For nearly a decade, California's top-paid school administrators got to collect six-figure lump sum cash payments in addition to their pensions by taking advantage of a little-known legislative provision that was intended to help retain and recruit teachers during the dot-com boom.
The program, known as the "partial lump sum" payment option, was approved by the state Legislature in 2000 to boost the state's teaching ranks at a time when California was projected to face a teacher shortage.
The benefit, which is allowed in some form in about a dozen states, lets retiring educators tap into their pension accounts for a large cash payment in exchange for a reduced monthly pension check.
Yet many who took advantage of the benefit from the California State Teachers' Retirement System turned out to be highly paid administrators who already stood to receive generous monthly pension checks, according to data obtained by The Associated Press under a California Public Records Act request.
None of the retirees on the AP's top 10 largest partial lump-sum payments were teachers or administrators in San Diego school districts.
According to the AP's analysis, approximately 180 participating retirees receiving $100,000 or more a year in pensions took home an average additional lump-sum payment of $147,000 when they retired between 2002 and 2010.
In the largest such payout, Alan Nishino took a lump sum payment of $421,000 when he retired in July 2009 as superintendent of the Morgan Hill Unified School District in Santa Clara County. He continues to draw a $200,000-a-year pension.
"That wasn't our target audience, I can guarantee you that," said Jonathan Lightman, executive director of the Faculty Association of Community Colleges, after being informed about the AP's review of the program.
The faculty association sponsored the bill that established the enhanced benefit. A legislative analysis from that time showed it was intended to encourage educators to work an additional three years to age 60 because the state was projected to need 300,000 teachers within the next decade.
"When Wall Street was performing really, really well, the whole idea was, `How do you use the gains in the stock market as a way to incentivize people to either enter or to stay in education when private-sector salaries were far outstripping that in education?' That really was the question," Lightman said.
He added: "There's always policy decisions that miss the mark."
While CalSTRS says the program was designed not to cost the system extra money, the true costs are unknown. Lawmakers never included language in the two-page bill requiring an assessment or review, and it was passed unanimously with bipartisan support at a time when pension funds were enjoying high investment returns before the recession took its toll later in the decade.
Inglewood Democratic Sen. Rod Wright, who carried AB2456 in the Assembly, did not return requests for comment.
It's not clear exactly how many retiring educators took the lump sum payments in the eight years the option was available, nor is it clear whether the program succeeded in attracting and retaining classroom teachers. By law, the program expired at the end of 2010.
The AP requested data from CalSTRS of 6,600 retirees whose annual pensions are $100,000 or more. A review showed that nearly $27 million was paid out through the lump-sum program to the system's highest paid employees, with many of them cashing out at a time when the pension system was suffering significant investment losses.
Dhyan Lal received a lump sum of nearly $380,000, the second highest, when he retired two years ago as superintendent of the Lynwood Unified School District in Los Angeles County. In addition, he collects $185,000 a year from his remaining pension.
And Jay Hoffman, former superintendent Nuview Union School District in Riverside County, used his $379,000 lump-sum check to buy whole life insurance with a guaranteed payout to benefit his wife and two daughters. In exchange, Hoffman, who now serves on the Riverside County Board of Education, is receiving a reduced annual pension of $170,000.
By comparison, the average California teacher who retired last year received $49,000 a year in pension benefits.
Critics say the problem with such pension enhancements is that they tend to favor those who already were going to be well off in retirement, rather than workers with more modest salaries and benefits.
"Enhancements do tend to favor a small group at the very top of the system and do not enhance the pension benefits for rank-and-file workers," said Frank Keegan, who works as the editor of State Budget Solutions from Connecticut, which advocates for budget and pension reform.
Nishino and Lal didn't return requests for comment. Hoffman, 62, said after working in public education for 37 years, he didn't think he was taking out more than he earned.
"You know, we didn't cheat anyone else," said Hoffman, 62. "CalSTRS may not have had as much capital to invest by doing it that way. I suppose that might be a piece of the dynamic, and perhaps that's why they did away with the lump sum."
Reform advocates say it is another example of an enhanced benefit given to public employees without considering how it will affect the pension fund's health. The lump sum option applied only to CalSTRS, which covers teachers, school administrators and community college faculty, and not to the state's main pension fund, the California Public Employees' Retirement System.
Marcia Fritz, president of the California Foundation for Fiscal Responsibility, which advocates for public pension reform, said the lump sum withdrawals were a drain on a taxpayer-backed teacher retirement system that already is underfunded by $64.5 billion.
She said such a cash-out should not have been allowed because the systems are designed to distribute small amounts of money over time to cover guaranteed lifetime payments to a retiree.
"The big problem is that the lump sum can be taken out no matter what the market is doing," Fritz said. "Defined benefits were never designed for lump sum cash-outs."
CalSTRS lost roughly a third of its value between 2007 and 2009, and still has not fully recovered.
Gov. Jerry Brown last week announced a pension reform deal to begin shoring up the state's public pension systems. The Democratic plan would cap future pension benefits at $132,120, among other changes.
Ed Derman, deputy chief executive officer of CalSTRS, said the lump-sum benefit was not a burden on the pension system, which makes payments to 250,000 retirees.
When retirees took a lump sum of up to 15 percent of their lifetime benefits, their monthly pension check was reduced correspondingly using an actuarial formula that accounted for a retiree's age and average lifespan, among other factors.
"It's not a benefit that cost anything; it didn't cost the system a dime," Derman said. "Recognize that what they take as a partial lump sum is at the expense of their own benefit. They're not getting anything for free out of this."
Derman acknowledged that some retirees who take the lump sum could end up receiving more in retirement than they otherwise would have under the straight pension model, depending on their life span.
He said there are "lots of different scenarios, and all of these things pay for themselves."
California isn't the only state to offer lump sum options, said Keith Brainard, research director at the National Association of State Retirement Administrators. Arkansas, Kentucky and New York are among about a dozen states that allow public retirees to cash out a portion of their benefits.
"The basic idea is to provide a little more flexibility for the retired member," Brainard said. "For example, if a retired member is seeking to pay off some debt, or finish off their mortgage upon retirement, something like this can allow them to do that."