SAN FRANCISCO — The California Public Employees' Retirement System is vulnerable to pension "spiking" practices as a result of its passive oversight and failure to use automated controls, according to a Sept. 9 report from State Controller John Chiang.
The report looked at efforts made by the state's largest pension system to detect and prevent pension spiking at the 3,100 public agencies that contract with the system.
The controller also reviewed 11 CalPERS member agencies, which included three state agencies, two counties, two cities, and four special districts, to determine if any retirements occurring during the audit span included any inappropriate benefit enhancements.
"The good news is that my office sampled 11 employers within the CalPERS system and found no incidences of pension spiking," said Chiang. "The discouraging news is CalPERS's lack of robust auditing, underutilization of advanced technology, and its generally passive approach to the problem invites abuse."
Among the 11 member agencies reviewed were the California Department of Fish and Wildlife, the California State University Chancellor's Office, and Riverside County.
Chiang said CalPERS has a number of electronic risk assessment tools that can be used to detect pension spiking, but does not effectively use them. Instead of applying these tools on a monthly basis, it only performs an assessment once a year.
"Compounding the deficiencies inherent in an approach that does not systemically screen data on a frequent basis, CalPERS generally only reviews pay data for spiking when an employee of a member agency is about to retire," the controller's office said. "This lack of up-front, real-time accuracy verification needlessly creates opportunities for abuse to occur."
Part of the problem, according to the controller's office, is a lack of auditing resources to effectively oversee CalPERS member agencies. At the time of the review, available resources limited annual reviews to only 1.5% of CalPERS' membership.
The review of CalPERS follows a recent vote from the board to change retirement calculations for new government hires. The decision has received criticism from Gov. Jerry Brown who raised concerns about pension spiking and said it undermines recent pension reforms.
Fitch Ratings released a recent report saying the new calculations will likely raise funding pressures on public employers.
The controller's office recommends that CalPERS address its understaffing immediately, make use of its electronic tools, and enact a more rigorous, prevention-based approach to combat pension spiking.
In a response to the controller's review, CalPERS said it has increased efforts to monitor compliance of its agencies in recent years, including increasing its audit staff and, in the last year alone, doubling the number of audits of contracting public agencies to 99.
"We agree on the importance of a proactive and automated system to detect pension spiking," said Rob Feckner, President of the CalPERS Board of Administration. "Long before the Controller's Office began their current review, CalPERS saw the need for a 21st century, state of the art technology system and we successfully implemented it in 2011. That is one of the reasons why the SCO's report 'did not identify pension spiking' among the 11 agencies they reviewed."
CalPERS said it's also developing a business intelligence program using technology and data analytics to identify payroll anomalies across its membership. This will allow the pension fund to focus its auditing efforts on contracting agencies most at-risk for reporting efforts, they said.
CalPERS said it agrees that it needs a larger audit staff, which is why they have significantly increased it and plan to continue to increase it in the near future.