September 9, 2014 / 8:40 PM / 5 years ago

UPDATE 1-Calpers criticized for passive approach to pension 'spiking'

(Adds comment from Calpers, changes headline to reflect broader findings of report)

By Tim Reid

LOS ANGELES, Sept 9 (Reuters) - America’s largest public pension fund was criticized in a report on Tuesday for failing to sufficiently audit and clamp down on pension “spiking”, a practice of inflating workers’ benefits just before retirement in order to boost their pensions.

California’s State controller, John Chiang, said Calpers, the state’s giant public pension fund with assets of $300 billion, had a “passive” approach towards pension spiking and failed to adequately review payroll data, inviting abuse.

Calpers administers benefits for over 3,000 city, state and local agencies, or nearly 3 million people.

Pension reform advocates have accused Calpers of authorizing pension spiking after the fund’s board voted last month to approve nearly 100 types of extra pay that will count toward pensions for workers hired since 2013. A majority of the Calpers board have current or former roles with unions.

Chiang said that of the 11 Calpers entities he had scrutinized, he found no incidence of pension spiking. His review was conducted between July 2010 and June 2012.

But speaking of Calpers’s spiking review procedures, Chiang said that “on the current audit schedule, a local government that contracts with Calpers, for example, would only face an audit once in every 66 years.”

Chiang said Calpers only reviews 1.5 percent of its membership annually for spiking, and the primary driver of that is whether an entity has public employees who are paid more than $245,000 a year.

“The state’s largest pension system can and must be more vigorous in protecting taxpayers from this form of public theft,” Chiang stated.

Calpers pushed back against Chiang’s criticisms. “The Controller’s review did not identify any pension spiking,” said Rob Feckner, President of the Calpers Board of Administration.

Feckner said Calpers had significantly increased audit staff since June 2012, and has doubled the number of member audits in the past year.

“We agree on the importance of a proactive and automated system to detect pension spiking,” Feckner said.

Audit technology is superior today to the period of Chiang’s review, a Calpers spokesman added.

California Governor Jerry Brown passed a pension reform law in 2012 aimed at reducing pensions for newly hired workers. Cash-strapped California cities are straining to pay rising retirement costs, often their biggest budget item.

Part of that law was aimed at halting spiking, the practice where workers on the eve of retirement cash out, for example, years of unused vacation and sick pay to inflate their final year’s salary. For most workers in California, pensions are calculated on their final year’s wage.

The Calpers board, after last month’s vote, said it was clarifying Governor Brown’s 2012 pension reform law. Brown objected to one of Calpers’s extra pay calculations: allowing temporary upgrade pay to be counted as permanent, pensionable income.

Under Calpers’ new provisions, various types of incentive, educational and special assignment pay will be deemed eligible as pensionable income. They include extra payments to police officers for being good marksmen and physically fit, and library staff who are consistently helpful. (Reporting by Tim Reid; Editing by Ken Wills)

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