Archive for the ‘Spiking’ Category

How paid sick leave can be healthy for pensions

January 26, 2015

President Obama said during his State of the Union address last week that 43 million workers have no paid sick leave, forcing “too many parents to make the gut-wrenching choice between a paycheck and a sick kid at home.”

The president wasn’t talking about government employees.

Most of them not only have paid sick leave, but also an incentive not to use it. When they retire, their unused sick leave can be converted into “service credit” for time spent on the job, which increases the amount of their pensions.

Is this “spiking,” the improper boosting of pensions by manipulating the final pay or time on the job used in the formulas that set monthly pension amounts?

Many do not think so. The higher cost of pensions presumably is paid for in advance by rate increases resulting from what the actuaries assume will be the cost of converting unused sick leave to service credit.

California Public Employees Retirement System actuaries assume, when calculating future costs, that service credit for unused sick leave will increase pensions and other benefits by 1 percent for state workers and non-teaching school employees.

Actuaries for the California State Teachers Retirement System, making the calculation in a different way, assume that unused sick leave will increase the service credit for educators by 2 percent.

An analysis by the CalSTRS actuary, Milliman, issued in 2010 found that the average amount of unused sick leave converted to service credit was 0.5 years for members retiring after 26 years on the job.

Unused sick leave was not considered in the development of the anti-spiking provisions in Gov. Brown’s pension reform (AB 340 in 2012). The bill barred final pay boosts through overtime, bonuses, one-time payments or terminal pay.

Sick leave can vary through labor bargaining or for other reasons. State workers in CalPERS get eight hours of sick leave per month. CalSTRS members get one day of sick leave per pay period, and employers are charged more for exceeding a limit.

In the Vallejo bankruptcy, the lack of a cap on unused sick leave was an issue. A city consultant, Charles Sakai, said in a court filing that a firefighter working 20 years could accumulate up to 5,760 hours of sick leave worth nearly three years of service.

Vallejo firefighters retiring after 20 years on the job could take half of the unused sick leave in cash, Sakai said, and use the other half to boost their CalPERS pensions by adding 1½ years of service credit.

Unused sick leave helped give a San Ramon Valley Fire Protection District chief a pension far exceeding his salary, one of the cases reported by Daniel Borenstein of the Contra Costa Times that prompted the introduction of anti-spiking legislation.

The fire chief, Craig Bowen, age 51, with a salary of $221,000, retired in December 2008 after 29 years on the job with an annual pension of $284,000. Unused sick leave boosted his service credit to 30.3 years, adding $10,700 to the pension.

Bowen is in the Contra Costa County Employees Retirement Association, one of 20 independent county pension systems operating under a 1937 act. After anti-spiking legislation for CalPERS was approved in 1993, similar legislation for counties in 1994 cleared the Senate but died in the Assembly.
sick
The conversion of unused sick leave to service credit began for both CalPERS and CalSTRS with legislation in 1973-74. The reason for the CalPERS change, modified several times since then, was not readily available last week.

Why CalSTRS members were allowed to begin converting unused sick leave into larger pensions was explained in a later bill analysis.

“It was anticipated that this benefit would reduce sick leave usage and enable employers to achieve some salary savings from not having to hire substitute teachers to replace teachers who might otherwise have been absent from the classroom,” said a CalSTRS analysis of AB 1102 in 1998.

“However, the anticipated reduction in sick leave usage and the projected salary savings were not realized. Consequently, employer costs increased as employers continued to pay salary for teachers who were absent from work because of illness, covered the cost of substitute teachers, and also paid STRS for the cost of the additional benefit at retirement.”

The costs were capped by legislation in 1979 that limited the conversion of unused sick leave to persons hired before July 1, 1980. Legislation in 1985 paid for the conversions by raising the CalSTRS employer contribution from 8 to 8.25 percent of pay.

Then in 1998 the unused sick leave conversion was reinstated by AB 1102 for those retiring on or after Jan. 1, 1999. Backers said the bill was needed for “equity” with CalSTRS members hired before July 1, 1980.

The bill was part of a package of increased pension benefits enacted as the funding level of CalSTRS, which was about 30 percent in the 1970s, climbed toward 100 percent under the Elder full-funding plan enacted in 1990 and a booming stock market.

An Assembly analysis of AB 1102 said supporters believe the bill and others in the package are “a fair compromise on the use of the Elder full funding money and will encourage teachers nearing retirement age to postpone retirement and stay in the classroom a little longer.”

Much of the current CalSTRS funding gap, which a $5 billion rate increase being phased in over the next six years is intended to close, is due to state and teacher contribution cuts and benefit increases enacted around 2000. Finally reaching the long-sought full funding was treated as a windfall to be spent.

The state CalSTRS contribution was cut from 4.6 percent of pay to 2 percent. For 10 years, a quarter of the teacher contribution to CalSTRS, 2 percent of pay, was diverted into a new individual investment plan. A half dozen small increases included the unused sick leave conversion and a longevity bonus.

CalSTRS would have had a funding level of 88 percent if it had not made the contribution and benefit changes around 2000 and continued to operate under the 1990 structure, a Milliman report said in 2013 when the funding level was 67 percent.

Last week President Obama called on Congress to “send me a bill that gives every worker in America the opportunity to earn seven days of paid sick leave. It’s the right thing to do.”

The president said the U.S. is “the only advanced country on Earth that doesn’t guarantee paid sick leave or paid maternity leave to our workers.” California has been in the vanguard of change.

Gov. Brown signed legislation last September requiring businesses to give employees at least three days of paid sick leave each year. In 2006, San Francisco required employers to give workers paid sick leave.

The president expanded paid sick leave for federal workers this month by adding six weeks to care for a new child or ill family members. And during his first year in office he expanded the conversion of unused sick leave to boost pensions.

Only federal workers hired before a cost-cutting pension reform in 1987 had been allowed to convert unused sick leave to pension service credit. In October 2009, Obama signed a bill giving a similar benefit to federal workers hired after the 1987 reform.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 26 Jan 15


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