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

Thursday, May 22, 2014

If sick and vacation leave sellback aren't pensionable, did employees and employers overpay into PSPRS?

As the debate over pension spiking heats up, things are bound to get more complicated.  To wit, the following passage comes from Tucson Councilmember Steve Kozachik's May 21, 2014 Ward 6 Newsletter:
Tangled Pension Web
In May of last year, Craig Harris was reporting in The Republic up in Phoenix about the Phoenix public safety pensionissue. This was before the Goldwater Institute had filed their lawsuit against the City of Phoenix over the issue of pension spiking with sick leave dollars. At the time the Pension Board system administrator, Jared Smout indicated that the City could avoid a legal judgment by voluntarily agreeing to change its policy. They didn’t and they’re being sued.
As I noted last week, we’re changing our policy to stop allowing unused sick leave to count as pensionable income. As I also mentioned, it’s my contention that we need to further protect ourselves from any claims, and protect the solvency of the public safety pension system by clawing back the money that has been used to spike employee pension benefits – for those workers who have not yet started collecting the benefits. We have the information – we need to disaggregate the unused sick leave dollars from the legitimate base pay.
I’m being told that we can’t do that, for two reasons. First, it’s the Pension Board who calculates the pensions. Second, the higher pension calculation formed the basis for the employee and employer contributions.
To the first point I’d simply say that it’s us who provides the Pension Board the data.  We can correct it. To the second point, everybody knows that pensioners will collect far more than they paid into the system. And if necessary, correct the overpayment by adjusting what they’re paying now, before they retire, or do it in their pension checks after they start collecting.
Jared Smout had suggested something similar last year as it related to recouping money that was improperly paid to the Phoenix police. It was his contention at the time that if Phoenix lost their lawsuit, the Pension Board would have to “figure out what their pension should have been, and any overpayment, and collect that. The way we typically collect is by reducing pensions.” He went on to say that “this potentially would affect a large amount of people.”
I think Smout’s wrong when he suggests that they reduce the pension payments to people who are already out receiving the benefits. That’s spilled milk. But for those not yet off the payroll and collecting benefits, we should absolutely correct the record and make sure what they eventually receive reflects what is allowed by State law. State law says “unused sick leave, payment in lieu of vacation, payment for unused compensatory time or payment for any fringe benefits” cannot be used as compensation to compute retirement benefits.
State law also says that only “base salary, overtime pay, shift differential pay, military differential wage pay, compensatory time used by an employee in lieu of overtime not otherwise paid by an employer and holiday pay” may be used to calculate pension benefits.  That’s pretty clear. We have the data. We need to claw back money improperly credited as pensionable.
This is a budget issue, and it’s an issue that addresses the long term health of the Pension system. If the current police and firefighters wanted to do their part in ensuring the viability of the PSPRS, they wouldn’t be pushing back against me as hard as they have been over fixing this. We should all be in this with a long term perspective, not just the here and now, and today’s all that matters.
This is an issue that I have been intrigued by ever since the legality of counting sick and vacation leave sellback as pensionable income was raised: if they are not pensionable, then shouldn't employees and employers be refunded any pension contributions previously paid on past sick and vacation leave sellback?

If we look at the current fiscal year (FY 2014) that started July 1, 2013, the employee contribution rate for all PSPRS members is 10.35%.  (This will go up another 0.70% on July 1 of this year and top out at 11.65% starting July 1, 2015.)  If a hypothetical employee sells back $3,000 of sick leave this fiscal year, she would pay a pension contribution of $311 on this amount.  If she had been selling back the same amount of sick leave in past fiscal years, she would have paid $296 in FY 2013 (9.55%), $260 in FY 2012 (8.65%), and $227 in FY 2011 (7.55%) and prior FY's.  If she had been selling back sick leave for five years, she would have paid a total of $1,321 in pension contributions on the $15,000 in sick leave sellback pay.

If Councilmember Kozachik is correct that employers should be allowed to claw back excess pension contributions that employers paid, employees should get their talons in there too.  In the case of our hypothetical employee, she should be refunded $1,321, plus some amount of interest, for the contributions on income that is now deemed non-pensionable.  Refunds should, at the very least, cover any employee contributions on sick or vacation leave sellback made in the last eight years since the law passed making those forms of compensation non-pensionable.

Where this gets more interesting is when we look at employer contributions.  Using the same $3,000 annual sick leave sellback, we can see what each of the ten largest employers would have to pay in FY 2014 pension contributions for our hypothetical employee:

FY 14
 FY 14 

Phoenix Police
 $    1,035.00
Phoenix Fire
 $    1,048.50
 $    1,559.70
Tucson Police
 $    1,372.50
Mesa Police
 $        936.30
Maricopa Sheriff
 $    1,076.10
Tucson Fire
 $    1,403.10
Pima Sheriff
 $    1,058.70
Glendale Police
 $        839.40
Scottsdale Police
 $        793.20

From this table we can see how much more the employer has to pay versus the employee, anywhere from 2.5 to 5 times as much.  Remember that these amounts represent only the current fiscal year's contribution.  Past years' contributions would be lower as employer contribution rates have been increasing annually, but future years are likely to be higher than the FY 2014 rate.  For an employer that currently counts sick and vacation leave sell back as pensionable, we can begin to see some pretty large amounts that could be clawed back from PSPRS, depending on the contribution rate and the aggregate sick leave sold back.  If 400 members, approximately 10%, of Phoenix Police and Fire members are selling back an average of $3,000 a year in sick and vacation leave, this would be over $400,000 in pension contributions that could be refunded to the City of Phoenix.  Going back five years, this is around $2 million that could be returned to a city currently dealing with a budget deficit.  This would be in addition to savings going forward on all future sick and vacation leave sold back.

With Arizona's two largest cities having budget deficits, how attractive is this found money going to be if, and most likely when, the Goldwater Institute wins its lawsuit?  Tucson's City Attorney has declared sick and vacation sellback non-pensionable, and as Councilmember Kozachik writes, the City of Tucson has already changed its policy.  I would see it as almost a legal requirement that they pull those excess contributions back and request that PSPRS refund employees their excess contributions as well.  What it comes down to is that types of income are either pensionable or not.  If the policy can change arbitrarily, then employees' income will never be safe.  What if they decide later to not count overtime as pensionable?  Will all the contributions paid on past overtime be forfeited into PSPRS?  Neither employers (i.e. taxpayers) nor employees ever agreed to donate money to PSPRS, which is essentially what they would be doing if they were forced to relinquish past contributions on income that was later declared non-pensionable.  This would certainly be a great way to eliminate funding shortfalls in PSPRS but not right or fair.

In the end, this issue raises a lot of questions.  What would clawing back this money do to an employer's PSPRS funding level and annual required contribution?  Will there be long-term savings to employers that more than offset short-term costs?  How does this affect those working on their high-three years? What about those who have already DROPped?  Will they have their final pensions recalculated and their DROP payouts correspondingly downsized?  Who (else) is going to sue (because someone always does)?  This post really only deals with the issue of what is fair and right, so I have no answers to these questions.  I guess this is why Councilmember Kozachik called his post "Tangled Pension Web."

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