From CalPensions’ Ed Mendel: Public pension

A new bill makes yet another attempt to crack down on public pension “spiking,” a bag of tricks that last year famously gave two Contra Costa County fire chiefs monthly pensions far larger than their salaries.

The chairman of the Assembly public employees retirement committee, Ed Hernandez, D-West Covina, wants to add spiking to his reform bills aimed at regulating “placement agents” paid big fees for helping investment firms get pension funds.

But the anti-spiking bill he introduced last week, AB 1987, could face a lack of support from labor groups, who may be divided on the issue, as well as criticism from reformers who think the proposal does not go far enough.

“Employees like our teachers, nurses, firefighters and police officers deserve an adequate and secure retirement that is not threatened by a few unscrupulous individuals trying to fatten their own benefits,” Hernandez said in a news release. “And we owe it to taxpayers to guard against these abuses and make certain tax dollars are used fairly and equitably.”

The lifetime monthly checks provided by public pensions are based on age, years on the job and the “final” pay. A common way to spike a pension is to boost the final pay by cashing out vacation time, administrative leave and a wide variety of other things.

The Contra Costa Times revealed last year that one fire chief, age 51, retired with a final salary of about $221,000 and an annual pension of $284,000. Another chief, age 50, retired with a final salary of $185,000 and a pension of $241,000.

A governor’s pension commission report two years ago contained a response by three of the largest retirement systems to a list of “30 ways to spike your pension” compiled by Ted Costa of People’s Advocate, a grass-roots sponsor of initiatives.

Pension spiking angers some labor union officials for two reasons. The usual employer-employee contributions often have not been paid for the amount of the spike, which means the 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’s really threatening the retirement security of the vast majority of people in pension systems,” Scott Adams of the American Federation of State, County and Municipal Employees, AFL-CIO, told a CalPERS forum in Sacramento last month.

“It may not be a huge amount of money,” Adams said of spiking. “But it’s in effect stealing from members to do this. I think everybody in this room expects the Legislature to come up with some anti-spiking proposals.”

There have been several cycles of pension spiking reform. In 1993, the giant California Public Employees Retirement System backed legislation, SB 53, creating screens and audits to check for spiking.

“From 1994 to today it’s a breath of fresh air,” Ken Marzion, a retiring top CalPERS official told the forum. “We think our system is working very well. I would encourage others to use a similar process.”

An anti-spiking bill for the 20 county systems covered by a 1937 act, SB 2003, failed in 1994. The two fire chiefs in Contra Costa County receive their pensions through a county system covered by the 1937 act.

In a suit filed by Ventura County deputy sheriffs, the state Supreme Court ruled in 1997 that what some had previously regarded as “spiking” was actually required for the county retirement systems.

Among items the court said were improperly excluded from final pay: bilingual, uniform, education, meals, leave, holiday, training, and longevity bonuses. A retroactive increase was approved for retirees with pensions not based on the pay items.

Still, a report for the Contra Costa system found that the pension of one of the fire chiefs, San Ramon’s Craig Bowen, appeared to be improperly based on pay for administrative leave and vacation time, a spike “approaching a million dollars over time.”

California offers a unique opportunity for spiking. A Sacramento Bee investigation reported in 2004 that California was the only state where the pension is based on the highest salary in a single year, rather than an average of several years.

Boosting pay by cashing out leave time or briefly taking a higher-paying job would result in a much smaller pension increase if “final pay” is an average of the last three years on the job.

The Bee said the one-year rule was a last-minute addition to a state budget agreement in 1990, the price of approval from public employee unions concerned that accounting changes might shrink retirement benefits.

In recent years the Schwarzenegger administration has negotiated labor contracts that now put most new state hires under a three-year rule. Among those who still have a one-year rule are the Highway Patrol and firefighters.

The anti-spiking bill introduced by Hernandez last week tightens the three-year rule. The average is not based on the individual’s pay, but instead on the average pay increase received by other workers in the same or a similar group.

Pay changes mainly made to increase pensions could not be used as part of pension-setting final pay. Retirement systems would have to conduct audits to check for spiking, much like CalPERS.

To curb “double dipping,” the Hernandez bill also requires at least a six-month delay before a person retiring with a public pension can take another job that provides a public pension.
“The anti-double dipping provision is very good and long overdue, especially with our state’s high unemployment and an excess of talent that can fill jobs vacated by those who retire,” said Marcia Fritz, the president of a pension reform group.

But Fritz said via e-mail the bill gives retirement boards too much “latitude” in deciding whether pay increases close to retirement are intended to spike pensions. She said any conversion of time off into cash should not be included in final pay.

Her group, the California Foundation for Fiscal Responsibility, is trying to gather enough signatures to place an initiative on the November ballot that would give new state and local government employees lower monthly pensions and extend retirement ages.

“We are continuing to raise (money) for signature gathering, but it’s very difficult,” Fritz said. “Polls indicate that voters prefer a 401(k) solution vs. a more modified ‘defined benefit,’ and our (money) supporters are telling us that, too.

A Public Policy Institute of California poll last month said two-thirds of Californians (67 percent) favor switching new public employees from monthly pensions, a defined benefit, to the 401(k)-style individual investment plans widely used in the private sector.

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/ Posted 22 Feb 10