annual reviews to only 45 (or 1.5 percent) of its membership. At this rate, a public agency would only face a pension spiking audit once every 66 years.
Since the audit was completed, CalPERS has added additional staff; however, with the change, it still would be once every 33 years that an agency would face an audit.
The Controller's Office strongly recommends CalPERS address the understaffing immediately, makes full use of its electronic tools, and deploy a more rigorous and prevention-based approach to combating pension spiking.
Finally, the review observed a form of “legal” pension spiking authorized with the 1993 enactment of California Government Code section 20692. This method of pension enhancement involves a one-time shift in “pick-up” payments, or payments made by employers to cover the employee's share of pension costs.
Commonly referred to as “Employer Paid Member Contributions,” 97 contracting agencies – primarily local governments and special districts – have contract amendments allowing them to withdraw the commitment to pick up the retirement contribution in the employee’s final year, and will instead add the cash value of that payment to the employee's salary to be paid by the employee as a retirement payment.
While this arrangement does not affect the total cash value being sent to the pension fund each year, it does “spike” the employee’s final year of compensation by shifting the cash value of the pension payment into the regular salary.
As a result of the California Public Employees’ Pension Reform Act of 2013, this optional benefit is no longer available to new members.
However, the controller’s review concluded that the contract amendments increased members pay by $39.1 million in annual pensionable compensation for participating employees. This arrangement could provide as much as $796 million in this type of pension compensation over 20 years, Chiang's office reported.
CalPERS said the Controller's Office review did not cite certain aspects of its efforts to monitor compliance of contracting agencies.
It said it has significantly increased audit staff since June 2012 and, in the last year alone, has doubled the number of audits of contracting public agencies to 99. CalPERS said it also provides comprehensive education for employers and offered more than 600 training courses last year.
In addition, CalPERS has procedures in place to review compensation of active employees for pay increases and inappropriate reporting by employers. CalPERS also targets public agencies that have highly paid employees with reported earnings exceeding $245,000 annually in an effort to optimize its review of agencies.
CalPERS said it is developing a business intelligence program using technology and data analytics to identify membership and payroll reporting anomalies across its membership. This will allow the Pension Fund to focus its auditing efforts on contracting agencies most at-risk for reporting errors.
Lastly, CalPERS said that while the practice of using Employer Paid Member Contributions is still generally available for the “classic” employees who were first hired by Jan. 1, 2013, the recent Public Employees' Pension Reform Act prohibited EPMC for “new hires.”
“CalPERS shares a partnership with our local government employers who bear the primary responsibility for complying with and accurately reporting employee compensation in compliance with the law,” said Feckner. “We welcome suggestions on how to improve our oversight role.”