The California State Teachers’ Retirement System (CalSTRS), the second-largest public pension fund in the nation, lost 25 percent of its value in 2009, and is carrying close to 50 billion dollars in unfunded liabilities.
CalSTRS members, which include both administrators and certificated district employees, receive pensions paid according to a “defined benefit”, which means that a member’s pension is determined according to their creditable salary and years of service and does not depend on the amount paid into the plan.
Typically, CalSTRS members contribute 8% of their salary to STRS, the district contributes 8.25%, and the state of CA kicks in another 2.1%. In this current time of financial crisis and rampant unemployment, one of California’s major issues is paying the pension obligations for teachers and other public employees who are no longer working. The defined benefit structure of CalSTRS makes it particularly susceptible to abuse by members who collect benefits far in excess of their contributions.
Enter Sharon McClain, former superintendent of the Del Mar Union School District. In addition to her salary, McClain’s employment contract with the DMUSD included annual benefits of: 6 weeks of vacation and 24 days sick leave, and a $4,800 automobile allowance. In addition there was $16,000 to be used “to offset her employee contribution to the State Teacher Retirement System or to fund a tax sheltered annuity, or some combination of thereof”.
However well-intentioned that $16,000 retirement benefit was, it has already cost the district far in excess of $16,000 in legal fees and it’s not over yet. Instead of using the $16,000 to offset her 8% contribution to STRS, Sharon McClain did the math and determined that if that money could somehow be classified as salary, it would raise the basis on which STRS calculates her retirement benefit and guarantee her higher retirement payments for the rest of her life.
To show the effect of such a reclassification of income, below is a very rough calculation of how creditable income for McClain might be calculated by STRS. The last two rows of the table show McClain’s income with and without the additional $16,000 added.
| 2009-2010 | 2010-2011 | 2011-2012 | |
| Salary (184 days) | $178,000 | $183,000 | $188,000 |
| Vacation (6 weeks) | $29.022 | $29,837 | $30,652 |
| Sick leave (24 days) | $23,218 | $23,870 | $24,522 |
| Auto allowance | $4,800 | $4,800 | $4,800 |
| Creditable income* | $182,400 | $187,400 | $238,370 (incl. vacation) |
| Creditable income + $16,000 retirement | $198,400 | $203,400 | $254,70 |
*The creditable income was calculated with the following assumptions: Salary + auto allowance + 45 vacation days accrued and paid at end of contract, 30 vacation days from final year and 15 from previous year.
Using the creditable income figures above, a rough calculation of Sharon McClain’s possible retirement benefit was made using the benefits calculator on the STRS website.
| Current Contract | Amended Contract | Gain | |
| Monthly Benefit* | $12,719 | $13,689 | $970 |
| Annual Benefit* | $152,623 | $164,268 | $10,645 |
* STRS benefits calculated using birthdate Feb 1945, retirement date Jul 2012, creditable service 30 years, unused sick leave 60 days, no service credit or incentive.
From the above figures, it is easy to understand what Sharon McClain’s motivations were for requesting this change, she stated at the February 24 board meeting that the change was worth $200,000 to her, a substantial financial incentive.
If the district were to redirect McClain’s retirement contribution to her salary, she would owe 8% of that amount to STRS, the DMUSD would be responsible for another 8.25%. If she were to be eligible for a performance bonus, her increased salary would increase the basis on which the bonus was calculated.
The exact changes requested by Sharon McClain to paragraph 8E of her contract were:
During the term of this contract or any renewal or extension thereof, the Board shall provide the Superintendent an annual fixed additional salary retirement contribution
sin the amount of Sixteen Thousand Dollars ($16,000) at no additional cost to the district.At her discretion, the Superintendent may elect to use the retirement contribution payment to offset her employee contribution to the State Teacher Retirement System or to fund a tax sheltered annuity, or some combination of thereof.
In a letter to the board, she gives the following reasons for the change:
I’m asking permission to change this section for three reasons:
- First, I believe the board’s intention was to meet my need to boost my retirement income which is based on the highest year’s salary.
- Secondly, Ricardo Soto, Annette and I agreed that the contribution was to be given annually, and was not specified in the contract.
- Third, having the option to add this amount to my compensation during my first year of employment will make a difference in my STRS calculation for retirement.
Most importantly, it would help me avoid the problem of STRS personnel determining that my salary was spiked.
I will pay the 8% cost of STRS, $1,200 each year so there will be no cost to the district.
This request will not affect my total compensation, there is no additional cost to the district, nor will it affect the annual salary or any increases made to it through the step system in the future. Any increases given will not be calculated on a larger base. The salary schedule outlined in the contract will remain the same unless negotiated differently.
McClain asked that the increase count as salary, but with differences. This salary would require her to pay the district’s portion of STRS, and this salary would not be a basis for any percentage salary increases. She did not address whether or not unused sick and vacation days would be paid at the higher rate.
So, was Sharon McClain trying to spike her pension? Pension spiking is defined as the intentional inflation of final compensation with the primary purpose of increasing the retirement benefit. McClain’s request seems to fit this definition to a T.
CalSTRS specifically prohibits pension spiking. The problem with such practices is that since salary spikes take place shortly before retirement, the inflated benefit that spiking produces is unfunded, which has an adverse impact on both the funding and credibility of public retirement systems.
By Sharon McClain’s own account, for the cost of an additional $1,200 per year ($3,600 total), she gains an additional $200,000 in retirement benefits, a very respectable and unrealistic rate of return on her investment.
Fortunately, this sort of salary manipulation is available only to an elite few members of CalSTRS, district administration. Classroom teachers are subject to collective bargaining agreements and do not have the power to manipulate their employment contracts individually.
Concerned over such abuses, CalSTRS regulations now specifically disallow:
- Compensation paid for the principal purpose of enhancing a member’s retirement benefit, as determined by CalSTRS
- Compensation paid for a limited period of time
- Compensation for service in excess of 1.000 years of service in a school year
- Compensation with restrictions on how the employee spends the compensation, or where they are required to document how it was spent
CalSTRS controls the practice of pension spiking by auditing school districts, combined with the provision of law that permits the Board to determine whether particular compensation is being paid for the principal purpose of enhancing the pension benefits. A presumption by CalSTRS that spiking has occurred can only be reversed upon receipt of sufficient evidence to the contrary. By auditing school districts, CalSTRS is able to identify circumstances in which the employer reported compensation that appears to CalSTRS to be spiking.
Last June 17, at a special closed meeting, the Board of Trustees unanimously voted to approve Sharon McClain’s request to modify her contract, a decision that is almost impossible to comprehend given that her request sounds like a textbook definition of pension spiking. Had the board just denied her request back in June, we could have nipped this particular piece of drama in the bud and saved the district tens of thousands of dollars.
Upon receipt of McClain’s proposed amendment, Dena Whittington, assistant superintendent of Business Services, sent it to her STRS contact at SDCOE, who in turn passed it on to STRS in Sacramento. Unsurprisingly, STRS responded that any increases in Ms. McClain’s salary resulting from the transfer of funds as written in the contract amendment could not be used for purposes of calculating her retirement income.
Although the Board of Trustees had voted to approve the contract change, they hadn’t signed the amendment and were unsure of how to proceed after the STRS determination. And then the legal wrangling began.
Sharon McClain’s attorney Mr. Gronemeier wrote nine letters to the board on November 19, December 11, 13, 14, 15, 17, 19, 21, and February 3, in an attempt to force them to honor the contract amendment they’d agreed to in June. The board retained their own attorney Mr. Shinoff, and asked McClain for an amendment with different wording that would satisfy STRS. In the February 24 meeting, McClain asserted over and over that she’d “given [the board] the remedy”, but from their discussion it does not appear that “the remedy” included an actual written amendment that could be sent back to STRS for approval.
McClain maintained over and over in the February 24 meeting that this amendment would cost the district nothing, but her proposal as written, even if approved by STRS, would at minimum have cost the district additional pay for sick and vacation days.
But those costs pale in comparison to the legal fees, not to mention the time that both she and the Board of Trustees have expended on this matter, reading and responding to letters in an endlessly circular argument that could only have been resolved by submitting a new amendment to STRS.
If McClain and the Board had managed to come up with an amendment that would be acceptable to STRS, where do any of them think that $200,000 comes from? It is exactly such abuses that have led to the current financial state of CalSTRS. Are we taxpayers and unemployed parents and teachers who share the CalSTRS pension pool so insignificant that our contributions to McClain’s pension don’t count? Why didn’t the board take a stand for their constituents back in June?
It’s inexplicable, and in the long run, it's us, the parents, the constituents, the taxpayers who are left holding the bag for the ongoing posturing and grandstanding by both Sharon McClain and our elected Board of Trustees, who should have just said no.
…All in all, it’s just one more brick in the wall…
- A DMUSD parent (Torrey Hills)
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