CalSTRS Recommends Legislature Adopt Stronger Pension Spiking Reforms
Trustees urge amendments to SB 27 to curb pension spiking.

News release

WEST SACRAMENTO, CA – The board of the California State Teachers’ Retirement System (CalSTRS) today voted to support proposed legislation that, if amended, would help strengthen its efforts to curb pension spiking.

The measure, SB 27 (Simitian), would change the types of compensation that are credited to the CalSTRS and CalPERS defined benefit programs, in order to curtail the inappropriate inflation in retirement benefits, known as pension spiking. The pending legislation enhances CalSTRS internal safeguards currently in place to stop compensation practices some members may undertake to increase their final compensation and inflate their retirement benefits.

“Our support of this bill emphasizes the seriousness with which we view the damage that spiking does to the financial soundness of our system and to the trust placed in us by the educators of California,” said Board Chair Dana Dillon. “We must, however, be mindful of the legal and moral issues of changing the rules on our existing members who have made life decisions based on the rules that existed when they were hired. This principle guides our calls for amending the bill to apply only to new members.”

Under current law, benefits are paid to retiring members of CalSTRS Defined Benefit (DB) Program based on the age, service credit and final compensation at retirement. Final compensation is based on the average annual full-time salary rate over one or three years, depending on the number of years of service. Twenty-five years is the benchmark for a one-year final compensation pension calculation.

The bill specifies which types of compensation would be included in a member’s final compensation for the purpose of determining retirement benefits. Salary would continue to be credited to the DB Program. However, payments, such as stipends for supplemental assignments, car or housing allowances made in addition to salary or wages would be credited to the Defined Benefit Supplement (DBS) Program rather than the DB Program and would not be included in final compensation.

To go a step further, CalSTRS seeks amendments to establish a uniform limitation on annual creditable compensation a member hired in the future can earn. The limitation would improve upon current processes, which require time-consuming manual reviews that can be perceived as subjective, and serve as a more effective way of combating spiking. A limit equal to 60 percent of the IRS annual indexed pension compensation limit (currently $245,000), or $147,000, would be allowed to be credited to the Defined Benefit Program, with compensation exceeding the limit credited to the member’s DBS account.

“CalSTRS uses a hybrid retirement plan in the form of its DBS Program to accumulate member and employer contributions not creditable to the DB Program. It works like a defined contribution plan,” said Jack Ehnes, CalSTRS chief executive officer. “Currently, contributions paid for overtime, such as for summer school or after-school activities, or on compensation being paid in order to spike a person’s pension, are credited to the member’s DBS account, rather than the member’s monthly pension. The proposed amendments build on that foundation to further our efforts to prevent pension abuse.”

In its current form, SB 27 applies to all current and future active members of CalSTRS. However, under current law applying compensation limit provisions to existing members would constitute a prohibited impairment of contract. CalSTRS seeks amendments to any provisions in the legislation that reduce benefits to only be applied to individuals who first become a public educator on or after July 1, 2012.

A similar bill (SB 1425, Simitian), which was tied to separate legislation making parallel changes to local retirement systems, including county retirement systems, was vetoed last year by Governor Schwarzenegger.

The California State Teachers’ Retirement System, with a portfolio valued at $155.4 billion, is the largest teacher pension fund in the United States. It administers retirement, disability and survivor benefits for California’s 852,000 public school educators and their families from the state’s 1,600 school districts, county offices of education and community college districts.