Pension ‘spiking’ reform may split unions

Support is growing for legislation to curb boosts in final-year pay to get a bigger public pension, a practice called “spiking,” despite recent local setbacks in Contra Costa County, San Francisco and Rocklin.

An “anti-spiking” bill was introduced last week by state Sen. Joe Simitian, D-Palo Alto, a clone of legislation introduced last month by Assemblyman Ed Hernandez, D-West Covina.

Hernandez is the chairman of the Assembly public employees committee. The chairman of a similar committee in the Senate, Lou Correa, D-Santa Ana, is a co-author of the Simitian bill.

State Controller John Chiang is a new sponsor of the Hernandez bill. Chiang sits on the boards of the two large state pension funds, the California Public Employees Retirement System and the California State Teachers Retirement System.

Pension “spiking” got national attention media attention last year when two fire chiefs in Contra Costa County retired, at ages 50 and 51, with pensions far larger than their final salary.

One chief retired with a final salary of about $221,000 and an annual pension of $284,000, the Contra Costa Times revealed, and the other chief retired with a final salary of $185,000 and a pension of $241,000.

How is this possible? Much of the increase comes from cashing out vacation time, administrative leave and other things that boost the “final pay” on which the pension is based, along with years of service and age.

Last week the board of the Contra Costa County Employees Retirement Association voted to prevent the use of boosts in final pay to get bigger pensions, but only for new hires not current employees.

The board’s counsel, Harvey Leiderman, said in January that part of the pay boost for one of the fire chiefs appeared to be improper under two appellate court decisions. He warned of the potential for a lawsuit if board policy does not comply with the law.

At the same meeting, the president of a firefighters association warned of a lawsuit if the board reduced benefits for current or future employees. Retirement benefits for current employees are “vested” rights, protected by court decisions under contract law.

Leiderman argued that employees cannot be vested in a benefit that is an error. At the meeting last week, a union official reportedly told the board that the court decisions cited by Leiderman allow a change in the benefits in question, but do not require it.

Daniel Borenstein, the columnist who revealed the fire chiefs’ pensions, estimated that ending final pay boosts “for current and former workers who have yet to draw their pensions would have immediately saved county taxpayers about $20 million a year.”

In San Francisco, the board of supervisors voted earlier this month to place a measure on the June ballot that would save an estimated $400 million over the next 25 years by trimming pension costs.

New employees would have to contribute 9 percent of their pay to help fund their pensions, up from 7.5 percent for current workers. The pensions for new hires would be based on average pay during the last two years on the job, up from the final year.

Supervisor Sean Elsbernd originally proposed that the pension be based on the final three years on the job, which he estimated would save more than $600 million over 25 years.

But unions opposed a switch to three years, reportedly arguing that the lowest-paid workers would be hit the hardest. Elsbernd joined in a 9-to-1 vote for the two-year plan, a compromise expected to get labor support for the June measure.

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.

If San Francisco voters approve the pension measure in June, the switch to a two-year final pay period is said to require legislation and the approval of CalPERS, which currently only uses one-year or three-year final pay periods.

The giant CalPERS system, covering half the state and local government workers in the state, has a well-regarded anti-spiking program enacted by CalPERS-sponsored legislation in 1993.

Much of the change resulting from passage of the anti-spiking legislation, AB 1987 by Hernandez and SB 1425 by Simitian, could be in the 20 county systems operating under a 1937 act, including the Contra Costa system.

Anti-spiking legislation for the 1937 act retirement systems failed in 1994. The county systems also operate under a state Supreme Court decision in 1997 in a Ventura County suit that requires some pay, previously excluded, to be counted toward pensions.

The anti-spiking bills are broad concepts at this point. Crafting legislation that does not conflict with what some regard as vested rights under the Ventura decision may be one of the complications in drafting detailed legislation.

An innovative provision in the bills would require pensions to be based on the average pay increase in the final three years, not for the retiring individual but for their job group.

Another provision, aimed at “double-dipping,” requires a new retiree to wait at least six months before taking another job covered by a state or local government pension.

The city of Rocklin, near Sacramento, recently boosted the pensions of nine retiring managers by giving them credit for an additional two years of service, then rehired them in their old jobs as part-time employees.

The city says it saves money with part-time pay and no health and pension payments, the Sacramento Bee reported. City Manager Carlos Urrutia gets $170,000 from CalPERS and $139,000 as a part-timer, topping his previous base pay, $230,000.

A reform group that suspended a drive to put a pension reform initiative on the November ballot considered “double-dipping.” But the provision, possibly drawing opposition from local government officials, was not in the proposed initiative.

The anti-spiking legislation seems likely to get mixed reviews from labor. Some concerns have already surfaced in Contra Costa and San Francisco.

“It’s going to run the gamut,” predicted Dave Low, chairman of Californians for Health Care and Retirement Security, a public employee union coalition. “There is probably going to be some opposition and some support.”

In his view, said Low, it’s “absolutely necessary to stop the abuses,” which undermine support for public pensions.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 16 Mar 10

7 Responses to “Pension ‘spiking’ reform may split unions”

  1. Touch Love Says:

    Quoting …”Last week the board of the Contra Costa County Employees Retirement Association voted to prevent the use of boosts in final pay to get bigger pensions, but only for new hires not current employees.”

    This is why Civil Service Unions MUST be eliminated.

    They are a CANCER on Society.

  2. Mary Says:

    The previous poster clearly dislikes unions, but unions are in no way responsible for the abuses of fire chiefs and city administrators. Unions and working people continually take the blame for a problem that is mostly caused by high paid administrators and managers. The ignorance of the previous poster also fails to recognize that the pensions and retiree health benefits of civil service employees are much more cost effective (and humane) that the alternative. Who wants to live in a society of old people living on cat food and using the emergency room for medical care? Again, stop blaming unions and working people for the abuses of administrators and managers.

  3. Touch Love Says:

    Mary, I’ve posted the following before, but you seem to need some “education” on this subject…..or, (more likely) you or a family member is a Civil Servant riding this gravy train, and do not want it derailed.

    State & City Budgets are stressed all over the nation with supposed one-time “fixes”. Let me tell you something … this isn’t going to be a one-shot fix. Most States, cities, & towns have a FUNDAMENTAL structural problem which MUST be addressed.

    Long ago, Civil Servant “cash” pay was quite a bit less than Private Sector pay in comparable jobs. This justified a better pension & benefit package.

    Per the US Gov’t BLS, cash pay alone is now higher in the Public Sector than in the private sector. This justifies AT MOST comparable (but certainly NOT better) pensions & benefits.

    More valuable Public Sector pensions comes from multiple sources: (1) higher formula per year of service, (2) basing pensionable compensation on the final 1 year instead of 3 or 5 years of service, (3) including post retirement COLAs, (4) arbitrary end-of-career promotions or excessive raises to “spike” the pensionable compensation, (5) allowing the soon-to-be retired to load up on overtime includable in pensionable compensation, (6) including payouts of unused vacation, unused sick days, uniform, parking, and other miscellaneous “allowances” in pensionable compensation, etc.

    In MOST Corporate Pension Plans NONE of the above are included. Why? Because the cost would have to be paid for by the employer, and none of these being really justified, employers are not foolish enough to waste THEIR money this way.

    In the Public Sector ALL, of the above are generally included/allowed. Why? Our Politicians aren’t spending THEIR money, their spending YOUR money (via your taxes) while they curry favor for campaign contributions and election support.

    Sometimes, Corporate Sector Pension Plan sponsors realize that the plan is no longer affordable, so they reduce cost via formula reductions, increases in the retirement age, etc., for NEW employees and for FUTURE years of service for CURRENT (yes CURRENT) employees. This is ROUTINE in the Private Sector and is allowed by ERISA (the Federal Law that governs Private Sector Plans).

    Just as in the Private Sector, CURRENTLY EMPLOYED workers in the Public Sector have already “accrued” pension benefits for PAST service. To this will be added benefits for FUTURE years of service. However, in the Public Sector (and there are variations from State to State) the ability to reduce the pension formula for FUTURE years of service for CURRENT employees is “questionable”.

    Of course, the employees and their Unions say it cannot be reduced for anyone already employed (even for those very recently hired). There are many variations, e.g., NJ’s Office of Legislative Service said that cannot be changed only for current employees who already have 5 years of service. In some States, the rules that govern such potential Plan changes are in the State Constitution. In others, in Laws/Regs., and in others via Court Case law.

    One important consideration in examining the DIFFICULTY in reducing pension for (FUTURE years of service ONLY) for CURRENT employees is that the legislators, judges, and staff (such as in the NJ example above) that “opine” that such reductions are not allowed are THEMSELVES participants in these same pension Plans and would be negatively impacted by such formula reductions.

    Hence, they are hardly disinterested parties, but come with a built-in conflict of interest. These persons should not be making decisions that favor THEM (as beneficiaries of their own decisions) but add to the taxpayers’ burden.

    The financial situation across the country is getting more dire, and the ROOT CAUSE must be addressed. Stated another way, we must once and for all, address the STRUCTURAL imbalance between income and expenses.

    Way too much focus has been placed on the government entity’s neglect to “fully fund” the Plans. This is certainly true (to varying degrees across the nation). What is often given short-shrift is the “expense” side of the income statement. No one ever says …gee … funding a VERY generous pension plan is VERY expensive, and then moves to the logical next questions, that being, is it too expensive BECAUSE it is too generous and perhaps we such make it less generous.

    But what exactly is “too generous”? Well, given that “cash” pay in the Public Sector now exceeds that of the Private Sector in comparable jobs, maybe a Public Pension Plan that is more than MARGINALLY higher is too expensive.

    Above, I enumerated 6 items which make Public Sector Plans more expensive. Few people not educated in pending funding understand just how VERY valuable (and hence EXPENSIVE) these differences are. One thing is certain, the Public employee Unions know. That’s why they fight tooth-and-nail to stop changes.

    Here is an accurate comparison of the costs of Public vs Private Sector retirement packages (pension plus retiree healthcare, if any) …. The value (i.e., cost to purchase the pension/benefit package) at the time of retirement of the employer-paid (i.e., Taxpayer) share of the typical (non-safety) worker’s retirement package is 2-4 times that of employer-paid share of the comparable (in pay, years of service, and age at retirement) Private Sector worker, and that multiple increases to 4-6 times for safety workers (policemen, firemen, corrections officers, etc.).

    I’ll bet you had no idea that this HUGE disparity exists. Given that it does, and given that Public Sector “cash” pay by itself is higher, is it surprising that States, cities, towns are being so squeezed to fund this? Not at all.

    So what is the solution? Of course Civil Servants deserve “fair” pay as well as “fair” pensions & benefits, but “fair” should mean COMPARABLE to what their Private Sector Taxpaying counterparts get. Right now, this is anything but true.

    The EXPENSE side of the income statement has been neglected far too long. To reach a “structural balance” we need to reduce current pensions (as well as retiree healthcare subsidies) in the Public Sector to a level comparable to that of the Private Sector. A few more progressive States & Cities (or perhaps, those in the greatest financial pain) know they must look at this and are beginning the baby steps.

    But the BIG problem is the conflict-of-interest conundrum that reducing pensions for CURRENT employees will (in many cases) reduce there own pensions. So, they ONLY propose plan reductions for NEW employees. To be fair, this may be happening not because they just “cave” on addressing such reduction, but because they really believe it is not possible.

    A disinterested party might look a bit harder. Perhaps we need to get opinions from outside this circle, e.g., from university scholars. Or perhaps challenges should be brought in the Federal Court system where the conflicted parties are no longer the decision-makers.

    Not addressing the huge cost of future accruals for current employees is wishing-away current financial reality. The dire financial problem is here NOW. Reducing pensions ONLY for NEW employees will have little impact for 20-30 years until they begin to retire. We will never make it. But also, given that most (objective) observers agree that current pensions & benefits are overly generous (compared to Private Sector plans … while appropriately taking into account compensation levels), why should we CONTINUE to layer on MORE excessive pension accruals?

    It’s been said that the first step in getting out of a big hole is to STOP DIGGING. Well, every day we allow the current plan to continue, the hole gets deeper.

    Somehow we need to find the way to reduce pensions (not for PAST) but for FUTURE years of service for CURRENT employees. That, along with a significant reduction in the retiree healthcare subsidy just MAY save us.

  4. REALLY? Says:

    THE BLAME CAN BE DIRECTED TOWARD THOSE WHO WERE VOTED IN BY LOCAL TAXPAYERS. THIS IS A CRIME! TO THINK THESE “DEALS” WERE BEING ALLOWED UNDER THE APPARENT WATCHFULL EYE OF CITY CONCILS AND BOARD OF SUPERVISORS. THEY HAVE THE ULTIMATE OVERSIGHT OF OUR CITY MANAGERS AND COUNTY ADMINISTRATORS.RETIREMENT PAY SHOULD BE BASED ON AT LEAST THE PAST TWO YEARS OF SERVICE (BASE SALARY)PRIOR TO PARTICIPATING IN THE RETIREMENT SYSTEM. OUR ELECTED OFFICIALS NEED TO STEP UP TO THE PLATE AND REPRESENT THEIR CONSTITUENTS RESPONSIBLY.THERE ARE SAVINGS THAT CAN AND SHOULD BE REALIZED BY STOPPING THIS INTERPRETATION OF THE RETIREMENT SYSTEM THAT BENEFITS A SELECT FEW!

  5. Touch Love Says:

    Today Governor Christie made his budget presentation speech …. and what a speech it was (see link below). If this isn’t all “show” and he’s sincere & manages to reform the political/Union nightmare crippling NJ, he may one day find himself in the White house.

    Recommended reading for EVERYONE ! (including you, Mary)

    http://www.nj.com/politics/index.ssf/2010/03text_of_gov_chris_christie_bud.html

  6. Touch Love Says:

    Woops …got that link (above) wrong. Here is the correct link:

    http://www.nj.com/politics/index.ssf/2010/03/text_of_gov_chris_christie_bud.html

  7. Pat Says:

    how does this bill effect sick leave incentives torward retirements. Currently we are allowed to turn on sick leave in to future health insurance payments after we retire. When will this new now take effect. If this happens I think it should ot be until anuary of 2012. Please advise. Thank you

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