No, I’m not talking about dumping a bunch of Everclear in the punchbowl.
“Pension spiking” means “goosing” either final average salary or service credit in order to boost pension benefits in an artificial way.
Some ways this is done: extremely large raise the year before retirement; Sick days not taken added to service credit;a lot of overtime unusually logged before retirement… which is used to calculate the base pension amount.
As spiking does boost pension costs right before retirement, and thus is usually not baked into valuation assumptions, this can be a source of pension underfundedness. Some states have tried to put in anti-spiking measures, but sometimes it doesn’t work.
Let’s look at some recent examples.
MICHIGAN POLICE SPIKING
According to two retired city of Ann Arbor employees, some police officers nearing retirement engaged in a pension spiking scheme that involves writing more traffic tickets than usual. The scheme could add hundreds of thousands of dollars in lifetime pension benefits for these individuals, and millions in additional taxpayer burdens.
Writing more traffic tickets generates extra overtime pay because officers are required to spend time in court when tickets are challenged by drivers. Pay boosted by extra overtime in an officer’s final three years increases, or spikes, the annual pension payouts by artificially boosting the final compensation figure used in pension formulas.
According to the former employees, as patrol officers near retirement they try to get on the midnight shift, if they were not already working that late shift. They then write more tickets than they customarily would, knowing that many drivers will fight the charges by taking them to court.
Historically, court appearances by officers are a big trigger of overtime.
One officer collected an average of $22,688 in overtime his last three years with the department. Another who retired in 2015 averaged $22,097 during his last three years on the job. Both worked the midnight shift.
For an officer who had been employed for 25 years, $22,000 in annual overtime in the final years would add $15,125 a year to the individual’s annual pension benefit payments. Many employees of the Ann Arbor police department have retired in their late 40s or early 50s, meaning inflated pensions could be paid for decades.
It’s bad enough that the retirement ages are so low.
But to boost one’s benefit amount by that much makes the pension fund itself more precarious, as funds are eaten away more rapidly.
Of course, once the pensioners are retired, you know what the base benefit is, and it’s put in the benefit.
NEBRASKA POLICE SPIKING
This involves legislation trying to prevent spiking.
First, the set up. Troopers’ pension ‘spiking’ targeted
LINCOLN — State lawmakers are seeking to stop what they describe as state troopers “spiking” their pension benefits by cashing in excessive amounts of comp time in their final year of service.
While an official with the state troopers union disputed that deliberate spiking is occurring, a recent analysis of pension benefits from 2004 to 2015 found that retirees over that period had boosted their salaries, on average, by 16.7 percent in their final year. That translated into an average increase of $178 per month in pension benefits. [about $2000/year]
One trooper who retired in 2009 and had a 6 percent final-year pay raise increased their last-year salary by about 44 percent by cashing in nearly $23,000 in unused vacation, sick leave and comp time. That spiked the trooper’s last-year salary to $77,877, which boosted the trooper’s pension by $440 a month.
Overall, the increased pension benefits are projected to add nearly $13 million in additional taxpayer expenses over 30 years for the state’s defined benefit pension program for Nebraska State Patrol personnel. The net assets of the State Patrol pension plan as of June 30, 2015, were $363.9 million.
A committee proposal, Legislative Bill 467, would increase pension contributions and reduce benefits for new hires to firm up the plan financially. The measure also seeks to eliminate steep increases in final-year wages used to compute pension benefits by ending the use of comp time in computing compensation. It would also compute the final salary as the average of a trooper’s final five years instead of the final three.
Okay, a lot of numbers being thrown around in that one.
$13 million in expenses over 30 years is only about $430K/year. Which, frankly, looks tiny compared to the assets. Even comparing the 30-year number against the assets is a boost that’s less than 4% of the fund’s assets.
Over thirty years.
Of course, these numbers could just have been poorly reported.
A bill to put a spike in the practice of “spiking” retirement pay for the Nebraska State Patrol is advancing in the Legislature despite opposition from the State Troopers Association of Nebraska.
The practice of “spiking,” such as working overtime and saving holiday and other types of compensation until just before retirement has become more common. Last year every retiring trooper eligible to receive a payout for unused holiday time did so.
The danger for taxpayers is that the practice can spike the costs of the pension plan, requiring a larger infusion of tax dollars than planned.
The bill, which won first-round approval last week, would omit paid leave from the computation used to calculate retirement benefits and make other changes.
Nebraska’s cash balance plan guarantees state workers a 5 percent return on their investment. One benefit of the cash balance plan is that it eliminates the possibility of spiking.
Some particularly outrageous cases of spiking have drawn national attention. In Madison, Wisconsin, a bus driver worked so much overtime that his pay went from about $50,000 a year to $160,000. A few years ago the eight highest-paid employees in St. Paul, Minnesota, were fire department supervisors who made more than the mayor or police chief by clocking long hours supervising emergency scenes. California Fire Chief Pete Nowicki became known as the poster child for pension spiking when he cashed in unused vacation and holiday pay to boost his retirement income by more than $50,000 a year when he retired at age 51.
Nebraska’s taxpayers surely are willing to allow patrol troopers and other state workers a fair retirement income in line with those available in the private sector.
Fair treatment in line with the private sector would be a defined contribution plan.
Cash balance plans are a hybrid between DC and DB, usually. As you can see above, the Nebraska cash balance plan provides a guaranteed return; less than the assumed 7% and above you see in most defined benefit pension plans, but that guarantee is a lot more than I get in my 401(k).
Sometimes there’s a guaranteed retirement income component, but I don’t see that mentioned in the editorial.
But let me get to something in the editorial I didn’t quote: the officers can retire at age 50, with 25 years of service.
Let me know where you can get that in the private sector. I’m curious.
CONTRA COSTA SPIKING
Finally, here is some California spiking. A bit more lucrative than California dreaming.
In another crackdown on pension spiking, the Contra Costa retirement board trimmed payments to four county doctors who had been overcompensated since 2012.
The Contra Costa County Employees’ Retirement Association on Wednesday cut by an average 9 percent the future pension payments to Drs. Krista Farey, David Hearst, Priscilla Hinman and Dana Slauson.
The action reduced their annual payouts by an average $10,000 each. For their lifetimes, assuming normal longevity, the cuts average about $150,000 each in today’s dollars.
However, departing from past practices, the retirement board decided to recoup nearly three years of past overpayments from the county rather than the retirees.
It was the right decision. As reported here in 2013, the pension spiking resulted from a scheme Health Services Director William Walker cooked up to inflate doctors’ salaries without approval from the county Board of Supervisors.
The doctors didn’t know the extra pay they received during their final year could not legally be counted as income when calculating their pensions.
It’s the third time in 10 months that the independent retirement board, comprised of county, employee and retiree representatives, cut retirees’ pensions.
Now look. You want to make sure pensioners are fairly treated. I understand wanting a fair process to make sure any pension cuts are equitable.
That said, let’s look at what it’s alleged happened:
Imagine employers handing workers $150,000 bonuses just before retirement. Or $216,000. Or more than $1 million.
That’s effectively what happened to, respectively, four Contra Costa County doctors, a county hazardous materials worker and the former fire chief of the Moraga Orinda Fire District. Their cases provide excellent examples of the math behind pension spiking.
They received salary boosts at the end of their careers. Because their pensions are based in part on their top salary year, that would increase their annual retirement pay — each year for the rest of their lives. And those payments would increase annually with inflation.
It’s a multiplier effect. In today’s dollars, the value of the pension spike for the remainder of their lives would be about 15 times the increase on the first year of retirement pay.
Thus, the salary boosts, as significant as they may be, would pale in comparison to the pension effect. Fortunately, in these cases, the Contra Costa County Employees’ Retirement Association disallowed counting at least part of the salary boost in the pension calculation.
The amount of those contributions to the pension plan assume gradual salary increases during the worker’s careers. But they don’t take into account a sharp, last-minute jump just before retirement.
As a result, the spikes create immediate shortfalls in the pension systems — shortfalls that must be made up by the public agency employers, the taxpayers. For the workers, it’s often a pension windfall.
But that exorbitant amount was due largely to two contract amendments in Nowicki’s final work year, increasing his salary and benefits without proper public transparency, in violation of the state’s open-meeting laws, and retroactively, in apparent violation of the state constitution, according to the retirement board’s attorney.
The retirement board trimmed the payout 28 percent, or about $77,500 annually. In today’s dollars, that’s about $1.2 million over Nowicki’s expected remaining life. In addition, the retirement board seeks nearly $500,000 of past overpayments. Nowicki has filed a lawsuit to block the reduction.
That doesn’t mean that traditional pension plans are bad. Quite the contrary, they’re good ideas. They provide security of steady income for the rest of a retiree’s life.
But they should be properly funded. And government agencies should block final-year pay schemes designed to spike pensions.
But it’s not only final-year pay schemes that is the issue. There’s also all that unused sick time used to transform into lump sum payouts. There’s a reason that most private sector employees are limited in how many PTO days they’re allowed to accumulate.
WHAT ACTUALLY HURTS THE PENSIONS
Spiking is one of those things, like politicians accruing public pensions that perhaps they shouldn’t be allowed to have, that makes public pensions less popular with taxpayers… but doesn’t boost the pension liabilities all that much (see the less than 4% boost mentioned above) — because generally it’s only a handful of people doing it.
If all the employees were doing it, then there would be much worse results in the pension underfunding. Mind you, that did happen in the past, which is how anti-spiking laws got passed.
But for the individual – their little spiking does not erode the plan all that much. It’s the old “nobody will miss it if I skim just a little…” and many of these “schemes” are “legitimate” in that they hew to the letter of the law. That’s how they work.
Except when laws are passed to prevent this behavior.
Then it’s a matter of not getting caught.
What’s nice is that there are so many government expenditure transparency efforts like Open the Books and See Through NY that make it easier for citizen sleuths to ferret out such individual behavior.
My own interest isn’t the small beer, though. I want to dig into the larger trends…
….but that’s for another time.
Nevada Pensions: Liability Trends
Public Pensions Watch: Sometimes Politicians Do the Right Thing
A Week of Bad Pension Ideas: Just Make the Full Payments!