Pension spiking bill doesn’t change one-year rule

A one-year rule that some say allows public pensions to be “spiked,” boosted through the manipulation of final pay, is not being changed by a reform bill because a powerful union wants the issue to be “bargainable” during contract talks.

A rule said to be unique to California bases the final pay used to determine pension amounts, along with age and years of service, on one year rather than the average of pay during three to five years common in other states.

Using just one year, critics say, makes it easier to boost pension payments by briefly switching to a higher-paying job at the end of a career or by increasing the base salary through supplemental pay such as cashing out unused vacation time.

Sen. Denise Moreno, D-San Diego, received a swift response when she asked during a committee meeting last week whether the reform bill would “require everybody to do pension calculations based on a three-year average rather than a final year?”

“It does not,” replied Terry Brennand, a lobbyist for the Service Employees International Union. “That’s a bargainable issue, and we have bargained it in different places. It’s been bargained for and bargained away.”

Brennand said a number of state worker bargaining units have agreed to contracts in recent years that switch new employees to a three-year average. He “guaranteed” that the issue will come up in all bargaining talks this year.

“It’s not a huge issue for my members, trust me,” Brennand said. He said managers “are the ones that have been abusing it.”

The reform bill, AB 1987 by Assemblywoman Fiona Ma, D-San Francisco, is a response to reports that two Contra Costa County fire chiefs retired last year at ages 50 and 51 with pensions much higher than their base salary.

San Ramon fire chief Craig Bowen, with a final salary of about $221,000, retired with an annual pension of $284,000. Moraga Orinda fire chief Peter Nowicki turned a final salary of $185,000 into a pension of $241,000.

Brennand and Ma, who said the bill ensures that pension fund assets “don’t become unraveled by a couple of bad apples,” share an apparently common view that pension spiking is usually done by top managers.

But the Contra Costa Times columnist who uncovered the generous fire chief pensions, Daniel Borenstein, also found that in a sanitary district “more than two-thirds of departing employees in the past five years spiked their pensions 25 percent to 41 percent.”

In San Francisco this month, voters approved a measure that increases pension contributions for new employees from 7.5 to 9 percent of their pay and bases final pay on the last two years on the job, up from the final year.

Supervisor Sean Elsbernd proposed a three-year average, but unions reportedly argued that the lowest-paid workers would be hit the hardest. Using two years instead of three years dropped the savings estimate from $600 million to $400 million over 25 years.

The San Francisco Civil Grand Jury said in a report last July that pension spiking “may be institutionalized and ongoing” among police and firefighters. In the last decade, 25 percent of retirees received a pay boost of 10 percent or more in their final year.

The grand jury estimated that the spiking cost the city and members of the retirement system $132 million during the period.

This month, four state worker unions tentatively agreed to cut pension costs by increasing worker contributions and, for new hires, lowering benefits and basing final pay on a three-year average, rather than one year.

A Sacramento Bee investigation six years ago reported that the one-year rule was a last-minute addition to a state budget agreement in 1990, the price of approval from unions concerned that accounting changes might shrink retirement benefits.

“The one-year pension rule became law with little fanfare,” the Bee reported. “Yet workers who retired in the past four years have received 5 percent more in pensions than they would have under a three-year system.”

A Bee payroll analysis found some received cost-of-living and merit raises, while others were promoted to higher-paying positions. Surveys showed that California was the only state using the highest single year of salary to calculate pensions.

Ma’s bill is aimed at the 20 county retirement systems operating under a 1937 act, including Contra Costa. A separate reform bill, SB 1425, covers the California Public Employees Retirement System and the California State Teachers Retirement System.

One of the reasons the “’37 act” counties are in a separate bill is a court decision in a Ventura County suit in 1997 requiring that a long list of supplemental payments be included in county pension calculations.

Brennand said the Ventura decision, and different settlements in a half dozen counties, cover night shift, bilingual and other “singularly ongoing pay” not received by all workers but counted when setting employer-employee pension contributions.

“You get to include what’s bargained and what was agreed to under the Ventura decision in your county,” Brennand told the committee when asked to summarize the bill. “You get to count sick leave, vacation and leave pay that was accrued in that year, not rolled forward.”

He said the fire chiefs spiked their pension by counting unused vacation and other supplemental pay earned in previous years.

Borenstein said in a column this month that the reform bill falls short by still allowing unused vacation to be cashed out to boost pensions. He said the Ventura decision “paved the way” for most costly spiking and should be overturned by legislation.

“If legislators want to stop spiking, they must undo the Ventura ruling and the settlement agreements signed by county-level pension boards around the state,” Borenstein said.

Another part of both reform bills aimed at “double-dipping” requires retirees to wait six months before going back to work for a government agency in the same retirement system.

One of the fire chiefs, Nowicki, was immediately rehired by his fire district with a salary of $176,000 on top of his $241,000 pension. The city of Rocklin boosted the pensions of nine retiring managers this year, then rehired them as part-time employees.

Counties oppose the six-month moratorium, saying retirees can be needed during searches to fill specialized jobs. The county retirement systems are neutral on the bill, but worried about management issues, potential lawsuits and costs from audits and screening.

Brennand said separate legislation would provide additional funding for the county retirement systems, which were already seeking a change in a funding formula based on 0.18 percent of assets after the stock market crash.

The Senate retirement committee approved Ma’s bill, reserving the right to recall the bill if major changes are made. Her bill is linked to the reform bill for CalPERS and CalSTRS, meaning neither passes without the other.

In 1993, CalPERS sponsored anti-spiking legislation, SB 53, that limits the use of supplemental pay and created a screening unit. A year later similar legislation for the ‘37 act counties failed

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 28 Jun 10

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