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Friday, December 14, 2012

Working hard and retiring smart

I always cringe when articles like this one by Bloomberg, $822,000 Worker Shows California Leads U.S. Pay Giveaway, appear.  They decry the large overtime and sick leave payments and, invariably, highlight a few unfortunate individuals for exposure.  For better or worse, the salaries of public employees in Arizona are public record, and there are several searchable online databases that contain this information.

I can not speak to all government employees, but there is some additional explanation necessary for overtime and sick leave when it comes to public safety.  Due to the nature of their work, public safety departments try to  maintain constant staffing, which means they make every attempt to fill positions vacant due to sickness, injury, or vacation, so that the minimal level of service can be provide 365 days of the year.  This avoids brownouts or other service gaps that compromise public safety.  In order to do this, overtime becomes unavoidable and sick leave use is discouraged in order to keep those very same overtime costs down.

While there are no doubt plenty of abusers of overtime and sick leave policies, many of these costs are unavoidable.  If employees were not compensated for unused sick leave (usually at 50% of final hourly wage), they would simply use it.  We can debate the ethics of using sick leave when one is not sick, but the economically smart decision would be to use a benefit rather than lose it.  As for overtime, there are some employees that are more willing to work it.  Whether it is for financial reasons or sheer love of the work, some people are going to work more overtime while others may work none.  It is just another aspect of human nature that must be acknowledged and dealt with.

The real problem with overtime and sick leave sellback is how they are used to calculate pensions.  Since pensions, like PSPRS, are calculated on either an individual's high three-year or high five-year salary, the wise financial decision is to work overtime and sell back sick leave during those high salary periods.  This practice, often referred to as "pension spiking," creates an artificially higher pension that does not reflect what the individual paid into the pension over his total years of employment.  Pensions are supposed to use long-term compounding to achieve returns to pay future benefits, but pension spiking negates this advantage.

Employees should have overtime and sick leave sold back recognized in their pension, but there should be a formula where overtime worked and sick sold back over the employee's entire career is used to calculate a final pension, not just the a high years' period.  This would make more actuarial sense and protect the long-term health of the pension.

As a final note, the attempt to demonize individual employee's is not fair as one should always do what is best for oneself and one's family.  If an employee fairly utilized the rules in place to maximize his pension, the employee is not a villain.  The problem with the article referenced in the first paragraph is that egregious individual cases are the main takeaway.  This is a systemic problem, not a problem with individual greed.

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