(September 9, 2012) -- A review by the State Controller’s Office (SCO) of California has revealed that the California State Teachers’ Retirement System (CalSTRS) may be lacking adequate controls to detect and prevent pension payments based on compensation, commonly known as pension spiking, yet the public pension fund says the review lacks the whole picture.
The State Controller John Chiang's "Pension Controls and Mechanisms" review addressing pension spiking also independently reviewed five school districts for the period of July 1, 2006, through June 30, 2011, to determine whether the districts had controls in place to provide assurance that pension spiking could be prevented or detected.
During the period, the SCO found that the California public pension fund did not provide adequate oversight of the reporting entities it monitors. "For example, at the rate at which audits currently are being performed, each district would be audited only once every 48 years. In addition, CalSTRS’ audit process should have been more effective in detecting pension spiking at its member school districts," the report by the SCO stated.
The report concluded: "CalSTRS missed opportunities to increase school district accountability by reducing instances of suspicious or unjustified salary increases (i.e., pension spiking). Our independent review of the San Francisco Unified School District and the San Diego Unified School District concluded that these districts lacked the level of transparency and the necessary controls over management pay increases that a public entity should exercise on behalf of its constituents. As a result, pension spiking may be occurring at these districts."
In response to the review, CalSTRS CEO Jack Ehnes issued a statement in the fund's defense. He noted that last year, before the State Controller announced plans for his review, CalSTRS had identified the need to make aggressive changes and upgrades to mitigate pension spiking. "This resulted in the creation of a toll-free Pension Abuse Reporting Hotline and a dedicated Compensation Review Unit to investigate suspected pension spiking cases," he explained.
While the efforts to reduce the likelihood of pension spiking have achieved positive results, according to Ehnes, they are not reflected in the State Controller's report as the report's review time period stopped at June 30, 2011.
Meanwhile, Ehnes concluded that the California legislature has taken steps to address pension spiking with the recent passage of AB 340, which imposes a limit on compensation that is counted toward calculating a member's pension. "The passage of AB 340 provides another valuable tool to further enhance CalSTRS' existing safeguards to prevent pension spiking," he asserted.
Looking ahead, CalSTRS' CEO outlined a list of steps the pension would do to further improve pension spiking efforts, including:
1) Increase Audit Services staff by 66% over the next two years to strengthen review of audits.
2) Conduct audits of all of the 60 identified high-risk school employers within a two-year cycle by using increased staffing resources.
3) Intensify the focus on compensation reported by school employers.
4) Report ongoing progress of our efforts to the Teachers' Retirement Board Audit and Risk Management Committee.
CalPERS to Critics: Get Your Facts Straight