Pension spike reform: CalPERS yes, counties no

UPDATE: Four retired San Ramon fire district officials have annual pensions of roughly a quarter-million dollars, far more than they earned on the job, the Contra Costa Times reports. Click here to see story.

The San Ramon fire chief, Craig Bowen, had a final salary of about $221,000, but he retired last December at age 51 with an annual pension of $284,000.

The Moraga Orinda fire chief, Peter Nowicki, had a final salary of $185,000, but he retired in January at age 50 with an annual pension of $241,000.

The two chiefs are new and extreme examples of an old problem.

Public employee pensions are often based on the highest annual total pay received on the job. A variety of ways can be used to “spike” pay shortly before retirement, thus boosting lifelong pensions that increase annually with inflation.

The biggest of the spikes for the chiefs was getting paid for unused vacation time, said the Contra Costa Times, which revealed the generous pensions for Bowen and Nowicki earlier this year.

Nowicki drew national attention last week in a story in the Wall Street Journal. After retiring, he went back to work for the fire department as a consultant at an annual salary of $176,000 on top of his $241,000 pension.

“People point to me as a poster child for pension spiking, but I did not make these rules,” Nowicki told the Journal.

Apart from the absurdity of producing pensions that can exceed salaries, critics say spiked pensions are an unfunded burden for retirement systems. Their costs have not been covered by the standard career-long contributions from employers and employees.

In 1993, legislation was enacted making it more difficult to spike pensions in the giant California Public Employees Retirement System by manipulating final-year pay.

The CalPERS-sponsored bill, SB 53, prevents pension boosting with vacation time, sick leave and other things. The measure was a response to audits that found widespread pension spiking.

One example from a news story echoes the current fire chief pensions: A Manhattan Beach city manager received a $139,000 annual pension, $50,000 more than he earned on the job. But his pension was later cut by $60,000.

CalPERS also established a Compensation Review Unit to check pensions for mistakes and spiking abuses. A newspaper reported last week that CalPERS rejected a pension boost for a Beverly Hills police executive.

The police official received a $23,000 salary hike during his last year on the job, said the Beverly Hills Courier. The newspaper said the city council approved up to $20,000 in legal expenses to fight the CalPERS ruling.

CalPERS covers state workers and 1,500 local government agencies. But about 20 county retirement systems, including Contra Costa and the fire districts employing the two fire chiefs, are covered by a state pension law enacted in 1937.

An anti-spiking bill for the 1937 act retirement systems, SB 2003, was approved by the Senate in 1994. But a “gut and amend” in the Assembly removed the anti-spiking provisions, in effect creating a new bill on another subject.

The county systems, apparently preferring local control and flexibility in labor negotiations, are said to have a wide range of rules for determining what kind of pay determines pension payments.

“They adopt these things at the local level,” said Robert Palmer of the State Association of County Retirement Systems, which represents the 1937 act county systems.

For example, said Palmer, pay for operating a two-wheel motorcycle might apply toward a pension in in one county. In another county, he said, only pay for operating a three-wheeled vehicle might apply.

Most of the high-profile examples of pension spiking are managers, not rank-and-file employees. But a grand jury report this month said pension spiking may be widespread in the San Francisco public employees retirement system.

The grand jury said 25 percent of the San Francisco police and firemen who retired during the last decade received a salary increase of 10 percent or more in their last year on the job, costing the retirement system $132 million.

Employees nearing retirement can use their seniority rights to request a transfer to a higher-paying job. A safeguard against this kind of spiking is using pay during the final three years on the job, not just the last year, to determine the pension amount.

In CalPERS, average pay during a three-year period is used to determine pensions for most state workers. One year is used for peace officers, firefighters and the Highway Patrol. Local government agencies in CalPERS use either a one-year or three-year period.

Gov. Arnold Schwarzenegger’s proposal to cut retirement benefits for new state hires includes using compensation “based on the highest 3 years instead of the highest one year” to determine pensions for the Highway Patrol and firefighters.

At one of the hearings held around the state by a governor’s pension commission two years ago, Ted Costa of People’s Advocate in Sacramento presented a document listing “Thirty Ways to Spike Your Pension.”

The final report issued by the governor’s Public Employee Post-Employment Benefits Commission last year contains a response to Costa’s spiking list from CalPERS, the California State Teachers Retirement System and the Los Angeles County Employees Retirement Association.

The largest of the 1937 act systems, LACERA, said in its response (Appendix 9) that it takes several steps to avoid spiking. Vacation time can be used to increase pensions, but the amount is capped.

The big Los Angeles system, with an investment portfolio valued at $80 billion before the stock market crash last fall, said that court decisions have played an important role in the way that county systems set pension amounts.

A state Court of Appeal ruling in 1983 said that compensation used to determine pensions should be limited to what is “uniformly paid in cash to all members in a given employment classification.”

But in 1997, said LACERA, the state Supreme Court ruled in a suit filed by Ventura County deputy sheriffs that the appeals court was incorrect. The high court said nearly all pay must be considered, except overtime and cash to third parties.

A second round of litigation produced a ruling that the state Supreme Court decision in the Ventura suit was retroactive. In 2006 LACERA announced a settlement that increased some pensions and provided payments for past shortfalls.

Costa said People’s Advocate asked CalPERS to send member agencies a “model resolution” declaring that only salaries, not other forms of pay, should be used to set pension amounts.

He said the five-member elected board of the San Juan Water District in suburban Sacramento, on which he serves, has adopted a salaries-only provision to prevent pension spiking for its employees.

“We think we have stopped it at the San Juan Water District,” Costa said. “If we haven’t stopped it, we are going to shut it down and do another one.”

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 27 Jul 09

5 Responses to “Pension spike reform: CalPERS yes, counties no”

  1. Dr. Mark H. Shapiro Says:

    Do not use the excesses of the few to punish the many. Solve the pension spiking problem, but remember that the vast majority of state and local government retirees do not receive these outrageous perks.

  2. Really Says:

    Pensions should be based on base pay … period ….. just as they are in the Private Sector.

    Taxpayers are fed up with Civil Servant ripoff schemes.

  3. GovDrone Says:

    These spikes are basically people at the top patting each other on the back & paying off their cronies. The common worker never sees any of these. JUST like in the private sector.

  4. A Worker Bee Says:

    You claim “In CalPERS, the year with the highest pay is used to determine pensions for state workers and non-teaching school employees.”

    Outdated attack information. I would refer you to Government Code 20037.6 to 20037.13. It is easy to attack pensions when facts are ignored. If you can’t make your case honestly at least use “facts” that can’t be checked.

  5. Ed Mendel Says:

    The statement that “the year with the highest pay” is used to determine state worker pensions was indeed based on outdated information. It’s from a CalPERS letter in the governor’s pension commission report last year, the “spiking” section in appendix 9. Pensions are now determined by the highest average pay during a three-year period for most state workers. One year is still used for state peace officers, firefighters and the Highway Patrol.

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