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...

Tuesday, August 11, 2015

PSPRS' problems in a nutshell: Tempe's pension spiking deal with firefighters

Whenever there is a glimmer of hope that fair, sensible, and lasting pension reform can be accomplished, we get a reminder of  how PSPRS got into its current mess in the first place.  Exhibit A is the recent news that the City of Tempe is going to reclassify payments for sick and vacation leave sellback in a way to make them pensionable again, in order to skirt state law that excludes these payments from pensionable income .  The Arizona Republic has this August 4, 2015 story, and two opposing editorials Tempe pension gimmick sticks it to taxpayers by the Arizona Republic editors and Performance pay is not 'pension spiking' by Don Jongewaard, president of the Tempe Fire Fighters union, appeared on August 4 and August 9, 2015, respectively.

Up until recently, some employers did allow payments for unused sick and vacation leave to be included in pension calculations, despite a state law that clearly prohibited it.  The relevant Arizona statute reads:

"Compensation" means, for the purpose of computing retirement benefits, 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 paid to an employee by the employer on a regular monthly, semimonthly or biweekly payroll basis and longevity pay paid to an employee at least every six months for which contributions are made to the system pursuant to section 38-843, subsection D. Compensation does not include, for the purpose of computing retirement benefits, payment for unused sick leave, payment in lieu of vacation, payment for unused compensatory time or payment for any fringe benefits. (Italics mine)
This practice allowed employees to save up their leave (mostly sick leave) over many years and received payments for it during their high-three years when their final pension was calculated.  This is pension spiking in its clearest form, where an employee's salary is artificially inflated during the years on which his final pension is based.  For example, an employee who sells back $5,000 a year in sick leave during his high-three years will raise his annual pension by over $200 a month, if he retires at 20 years (50% of average high-three salary for those hired before 2012).   The employee will pay about $1,747 (11.65% of $15,000) total over the three years, which he will recoup in his first nine months of retirement.  The City of Tempe has a non-phased-in contribution rate of just under 50% for the current fiscal year, so taxpayers will pay a total of about $7,500 in contributions at the current rate.  This blog has covered pension spiking in other posts, so I will not go further into the math, but it is important to remember how critical it is for contributions to compound over time.  End-of-career increases in pensionable salary, whether through leave sellback, overtime, or other enhancements, are the death by a thousand cuts that plagues PSPRS.

Fortunately, the Goldwater Institute successfully sued to stop this practice, and Phoenix and Tucson now prohibit it.  This should have been the end of this problem.  But not so fast.  The powers that be in the Tempe City Council and local firefighter union have thought up a method by which they can continue to slowly destroy their pension system and (hopefully) stay within the law.  Instead of receiving payments for leave already earned, employees with at least 17 years service would no longer accrue leave and receive the value of that foregone leave in the form of "medical and vacation performance pay" instead.  The tortured logic behind this plan is that since no previously accrued "unused" leave is actually being "sold" it is legal, although common sense tells us that employees are simply being paid for current leave that they would have earned and not used.  I do not see how this would not still be illegal.

This is not to say that there is anything wrong with selling back leave, only that it should not be pensionable.  I do not know if all, but many public safety agencies, have a requirement known as constant staffing, which means that all uniformed positions must be filled at all times.  This means that employees on sick or vacation leave must be always be covered by another uniformed employee.  This requires the payment of overtime to off-duty personnel if enough employees are absent, and discouraging leave use, particularly sick leave, saves employers money.  In his editorial, Mr. Jongewaard, the Tempe Fire Fighters union president, makes this point as well.  This is great since this is something that many taxpayers may not know about public safety work.

However, Mr. Jongewaard does not make a case for why payments for unused leave should be pensionable.  Employees will still receive the future pay incentive for limiting their use of sick leave, regardless of whether the payments are pensionable.  Employees still sell back sick leave where I work, even though it is no longer considered pensionable, because the financial incentive is attractive enough.  Even more telling is his lack of an explanation as to why a sick and vacation leave sellback program  needs to be contorted into a "medical and vacation performance pay" program.   It is obvious why.  It is an attempt to violate state law that specifically forbids this practice.  If you still doubt that this program in Tempe is pension spiking, look at the threshold for the program, 17 years.  It seems like a strange time to start the program--why not 15 or 20 years?  Where I work the amount of sick leave you can sell back increases at the following intervals: 5 years, 10 years, 17 years, and 22 years.  The reason for this unusual pattern of  increases is apparent when when we think of pension calculations.  Those hired before 2012 can retire at 50% of their average high-three year salary at 20 years service and at 62.5% of their average high three-year salary after 25 years service.  Is it a coincidence that the last two thresholds just happen to begin within three years of 20 and 25 years?  Of course not.

The more militant folks out there, who do not care at all about the taxpayer, may applaud Mr. Jongewaard and the union for cleverly extracting this benefit from the Tempe City Council, as after all, this is what a union is supposed to do.  True, however, is it really beneficial when you negotiate for a policy that will continue to bleed your own pension and divert scant department budget from current wages and benefits?  Also, does this benefit all Tempe firefighters?  Those hired in 2012 or later already have to work longer, pay more, and receive fewer benefits from PSPRS.  I have made the point before that unions act less as a collective working for all members and more like a seniority protection organization.  This seems to be the case here.  Those like Mr. Jongewaard, who states he has over 21 years of service, will certainly benefit from this pension spiking scheme, but this is not the case for someone just starting a career.  Newer firefighters and those who join the department in the future will see their wages impacted for the rest of their careers because their employer will have to plow more money into an underfunded PSPRS in order to pay the spiked benefits of those who retired decades before.  Passing the costs of one generation's excess on to future generations is hardly fraternal behavior.

Missing here is the perspective of the Tempe City Council.  The firefighter union at least can make a case for this policy out of naked, if misguided, self-interest.  What of the Tempe City Council?  They got nothing of value out of this for taxpayers, just higher pension contributions and a future lawsuit they will have to fight.  Now would be the time cue the conspiracy theorists, but unfortunately, I think
this is just business as usual in a world of other people's money and explains a lot about PSPRS' current woes.  If this is what the Tempe City Council will do when PSPRS is dangerously underfunded, what would they give up in good financial times?


  1. This sets a dangerous precedent that other Local Unions will undoubtedly attempt to follow. I hope that the Goldwater Inst. or some other watch dog group will get on this quick. Thank you for the article

    1. Thank you for your comment. This situation in Tempe is a fitting example of why Prescott voters were correct in rejecting a PSPRS sales tax increase.


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.