School district’s tax-deferred payments for official’s retirement total $339,346

The Newport-Mesa Unified School District has paid $339,346 in tax-deferred money to its chief business official through checks and a separate retirement fund over the past decade.

Beginning in 2006, four years into Deputy Supt. Paul Reed’s career at Newport-Mesa, the district’s board of education agreed as part of his contract to reimburse Reed for his annual purchases of a half year of credit, also known as “airtime,” from the State Teachers’ Retirement System. The decision was made “in recognition of the board’s desire that [Reed] serve the full term of the agreement” which was set to expire in 2008.

The credit, in essence, increased Reed’s years of service in public education in the eyes of the state retirement agency. That number is used as part of a calculation to determine an employee’s pension, according to CalSTRS.

During the first fiscal year Reed began receiving the benefit, the credit cost the district $31,704, records show.The cost of the credit increased each year, reaching $36,694 by 2009, the last year Reed elected to purchase additional CalSTRS credit.

From 2006 to 2009, the district paid a total of $138,449 toward the purchase of two additional years of credit for Reed. The money is not taxable until Reed takes distributions in retirement.

Eventually, instead of reimbursing Reed for airtime, the district began placing additional retirement funds into tax-sheltered accounts for Reed, which he is able to cash out upon retiring. That money is on top of what he will receive in his pension.

It is unclear how much Reed, 68, will be paid monthly from his pension when he retires.

The compensation was brought to light by John Caldecott, the district’s former director of human resources, through documents released to him in accord with the state’s public records law.

“Reed violated the public’s trust by using his authority as the deputy superintendent/chief business official to perpetrate an elaborate hidden scheme to compensate himself with … tax-free money,” Caldecott alleged. “I certainly hope all applicable laws are enforced and Reed is held accountable.”

District and Orange County education officials dispute the idea that any rules were violated.

Reed declined to comment through a district spokeswoman.

Caldecott was fired by Newport-Mesa in January 2015 shortly after he filed a lawsuit against the district to compel officials to release internal emails and other documents related to his claim that Supt. Fred Navarro had created a hostile work environment for employees and retaliated against Caldecott for questioning salary reports to CalSTRS.

After Caldecott presented his findings about Reed to the board of education last month, Reed leaned back in his black leather swivel chair in the district’s boardroom, laughed and quietly said “I’m sorry” to board members as Caldecott left the podium.

“I’m kind of reeling in incredulity at the skewed presentation by a man I used to think of as a friend,” Reed said later in the meeting.

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Payments as vendor

Caldecott has taken issue not only with the amount Reed was paid but also with how the funds were disbursed.

District records show that during the time Reed was purchasing additional CalSTRS credit, from 2006 to 2009, the district was reimbursing him each year as a vendor instead of through the traditional payroll system.

In the 2007-08 fiscal year, the district cut Reed a check for $34,050. Copies of checks from Reed’s account at the Orange County Teachers Federal Credit Union show that he wrote a personal check to CalSTRS for that amount roughly a month before his executive assistant sent a memo on his behalf asking a district business office employee to issue reimbursement to Reed.

As the district’s chief business official and second in command, Reed oversees the business services department, which includes divisions ranging from fiscal to transportation.

Reimbursing Reed as a vendor put the payments to him alongside those to companies that provide Newport-Mesa with printing, consulting and water services.Vendor lists are in an accounting report that the board approves with other documents as part of its consent calendar during public meetings. Items on the consent calendar are considered routine and typically are not discussed by the board during meetings. They are typically approved by a unanimous vote.

In one instance, only Reed’s vendor number — instead of his name — and the cost of his reimbursement were included on the list.

Funds paid to vendors are not taxed by state or federal agencies before they are disbursed, unlike money paid to employees through payroll, according to Orange County officials.

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Practices not uncommon

At the time Reed was doing so, it was not uncommon for individuals to purchase additional years of credit through the CalSTRS pension system. However, CalSTRS stopped allowing the practice after Gov. Jerry Brown signed legislation prohibiting it as part of the California Public Employees’ Pension Reform Act of 2013 as a way to grapple with billions of dollars in unfunded liability.

Before 2013, CalSTRS members could purchase up to five years of nonqualified service credit. About 700 members purchased service credit each year, according to CalSTRS.

In the 2010-11 fiscal year, Newport-Mesa began purchasing tax-sheltered annuities of “like value” for Reed instead of paying for the CalSTRS credit. A tax-sheltered annuity, also known as a 403(b) account, is similar to a 401(k) in that it enables employees to defer some of their salary in individual accounts. The deferred salary is generally not subject to federal or state income tax until it is distributed, according to the U.S. Internal Revenue Service.

It’s not unheard of for public employees to receive retirement funds in the form of tax-sheltered annuities, according to CalSTRS officials.

So far, Newport-Mesa has paid $200,897 into Reed’s retirement annuities. The board and top staff have said the extra compensation is an incentive to keep Reed from retiring.

“We have the duty to recruit and retain the best and the brightest people in every position within our district,” Navarro said. “Paul has consistently demonstrated his abilities and worth throughout the years and has done an exceptional job at ensuring fiscal responsibility in an effort to support students.”

Board President Dana Black added that it is common for employees to be reimbursed as vendors.

“Paul Reed’s compensation was approved in an open board meeting,” she said. “The contract was attached to the board item for the public’s examination. This process is consistent with our policies and was reviewed by both district and county legal counsel. The board was transparent in this transaction.”

Officials with the Orange County Department of Education agreed that the reimbursement method was aboveboard.

“This specific compensation package is among those that have been audited by the Orange County Department of Education in the course of its routine review process and OCDE has found no irregularities,” said Department of Education spokesman Ian Hanigan.

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Transparency questioned

Though it might be an approved practice in school districts across the county, an observer besides Caldecott questioned the transparency of the way Reed was compensated.

Glenn Rothner, an employment and labor law attorney at Rothner, Segall and Greenstone in Pasadena, took issue with the fact that Reed’s contract doesn’t state specific costs for the CalSTRS credit.

“The purpose and spirit of the Brown Act is to make sure that when it comes to expenditures that the average citizen who pays attention will able to know what’s going on,” Rothner said. “Even if they were persistent enough to go to board meetings and at the same time make a public records act request, they would have had no [idea] that based upon this language and contract that this individual would have been reimbursed for airtime in the tune of hundreds of thousands of dollars in addition to his very high salary.”

At the same time Reed was receiving additional retirement compensation, his salary was increasing.

According to his contract in 2005, Reed was paid $191,275 that year, plus cellphone and transportation allowances. This year, Reed is expected to earn $259,143 for 224 days of work, along with a $7,800 transportation allowance and a $1,200 cellphone allowance, documents show.

“At this salary level, [Reed] has means to provide very well for himself even on top of what the STRS benefit would be without airtime,” Rothner said.

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‘Exceptional employee’

However, district officials believe Reed’s expertise is well worth his compensation.

Reed began working at Newport-Mesa in 2002 after spending 26 years in the Irvine Unified School District, where he got his start as a labor negotiator.

His penchant for holding the line on Newport-Mesa’s spending — whether on projects or programs — has earned him the nicknames “Dr. No” and “The Great Barrier Reed.”

Still, his calm nature and aptitude in balancing budgets during financially tumultuous times have earned him his role as a trusted advisor among top district staff and the board of education, officials say.

“Paul Reed has been an exceptional employee,” Navarro said. “Through his tenure at NMUSD, he has saved the district millions of dollars.”