A public pension reform bill signed by Gov. Brown last month attempts to curb abuses such as two Contra Costa fire chiefs retiring, at ages 50 and 51, with lifetime pensions far above their final salary.
One chief with a final annual salary of $185,000 received a $241,000 annual pension, and the other had a final salary of $221,000 and received a $284,000 pension, the Contra Costa Times revealed.
“People point to me as a poster child for pension spiking, but I did not make these rules,” Moraga Orinda fire chief, Peter Nowicki, told the Wall Street Journal in 2009. He stayed on as a consultant, receiving $176,000 in pay on top of his $241,000 pension.
The reform bill takes several steps to curb “spiking” by boosting the pay on which pensions are based: a Social Security-linked cap on pensionable pay, a ban on unused vacation and sick time and other add-ons, and a three-year average instead of one year.
These changes only apply to new hires, following the view that the courts have said pensions promised current workers on the date of hire are “vested” rights, protected by contract law, that can only be cut if offset by a new benefit of equal value.
But the reform bill also has two provisions aimed at current workers in the 20 county systems operating under a 1937 act. The independent systems, among them Contra Costa, would be the untamed Wild West of spiking, except much of it is court ordered.
A 1997 state Supreme Court decision in a Ventura County deputy sheriffs suit said under the 1937 act cash commonly received for things other than salary counts towards pensions. On some lists, it’s 60 items including unused vacation and sick time.
The ruling came despite agreements during contract bargaining that the additional pay would not count toward pensions. An unfunded pension debt created by the ruling grew when the decision was made retroactive, giving retirees a hefty pension increase.
For current workers, the reform bill, AB 304, limits the non-salary pay that can be counted toward pensions to the amount earned in a 12-month period, preventing the use of multiple years to boost pensions.
The argument by the bill drafters is that the Ventura decision has been misinterpreted to allow the use of multiple years. So the bill is said to simply correct a mistaken view, not infringe on vested rights.
A second part of the bill that could curb spiking by current workers gives the county systems new authority to police spiking. The county systems, ranging in size from Los Angeles to Mendocino, have varying means and tendencies to check for spiking.
The nine-member pension boards are dominated by labor-management representatives with a stake in the system. Reformers say board members should be independent with a financial background useful in managing pension fund investments.
But for whatever reason, most of the county systems are said to have done little to police spiking, sometimes citing a lack of clear authority. And legislation to strengthen spiking control in the county systems has been resisted in the past.
In 1993, the giant California Public Employees Retirement System sponsored anti-spiking legislation for its members, SB 53, that limits the use of supplemental pay and created a screening unit.
Similar legislation for the 1937 act counties, SB 2003, failed the following year. That was three years before the court ruling in the Ventura suit, which required the county systems to include supplemental pay when calculating pensions.
Two years ago a bill tightening spiking controls for CalPERS and the California State Teachers Retirement System, SB 1425, was vetoed by former Gov. Arnold Schwarzenegger.
The governor said he vetoed the bill because it was linked to another anti-spiking bill covering the 1937 act county systems, AB 1987, that “does not provide real pension reform.”
When the Legislature began reworking Brown’s 12-point pension reform plan, skeptics thought the outcome would be limited to union-supported curbs on abuses such as spiking, not major cost-cutting structural changes.
(Surprising to some, for new hires the reform bill imposed a much lower pension formula, capped the pay on which pensions are based and declared that employees should equally share normal costs with employers.
(The bill also lifted restrictions and allows employers, through bargaining after a five-year phase in, to have current employees begin sharing the cost of pension debt, the “unfunded liability” that ballooned in recent years as investment earnings fell short.)
Spiking, which angers some union officials, was an obvious target for two reasons. If the usual employer-employee contributions have not been paid for the amount of the spike, the higher cost is spread among all employees in the retirement system.
The publicized spiking, nearly always by management not rank-and-file employees, appears to be an obvious abuse that can be used by critics who contend that overly generous public pensions are too costly for taxpayers.
It may not have been technically spiking, but a Los Angeles Times report in July 2010 that the city manager of Bell had an outsized salary, $787,637, prompted CalPERS to form a task force, change internal policies and review members with big salaries.
CalPERS reduced 329 pensions, mainly due to incorrectly reported pay, the Times reported last year. The expected pension of the city manager, Robert Rizzo, was cut from $650,000 to $50,000. His assistant, Angela Spaccia, was cut from $250,000 to $43,000.
The expected pension of the Bell police chief, Randy Adams, was cut $100,000, but he will still receive $287,066. Last May CalPERS announced plans to cut the pension of a former city of Vernon official, Bruce Malkenhorst, from $540,876 to $115,848.
The Bell scandal and its aftermath was a setback for the notion that CalPERS, with its two decade-old screening unit, had been keeping a tight check on spiking.
At CalSTRS, some think there is a structural check on spiking: a rigid salary schedule and a “hybrid” plan that puts supplemental pay (e.g., summer school) into an individual investment plan with a guaranteed minimum return.
But amid anti-spiking legislation prompted by the inflated Contra Costa pensions, and an internal conflict, CalSTRS began a review of its reliance on automated checks, resulting last year in a new screening unit and a hotline for reporting abuse.
A CalSTRS analyst, Scott Thompson, concerned about lax spiking controls for several years, was fired for reducing a pension without authorization and refusing to restore it. The State Personnel Board upheld the firing, and Thompson filed a lawsuit.
State Controller John Chiang criticized the spiking controls of the California State Teachers Retirement System in a report last month. He said CalSTRS does not adequately audit employers and cited examples of big pay raises shortly before retirement.
The CalSTRS response said the new screening unit has identified “270 suspected instances of spiking” since last December. CalSTRS announced last October that the pensions of 44 Yuba Community College retirees were being cut due to spiking.
A “retirement enhancement” had been incorrectly reported dating back to 2003, resulting in a total overpayment of $844,000. After reducing the pensions to the proper amount, CalSTRS began collecting the overpayment with a 5 percent monthly deduction.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/