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Fake janitors skim $2.2 billion from trust fund?!  Investigations by Joe Fried and the PPTO lead to Inspector General finding of $2.2 billion in unauthorized benefits! 

In 2002 and 2003, the Government Accountability Office (GAO) reported that thousands of retiring teachers in Texas were using a loophole (the so-called GPO "exemption") in order to bypass the GPO double dipping prohibition. (See “Congress Should Consider Revising the Government Pension Offset ‘Loophole’,” available at http://www.gao.gov/new.items/d03498t.pdf).  Use of this exemption allowed the retiring teachers to collect their own governmental pensions (which tend to be relatively opulent), while also collecting Social Security spousal and survivor benefits.  The GAO report concluded that the loophole would cost the Social Security trust fund hundreds of millions of dollars. 

To qualify for the GPO loophole, a retiring teacher had to work his or her last day, prior to retirement, in a position simultaneously covered by Social Security and the state pension plan, which is the Texas Teacher Retirement System (TRS).  Generally, a retiring teacher would do this by morphing into a janitor (or cafeteria worker or clerk) - one day prior to his or her retirement.  A cooperating school district would then pay the 1-day janitor a nominal amount (usually minimum wage), and would withhold 2 or 3 dollars of FICA tax, plus TRS, from his paycheck.  The dual withholding of FICA and TRS was what the retiring teacher needed to effect the GPO "exemption," and the pay stub was the only evidence he would need to present to the SSA upon his retirement.  That pay stub would qualify the teacher-janitor for about $113,000 in benefits!*

The results of the investigation conducted by Fried and PPTO were given to the OIG.  The Inspector General conducted his own independent investigation and has concluded that $2.2 billion or more could be lost by the trust fund as a result of 1-day hiring programs.  Some results of the Inspector General audit are shown below.  The rest can be found at http://www.ssa.gov/oig/ADOBEPDF/A-09-06-26086.pdf.

    *You are probably wondering why he would qualify for these large benefits, and you are right to wonder!  We carefully reviewed the wording of the so-called "GPO exemption," and do not believe that such an exemption was intended by Congress.  We think it was simply sloppy wording in the Code.  The loophole was eliminated by legislation that became effective on July 1, 2004.

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Excerpts from the Office of Inspector General report on Texas schools

The Inspector General's audit found:

"...individuals employed as 1-day workers by the seven Texas school districts did not appear to meet the requirements to receive a GPO exemption.  This occurred because of the questionable nature of these individuals' employment.  We also found that five of the school districts [of 7 audited] did not have the authority to provide these individuals Social Security coverage" (emphasis added).

Why was the employment "questionable"?  The OIG found that workers effectively paid their own wages via large, so-called "processing fees."  The report noted that one district collected $1,335,205 in fees from 4,313 1-day workers.  Yet, the district acknowledged that "if it had not collected application fees, the school district would only have hired three or four individuals."  Imagine, just 3 to 4 workers out of 4,313 were actually worth their wages.  The rest were hired because they paid large fees to the district.  How much did that one district cost the Social Security trust fund?  Nearly one-half billion dollars!

The employment was questionable for a second reason:  So many 1-day workers were hired that they could not possibly be of any service to the school districts.  For example, a tiny district, with just over 900 students in total, hired 502 part-time employees on a single day!  Is it possible for a district with 900 students to need 502 extra workers on just one day  (a single day that will cost the trust fund nearly $50 million)?

Why didn't the districts have "authority" to give Social Security coverage to the 1-day custodians"?  In several cases, they had signed written agreements with the Social Security Administration, stipulating that Social Security coverage would not be given to workers in part-time positions.  OIG determined that these were, indeed, part-time positions.  Therefore, the districts had no authority to deduct FICA tax from the wages of the workers. (For more explanation, click here>>.)

In its report, OIG estimated that the 1-day worker programs of these 7 tiny Texas school districts will cost the trust fund billions.

"...we estimate that 19,212 individuals will receive $110 million in spousal benefits annually to which they may not be entitled.  Over their lifetimes, they will potentially receive about $2.2 billion in spousal benefits" (emphasis added).

The table, below, gives a recap of the Inspector General's findings with regard to the 7 districts it tested.  These 7 small Texas school districts created programs that may cause Social Security to distribute more than $2 billion to unqualified beneficiaries.

The Inspector General identified an additional 8 districts that may have created similar, but smaller programs.  Those programs may cost the Social Security trust fund an additional $353 million, for a grand total of over $2.5 billion in improper disbursements.  The 8 districts are Hidalgo, Yoakum, Iraan-Sheffield, Hunt, Ft. Davis, Anahuac, Port Arthur, and Somerville ISDs.