Pension ‘spiking’ to cost CalPERS nearly $800 million, controller says

Reporting from Sacramento —  Taxpayers and local governments are on the hook to pay nearly $800 million stemming from “legal” pension spiking over the next two decades, the state controller said Tuesday.

The price tag came as Controller John Chiang issued a new audit of the California Public Employees’ Retirement System.

The audit of 11 state and local government agencies found no illegal pension spiking but concluded that the country’s largest public retirement fund makes itself vulnerable to the practice by not aggressively reviewing its 3,100 member agencies’ payroll records.

Pension spiking is the practice of hiking a public employee’s pay, through a promotion or salary hike, just before the employee retires. As a result, the monthly pension checks received, sometimes for decades, can be significantly increased. Pension benefits are calculated using a mathematical formula based on the pay received by a retiree during the three years of his or her highest compensation.

Chiang said he especially was concerned by the practice at 97 local agencies of fattening a worker’s final year’s pay when the collective bargaining agreement calls for the agency to pay both the employer’s and the employee’s share of the total pension contribution.

The benefit, which is no longer available to people hired after Jan. 1, 2013, increased CalPERS member compensation by $39.1 million a year. But it has the potential to cost the state and local agencies and taxpayers an estimated $796 million in additional pension costs over the next two decades, Chiang warned.

CalPERS in a formal response said it has no discretion to prevent such legal spiking when the local agency has complied with the law. Moreover, it argued that a discussion of the particular benefit was “outside the stated scope of the audit.”

The California Public Employees’ Retirement System, which provides benefits to 1.7 million state and local government members, retirees and their families, also lacks sufficient audit capacity, said Chiang, who sits on the CalPERS board. The board oversees a $301.5-billion investment portfolio.

The review, covering July 1, 2010, through June 30, 2012, contained some “good news,” Chiang said. His auditors closely reviewed pension records at 11 different public agencies and “found no incidences of pension spiking,” he said.

The agencies included the state Department of Fish and Wildlife, the California State University Chancellor’s Office, Riverside County, CalPERS, 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 and the Woodside Fire Protection District.

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.”

More oversight is needed with that much money at stake, Chiang said. “On the current audit schedule a local government that contracts with CalPERS, for example, would only face an audit once in every 66 years,” he said.

CalPERS Chief Executive Anne Stausboll countered that the controller “ ‘did not identify pension spiking’ among the nearly dozen public agencies reviewed.” Additionally, she said, CalPERS “has significantly increased audit staff” in the last fiscal year, doubling the number of audits of public agencies to 99.

Twitter: @MarcLifsher