Texas Teachers Scam

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! 

Background:

Normally, a person can only collect the greater of his/her own Social Security benefits or the spousal/survivor benefits he or she would get on the basis of his/her spouse’s employment.  This prohibition on “double dipping” has always been in place for workers in the private sector.  For governmental workers, the prohibition was created about 30 years ago by legislation known as the Government Pension Offset (GPO).  The GPO mandated a $2 reduction in spousal benefits for every $3 dollars of governmental pension benefits received.

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!*

In 2004 and 2005, Joe Fried and the PPTO conducted an extensive investigation of several school districts in Texas to determine whether all of the retiring teachers were, indeed, qualified to use the lucrative loophole.  Were they really performing services?  (Or, were the jobs “make-believe”?)  Were they really paid wages? (Or, did the 1-day workers effectively reimburse the school districts for the wages?). Social Security coverage can not be given unless the employment is bona fide.

Also, it appeared that some school districts had no legal authority to withhold FICA tax from the pay of these workers because of special “Section 218 agreements” they had signed years earlier. In those agreements, the school districts stipulated (to the Social Security Administration) that they would not give Social Security coverage to anyone in a “part-time” position.  This raised an important question: Were the school districts giving Social Security coverage to workers in part-time positions (in violation of their Section 218 agreements)?

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://oig.ssa.gov/sites/default/files/audit/full/pdf/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”?  As noted above, 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.

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.

School district May cause Trust Fund to lose:
    West $203 million
    Hudson $192 million
    Lindale $465 million
    Premont $235 million
    Coleman $409 million
    Sweeny $326 million
    Kilgore $354 million
              Total $2.18 BILLION

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.

For the full Inspector General report click here>>

Click here for more information pertaining to West ISD and its “unauthorized” Social Security coverage.

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Media Headlines:

“Loophole could still cost us billions”  Houston Chronicle

“Spousal Benefits Abuse” The American Spectator

“One-day jobs yield lifetime benefits” Tyler Morning Telegraph <Full text>

“Loophole could cost Social Security billions …”  Ft. Worth Star Telegram

The Teachers’ lesson: How to Scam Social Security, by David Hogberg, Ph.D. (published by the National Center for Public Policy Research)

“Teacher retirement loophole under fire … The loophole itself was legitimate, [the Inspector General] says in his report, but the way … the school districts tried to take advantage of it was not.”  Waco Tribune-Herald
“Texas teacher retirements tripled during the five years the loophole was irresponsibly promoted by predatory recruiters and a few school districts hoping to turn a quick profit.” by Congressman Kevin Brady, 8th District of Texas (Houston Chronicle)

 

**Are Texas teachers the real victims?

Commentary by Joe Fried, March 7, 2007

In the March 5, 2007 Houston Chronicle, Gayle Fallon, the President of the Houston Federation of Teachers, claimed:  “Teachers are routinely defrauded out of billions of dollars annually that are rightfully owed them from the Social Security system.”  Specifically, she asserts, they are cheated out of spousal and survivor benefits that “almost all [married] Americans” get.  However, that is simply false.

Since spousal benefits were introduced in 1939, no one except for state/local governmental workers has been allowed to “double dip” for Social Security benefits.  The ordinary guy (i.e., 96% of workers) can only collect the greater of his own benefit or the spousal benefit – not both. Until 1977, state/local workers in Texas routinely “double dipped” (i.e., collected both spousal and primary benefits with no offset). We all thought the law was fixed in 1977, and it was for about 20 years. Then, some unscrupulous characters managed to muscle their way through a loophole in the law. (Was some of that “muscle” union political influence?)  Fortunately, the scam has now been exposed.

The unions representing Texas teachers try to confuse us by citing the rules for private pension plans. They say, “If a Texas teacher were in the Acme Mfg. Pension Plan, or in a private IRA, the pension benefits he received would not affect the amount of his spousal benefit.”  But here is what they don’t say:  Texas teachers do not pay FICA tax (unlike the other 96% of us).  The reason?  They assert (correctly) that they are in a state governmental plan that is an alternative to the federal Social Security system (and not merely another private plan).  Being in an alternative governmental plan is the sole basis for their exemption from paying FICA tax.  Suddenly, however, we are supposed to imagine that this state governmental plan – exempt from FICA tax – is really just another private plan or IRA.

The unions want to eat their cake and have it too.  When it comes to paying the FICA tax, they claim exemption because the Texas Teacher Retirement System (TRS) is governmental, but when it comes to the spousal benefit rules they want us to pretend that TRS is merely another private plan. Some of these union leaders need to go back to school.