Teacher Retirement System of Texas combats pension spiking
It's a common retirement trick, Texas educators say -- so much so that they have coined it the "administrative upward mobility train."
It goes something like this: Work as a central office administrator for a midsize suburban school district. As you near retirement, get hired by a large, urban district for much higher pay. Cash out three years later. Or a variant: Work as a principal, and as you near retirement, get a central office job, with a nice pay boost.
Because Texas calculates public school employee pensions on the final three or five years of salary, the more you make at the end of your career, the higher your lifetime pension check will be, said Phil Lynch, a consultant who advises educators to maximize earnings in their final years.
"In a lot of ways, I try to capture every advantage possible on their behalf for retirement," he said.
But the Teacher Retirement System of Texas has seen a big drain as some have increased their pensions by up to 30 to 40 percent because of salary boosts in their final working years, officials say. Retirement system officials say that is a gaming of the system known as "pension spiking."
So the state's largest public pension, valued at $96 billion as of last summer, has capped annual compensation increases for the purpose of calculating benefits at 10 percent or $10,000, whichever is greater.
"I'm pretty passionate about this type of abuse," said system Executive Director Ronnie Jung, as he recommended the cap to board members in December. "It paints a black eye."
The cap, approved 5-3 by the board, takes effect in the 2011-12 school year and will mostly affect top administrators, including deputy superintendents, superintendents, chief financial officers and central office administrators, system officials said.
Opponents of the rule said they fear that such a tight restriction will penalize those who rightfully earned a pay hike. Take the situation of a teacher's aide who is promoted to a full-time classroom teacher, they say. Is that spiking?
"I suggest that's not spiking," said board member Philip Mullins, who works as a power plant operator at the University of Texas at Austin. "I suggest we send this back to staff and work out something which redefines what we're trying to do here."
Board member Nanette Sissney, a Whitesboro school counselor, said she understands the staff's intent. "We know there are people who have gamed the system, and we know there are people who will continue to try to game the system," she said.
But, she said, "I have to wonder the fairness. ... It's not fair for someone who legitimately receives that increase."
Jung's response: Most teachers do not receive large enough pay increases to be affected by the rule.
If anything, the new rule should encourage top administrators to work an additional year to have more pay counted.
"If you work one more year, you get over that hurdle," Jung pointed out.
The Teacher Retirement System has been reviewing pension spiking since summer 2010, spokesman Howard Goldman wrote in an e-mail response to questions by the Star-Telegram.
The objective was to make the calculation of compensation "more predictable, reliable and transparent," according to September 2010 board minutes.
The system could not determine the economic impact of the rule change. But Jung said spiking creates a liability for those contributing to the system. Members contribute a portion of their salary, and the state pitches in the rest. Investments allow the fund to grow.
"You're taking money from the rest of the retirees ... and only contributing to the system three years and getting 30 to 40 percent more in retirement," Jung said.
Lynch, who counsels dozens of top administrators when they retire, lauded the cap.
"I want my clients to retire with absolutely as much money possible," said Lynch, who runs his business out of Arlington. "On the other hand, we want the TRS system to be solvent forever. If this affects the solvency of my clients in 20 to 30 years, I've got to step back and look at both sides of this issue."
Teacher groups also favor the new rule.
"We would be onboard with basically anything that makes the system more secure and less likely to be manipulated," said Richard Kouri, public affairs director for the Texas State Teachers Association.
Tim Lee, executive director of the Texas Retired Teachers Association, echoed that. To game the system, he said, some administrators would leave car and cellphone allowances out of their salary calculation to keep their pension contributions low. Then, as they neared retirement, they would tack them on to maximize pensions, he said.