Featured Post

Was it constitutional for Proposition 124 to replace PSPRS' permanent benefit increases with a capped 2% COLA?

In this blog I and multiple commenters have broached the subject of the suspect constitutionality of PSPRS' replacement of the old perma...

Saturday, August 24, 2013

PSPRS and pension spiking, part III

So did someone say something about spiking?  This video about the highest-paid employees in Tucson city government comes from KVOA, the NBC affiliate in Tucson:

The video is accompanied by this story, which includes a list that shows the compensation of Tucson's top-paid employees.  The list breaks down compensation between base pay and other pay and benefits. For public safety personnel, who make up more than half of the top 100, overtime and sick leave sell back make up significant portions of their compensation.  A searchable and more user-friendly list  from 2011 is available here from the Arizona Daily Star.

KVOA's report does not mention retirement or pension spiking.  However, it does include the current mayor and a former mayor discussing the practice of sick leave sellback.  Current Mayor Jonathan Rothschild says sick leave sellback is something the Mayor and Council are "going to look at this year," and former Mayor Tom Volgy even refers to it as "a lousy practice."  It makes one wonder how they feel about using sick leave sellback in pension calculations.

When SB 1609 was enacted in 2011, one of the provisions of the law was the creation of a study committee on Arizona's retirement systems.  The Defined Contribution & Retirement Study Committee Final Report is the end product of that committee.  It includes information and recommendations on five issues that the committee was tasked to study.  One of those issues was pension spiking.

The committee used  the following criteria to define pension spiking in PSPRS:  a "more than 25% increase in compensation during the final 36 months of employment in PSPRS."  This threshold is "more than twice the average compensation increase that the plan uses in determining wage inflation in the final years of employment."  The years they used for comparison, 2008-2011, followed immediately after the housing market crash, so it is unlikely that there was any actual wage inflation anywhere in Arizona.  This makes any compensation increases in those years all the more dramatic.

The study found that in 2008 25.16% of retirees had an increase in compensation of more than 25% in their final three years.  In 2009, it was 29.77%, 2010-27.27%, and 2011-22.60%.  This means that in those four years 20-30% of all retirees were able to increase their final compensation by more than 25%.  In the previous post, we used only a 10% increase for our hypothetical retiree.  If she had increased her final compensation by 25%, she would have increased her annual pension by $10,937, instead of $4,375.  From 2008 to 2011 this type of spiking was being done by 2-3 out of every 10 PSPRS retirees.  This is not insignificant and was far greater than I would have imagined.

I suspect that it was also far greater than the committee imagined. Their recommendations read:
  • Legislation should be considered going forward that limits retirement benefits to base salary compensation and does not include off-duty work and the use of lump sum payouts at termination of vacation and sick time.  This would mitigate some of the methods in which a salary can be "spiked" to boost retirement benefits. (italics mine)
  • Further legislative study of spiking and other methods of increasing compensation that affect final retirement benefits should be conducted.
This goes far beyond what the Goldwater Institute is trying to stop in Phoenix.  This means not counting anything other than base pay in the final pension calculation, which means employees could only increase their pension by promoting or moving to a better paying employer.  Barring these two options, employees would be at the mercy of their employers for any increases in compensation (e.g. COLA's or step raises).

However, implementing this type of change to current workers may be problematic.  Workers with 10, 15, or 20 years of service, who have been paying pension contributions over the year on thousands of dollars of non-base pay compensation, would be due refunds with interest on all those accumulated pension contributions.  This says nothing of what refunds their employers might also be due.  PSPRS can not expect contributions to be paid on income that is not included in final pension calculations.

I fear that any "reform" to pension spiking will only affect new hires and will be another case of  the current generation passing costs on to the next generation of police and firefighters. Hopefully, the legislature will devise a solution that involves shared sacrifice this time around.

Of course, the Tucson City Council may have one pontential solution to salary and pension spiking in mind that was hinted at in the video.  They can simply eliminate sick leave sellback completely if they believe its elimination would more than offset the overtime costs incurred with any increased sick leave use.  While it is easy to demonize the Goldwater Institute for their lawsuit, it is clear that they are not the only ones who see a problem with pension spiking.

No comments:

Post a Comment

Relevant comments are welcome, but please adhere to the following rules:

1. No profanity or vulgarity.
2. No spam or advertising.
3. No copyrighted material may be posted unless you are the copyright owner.
4. Stay on topic.
5. Disagreement is fine, but please avoid ad hominem attacks.

Comments reflect the views of the authors alone, and do not reflect the opinion of this website.