November 2010 – Day 5: Pension Double Dipping
Some retired teachers rehired while drawing pensions
Craig Harris – The Arizona Republic – Nov 2010
Retired teachers are returning to classrooms across Maricopa County, some making $100,000 a year by collecting a pension and a paycheck at the same time, while retired administrators are doing the same thing and making more than $200,000.
Welcome to what is commonly known as double-dipping, education style.
With the Deer Valley Unified School District leading the way, nearly every public-school district in Maricopa County is using a legal loophole to allow senior educators to simultaneously retire and remain on the job without interruption, records obtained by The Arizona Republic show.
That means they can begin collecting their publicly funded pensions without ever missing a regular paycheck. In most cases, it works this way: When they retire, they are hired by a private firm that contracts their services back to the school district from which they retired. Instead of being paid by the district, they are being paid by a firm that is being paid by the district.
The loophole itself is not significant. State law says that retired state educators only can come back to work part time through that arrangement during the first year of retirement. After that first year, though, they can return to working full time directly for the district.
What is more significant, critics say, is the financial impact, a blow the underfunded Arizona State Retirement System can ill afford.
There are more than 900 educators benefiting from the practice, and by law they stop contributing to the retirement-system trust the minute they retire. By law, their employer also stops contributions to the trust on their behalf.
As they continue to work, they are preventing new employees from getting those jobs – employees who, along with their employer, would be contributing to the pension system.
That means the burden of keeping the pension system financially healthy is shifted to other teachers and ASRS members, such as local and state government workers, whose contributions to their pension trust continue to go up.
It also shifts costs among ASRS employers. For example, school districts that don’t allow double-dipping may find themselves contributing more to the trust to keep it healthy, and so might cities and the state.
School districts that allow the practice counter that they are saving money by not having to make pension contributions. They also say the cost usually is less to bring back retired educators because they work for a smaller salary and most don’t receive health-care benefits.
The practice of double-dipping is one example of problems within Arizona’s six public-pension systems. An Arizona Republic investigation has found that increased benefits combined with declining returns on pension-system investments in the past decade have led to soaring costs for taxpayers to keep the public systems afloat. Last year’s tab: $1.39 billion.
The newspaper estimates that the practice of double-dipping is costing the ASRS trust at least $8.6 million in employee and employer contributions this year, based on public records obtained from ASRS and all Maricopa County school districts. Officials from ASRS do not keep records on how much money the system is losing from double-dipping, and they could neither confirm nor deny the newspaper’s findings. But ASRS Director Paul Matson said it was a problem, and he will ask the Arizona Legislature to help fix it next year when lawmakers convene.
“It clearly violates the spirit of the retirement system,” said Rep. John Kavanagh, R-Fountain Hills, the House Appropriations chairman during the Legislature’s most recent session. “We provide a retirement system so when people are too old to work, they can have money to live off of. People who retire and go back to the same job are abusing that gift.”
Andrew Morrill, president of the 31,000-member Arizona Education Association, agrees.
“We can’t afford to do this,” Morrill said. “You are putting greater pressure on the retirement system, and it will drive up contributions.”
Teachers and other employees for public-school districts in Arizona are part of ASRS, which has 220,323 members including municipal, county and state employees. For the past five years, as the practice of educators double-dipping has gone on, ASRS retirees have not seen an increase in pension benefits because the trust is underfunded.
The other five public pension systems in Arizona also are underfunded, but policies on cost-of-living adjustments vary. For example, municipal retirees in the Phoenix and Tucson systems are not receiving pension increases, but retired public-safety, elected officials and correctional officers in three other state systems received increases July 1, their managers say.
In ASRS, workers and employers each contribute an equal amount to the pension trust. That amount is determined as a percentage of an employee’s wages, and the eventual pension payouts come from a defined-benefit plan in which annuities never decrease.
The overall rate, which includes retiree health-insurance costs, has significantly risen during the past decade because of poor market conditions. The rate is expected to steadily increase to 22.96 percent by 2018 before declining as the trust’s financial health improves, ASRS says.
The pension is a defined-benefit plan; it guarantees a level of payment upon retirement.
Some educators defend the practice of retiring and then returning to work.
” ‘Double-dip’ is a negative comment for the people who are now taking the opportunity for phased retirement and have qualified for their pensions,” said Sandra McClelland, founder of Smartschoolsplus Inc., which helps retired educators return to school districts. “They could leave the district and go to a private enterprise. This is a way for the district to get a return on their investment.”
Officials at ASRS, the state’s largest pension system, said double-dipping reduces contributions, but they believe the amount is insignificant to the $23.1 billion trust. Officials have not calculated precisely how much money is foregone, however.
The Republic determined the loss among Maricopa County educators by filing public-records requests with the county’s 57 school districts and obtaining the salaries of retirees still working. Those salaries totaled at least $44.8 million. By multiplying that figure by 19.2 percent – the current total contribution rate by both employee and employer to fund the pension – the missing payments would be $8.6 million.
Stretching the system
The Republic also found:
– There are at least 920 teachers, administrators and office personnel in 50 Maricopa County districts who are double-dipping. Seven districts had no employees double-dipping.
– The average salary for all school employees was $48,748.
– The average retirement benefit for those employees was $30,741. That’s 55 percent more than the average $19,788 ASRS pension.
– The Deer Valley Unified School District had the most double-dippers with 140. Paradise Valley Unified School District was next at 137.
– Twenty-five districts employed more than 10 retirees.
Kevin McCarthy, an ASRS board member and president of the Arizona Tax Research Association, believes double-dipping hurts the pension system.
“You can argue whether or not double-dipping is fair, but that misses the point,” McCarthy said. “The most important point is that it undermines the sustainability of the system. You can’t dress it up as a positive, no matter how you look at it.”
Matson said he would ask lawmakers to impose an “alternate contribution rate” that employers must pay if they hire ASRS retirees. He said the rate would help pay off the trust’s deficit, and it would be roughly two-thirds of the contribution that the employer normally would make toward that employee’s pension and long-term disability.
But that is also likely to drive up taxpayers’ costs because employers will now be making new contributions for the double-dippers. The double-dippers still will not be making payments on their own behalf because they already receive pensions and cannot accrue any additional work credits to enhance those pensions, Matson said.
Matson said he would ask lawmakers to have the new rate take effect in a few years so it wouldn’t hurt school districts that currently are struggling because of the economic downturn.
If the law were in place today, Matson said school districts would pay an amount equal to roughly 6.5 percent of a double-dipping employee’s salary to the trust. For a teacher making $40,000, that would be a $2,600 contribution.
Matson said that for the past four years, ASRS has tried to get lawmakers to impose an alternative rate, but it was opposed by Smartschoolsplus, one of the main contractors that hires retirees and puts them back to work in school districts. The company now supports the plan.
In addition to Tempe-based Smartschoolsplus, the other main contractor that hires retirees and puts them back to work in their districts is Cottonwood-based Educational Services Inc. Both are run by former educators.
Each charges the school district a 4 percent service fee based on an employee’s gross income.
John Tavasci is co-owner of Educational Services Inc. He started his business in 1999 and has worked with about 140 school districts in Arizona. Smartschoolsplus was founded in 2002, and it works with 80 districts around the state.
Both businesses began around the time Arizona was facing a teacher shortage, and they were instrumental in keeping educators in classrooms.
Tavasci said most districts hire retired educators at about 80 percent of what they were making prior to retirement, and many districts no longer pay health-insurance costs of the rehires, which results in more savings.
However, The Republic found some districts giving educators their full pay after retirement and returning to the same jobs.
Tavasci said the educators are “talented people the districts want to keep.” He also said they paid into the retirement system, and it was their choice what to do after qualifying for a pension.
While school districts and the contractors say the districts are saving money because retired teachers are returning for reduced pay, Morrill said it would be less costly to hire a first-year teacher with benefits. And, Morrill said, that first-year teacher would be contributing to the retirement system.
‘A bit of a hardship’
At the Deer Valley Unified School in north Phoenix, Superintendent Virginia McElyea said the deferred-retirement program saves the district money, and it retains valuable, experienced educators who return for less than what they were making.
“It’s a way to make sure we leverage our investment in employees who have been with us for a while,” she said.
The district’s 75 retired teachers who returned to work average $45,378 in salary and $26,765 in pension, for a combined income of $72,143, records show.
The average Arizona teaching wage is $47,277, according to the Digest of Education Statistics. That average teacher, however, would be contributing $4,539 to ASRS, making their take-home pay less than the salary for teachers who double-dip in Deer Valley.
Maria Leyva, president of the Deer Valley teachers union, said the practice puts burdens on other teachers who have to contribute more to the retirement system.
“I don’t resent them for doing it,” Leyva said. “They are seen as mentors, and they help other teachers. But financially, it’s a bit of a hardship.”
In Deer Valley, the biggest combined annual income of nearly $300,000 goes to McElyea, who retired Oct. 28, 2006, but has remained in the top job.
McElyea receives a salary of $182,150 from the district and a pension of $112,355 from ASRS, according to records. As a working retiree, she also saves $17,486 by not contributing to ASRS.
McElyea said it was unfair to lump her retirement pay with her salary because the pension was earned from her years of service.
According to ASRS records, the average retiree gets back every dollar he or she contributed to the system within three to four years of retirement.
“What a person makes in retirement is irrelevant,” McElyea said. “They would make that whether they are at home watching TV or doing something else. I really think if this is an issue that someone is concerned about at the state level, then the Legislature or state retirement system should look at it.”