How Would Phoenix Officials Handle The Up-Front Costs of Proposition 487?

Arizona State Seal

In two weeks, Phoenix voters will decide the fate of Proposition 487 – the ballot measure that would close off the city’s defined-benefit plan from new hires and shift them into a 401(k)-style plan.

The plan, if passed, would cost the city millions up front – but the tradeoff, proponents of the plan say, is a more sustainable pension system.

There are ways to offset the initial cost of the plan. One option is to eliminate deferred compensation for workers.

Would city officials support eliminating deferred compensation as a cost-saving measure?

The Arizona Republic asked them:

We asked: If Prop. 487 is approved, would you support removing deferred compensation without providing employees its value in another form? Please explain.

“It is important to provide employees fair compensation and to ensure the city remains a competitive employer. With that said, should Prop. 487 pass, the city will comply with the law and not provide deferred compensation. However, I would not want to presume what the end point or other forms of compensation could or could not be. We are required to negotiate in a fair and neutral manner per our Meet and Confer ordinance and to do so without a predetermined outcome. The city would negotiate in good faith with employee groups as required and practice good labor relations practices.”

Michael Nowakowski,District 7, southwest Phoenix and parts of downtown

“Yes. Prop. 487 lets current employees choose between their pensions or deferred compensation. They get to keep what they earned, but going forward, they can’t have both. Pensions are out of control — costs ballooned from $56 million in 2003 to $240 million in 2013. ‘Yes’ on Prop. 487 saves over $400 million by eliminating pension spiking and secondary retirement. This year, taxpayers saw a new water tax and cuts in police, after-school programs, seniors and libraries to fund the ballooning pension costs and $19 million in pension spiking. Prop. 487 treats employees and you fairly. Ask yourself, what do you get?”

Sal DiCiccio, District 6, Ahwatukee and east Phoenix

“I support 487. We must end pension spiking, and the prohibitively expensive status quo. I have voted against all final labor contracts as a councilman. By the time the initiative kicks in, the current contracts would have 18 months to run. I believe we must honor the voters’ decision and meet our contractual obligations (even though I voted against the contracts) by re-opening the contracts to mitigate loss of deferred compensation. In subsequent negotiations in 2016 and beyond, we should take a much more realistic approach to negotiations. The ‘we’ve always done it this way’ approach to negotiation must stop.”

Jim Waring, vice mayor (District 2), northeast Phoenix

“If deferred compensation is contained in contractual minutes — and rightfully owed to city employees — the city will be required to renegotiate its contract and provide payment in the form of wages. Ultimately, courts will decide the outcome at significant cost to taxpayers.”

Thelda Williams, District 1, northwest Phoenix

Fact Check: Would Phoenix’s Pension Proposal Really Cost $350 Million?

Entering Arizona sign

In just two weeks, Phoenix residents will head to the ballot boxes to vote on Proposition 487, the controversial pension reform measure that would shift new hires into a 401(k)-type system.

Recently, a group opposing the law made a bold claim:

“Prop. 487 will cost Phoenix taxpayers more than $350 million over the next 20 years.”

But is it true?

The Arizona Republic did some fact checking. They found that the switch to a 401(k)-type system wouldn’t save the city any money initially. In fact, one report claims that the switch would indeed cost the city $350 million:

That [401(k)] provision would not save money, according to the city’s actuary. A report from the financial analysis firm Cheiron states that closing the pension system and replacing it with a 401(k)-style plan would cost the city an estimated $358 million over the first 20 years, assuming the city contributes 5 percent of employees’ pay to the defined-contribution plan.

An analyst for Cheiron and city officials said the move to a 401(k)-style plan itself would cost more initially because Phoenix must pay down its massive unfunded pension liability while funding a new retirement plan.

The city’s pension system for general employees, the City of Phoenix Employees’ Retirement System, is only 64.2 percent funded, meaning it doesn’t have the assets to pay about $1.09 billion in existing liabilities. In other words, the city only has about 64 cents on the dollar to cover all of its long-term payments for current and future retirees.

Phoenix must pay off that pension debt regardless of what voters decide. Prop. 487 wouldn’t decrease the existing unfunded liability, but it would stop the city’s liability from growing, opponents and supporters agree.

But there’s a twist: other aspects of Prop. 487 could offset the previously-mentioned costs. From the Arizona Republic:

Other changes outlined in Prop. 487 could offset that up-front cost of switching to a 401(k)-style plan. If fully implemented, the initiative would save the city a net of at least $325 million over the first 20 years, according to Cheiron’s report.

Two key provisions of Prop. 487 could save money in the first 20 years:

–Make permanent and expand reforms the city has made to combat the practice of “pension spiking,” generally seen as the artificial inflation of a city employee’s income to boost retirement benefits. It would exclude from the pension calculation any compensation beyond base pay and expand the number of years used to determine an employee’s final average salary, a key part of the benefit formula. Those changes could save an estimated $475 million over the first 20 years, Cheiron’s report states.

–Prohibit the city from contributing to more than one retirement account for each city worker, including current employees. Currently, the city contributes to a second retirement plan, known as deferred compensation, on top of most employees’ pensions. Cheiron projects eliminating deferred compensation would save an estimated $208 million.

Consultants for the city have said Prop. 487 could save additional money if those changes are applied to public-safety employees, who are in a separate, state-run pension system. Although the initiative contains intent language saying it doesn’t impact police officers and firefighters, supporters and opponents disagree whether it will be interpreted that way.

Interestingly, city officials have tended to agree that the reform measure would cost the city $350 million over the next 20 years. Officials are also worried about the litigation the proposal could invite if passed by voters.

Audit Estimates Legal “Pension Spiking” by CalPERS Members Could Cost State $800 Million

Scrabble letters spell AUDIT

The California Controller released an audit on Tuesday that found a particular brand of “pension spiking”, although perfectly legal, could cost California $800 million over the next 20 years. From California Healthline:

Dozens of public agencies that contract with CalPERS have engaged in a legal form of pension spiking, putting the state on the hook for nearly $800 million over the next 20 years, according to an audit released Tuesday by the State Controller’s Office, AP/KPCC’s “KPCC News” reports (“KPCC News,” AP/KPCC, 9/9).

The legal practice involves employers withdrawing commitments to cover employees’ pension costs in their final year of work and instead adding the value of the payment to the employee’s salary. The practice was legal under a 1993 law but has since been prohibited for new employees.

The audit found that 97 agencies that contract with CalPERS have amendments allowing them to engage in the practice.

The amendments increased CalPERS members’ compensation by $39.1 million in pensionable pay annually, which could result in as much as $796 million in such compensation over two decades.

The audit found that CalPERS doesn’t have the resources to audit the 3,000 agencies with which it contracts. CalPERS said it has hired more staff recently to combat that issue, but it’s not enough. From California Healthline:

The pension fund also has insufficient resources for auditing all of the 3,100 public agencies with which it contracts. For example, the audit found that a local government contracting with CalPERS would only be audited by the pension fund every 66 years. Since the audit was performed, CalPERS has hired more staff, but the agency is still only capable of performing audits on a contracting entity once every 33 years, according to the controller’s office.

In a release, Controller John Chiang (D) said the prevalence of such issues “invites abuse” and that the pension fund “must be more vigorous in protecting taxpayers from this form of public theft.”

View the Controller’s entire audit here.


Photo credit: Lending Memo

Auditors Asking Questions About “Illegal” Pension Benefits at Pennsylvania Fund


Pennsylvania’s top auditor claims that the city of Carbondale boosted pension benefits for certain top cops close to retirement, an action that–due to the nature of the benefit increases–violated state law.

In Pennsylvania, pension benefits can only equal up to 50 percent of a worker’s final year salary. But the city offered to sweeten benefits for four city police officers, who are now earning benefits equal to 65 percent of their final salary.

The auditor says those benefits are a clear breach of state law, but the city says it avoided breaking the law by using a loophole of sorts. From the Times-Tribune:

Last year, Mayor Justin Taylor and city solicitor Frank Ruggiero said the higher benefits were legal because the 15 percent extra for the three officers and 10 percent additional for the disabled officer come from the city’s annual budget rather than the police pension fund. Mr. Taylor said the city would save almost $550,000 during the next four years by replacing the officers with lower-paid full- and part-time officers.

The additional benefits are costing the city an extra $2,326 a month, the auditor general says, or $27,912 a year.

Mr. Taylor said city officials still think they’re right and don’t plan to stop making the payments. The city is weighing its options and might appeal the findings because of a fundamental disagreement over the nature of the payments, which are retirement incentives not pension payments, the mayor said.

“We’ve been disagreeing from day one,” he said.

Auditors informed the city of their concerns back in February. The auditors say the city told them they would respond in 10 days. But the city never called them back.

Now, auditors are threatening punishment. Specifically, they are prepared to withhold all state contributions to the pension fund.

Susan Woods, a spokeswoman for the auditor general, said it may not come to that, but auditors are prepared to take action.

“It hasn’t risen to that level,” she told the Time-Tribune. “If they continue to do this, we do have the ability to withhold.”

Auditors took issue with other areas of the city’s handling of pensions, as well. From the Times-Tribune:

The auditor general also criticized other areas in the city’s pension funds:

  • The city’s provision of cost-of-living increases in pension benefits for firefighters who retired as of Jan. 1, 1993. These firefighters receive a 2.5 percent raise in benefits on the third anniversary of their retirement and every year after that, but the auditor general says the maximum pension should be only 50 percent of the highest salary of an active firefighter.

This criticism was actually a repeat of criticism in an earlier audit.

City officials told auditors they were unable to change the provision through bargaining with the firefighters’ union.

  • The city’s failure to calculate and contribute the interest on its late 2011 minimum pension payments and did not pay its 2012 and 2013 payments. In response to the criticism, the city contributed more than $666,000 to cover the payments and interest.

The Pennsylvania Commonwealth Court ruled in 2001 that cities must abide by the benefit limits imposed by state law.

CalPERS Responds To Criticism Of Plan To Boost Pensions


CalPERS is holding a hearing today seeking public comment on a set of potential rules that would open the door for many workers to increase their pensions.

The rules would introduce 98 new forms of “pensionable compensation”, or income that is counted when calculating a worker’s ultimate pension benefit.

But many interested parties didn’t wait until the hearing to voice their opinions. California Gov. Jerry Brown was among the first to voice his displeasure at the potential rules, as they contradict certain sections of the reform law he passed in 2012.

“This disregards the rule that pensions will be based on normal monthly pay and not on short-term, ad hoc pay increases,” Brown wrote in a letter to the CalPERS board. “I urge the board to vote against these regulations and instead request a new draft that excludes temporary pay upgrades from employee pension calculations.”

Other big players weighed in as well. Jon Ortiz writes:

Public pension-change advocates, including Democratic San Jose Mayor Chuck Reed, say the proposal is another sign that the union-dominated CalPERS board “is doing what they can to resist reforms. … They’re in favor of anything that expands benefits.”

Elk Grove City Manager Laura Gill said including temporary upgrade pay “really does invite spiking” and threatens to erode savings from pension changes the Sacramento suburb has enacted the past couple of years, such as city employees paying their share of pension costs.

If such practices became standard, “it would put us backward from all the work we’ve done to have a sustainable and sound pension system,” Gill said.

Unions responded as well, but they were receptive to CalPERS’ plan. From the Sacramento Bee:

Mike Durant, president of the union-backed Peace Officers Research Association of California, dismissed those kinds of concerns. If a city or the state needs pension relief, he said, “they can bargain it.”

Instead, he said, government employers expect CalPERS to save them from themselves.

“They want to put it on the backs of someone else to make those decisions rather than making it themselves,” he said.

You can bet CalPERS is listening to all this. And the pension fund responded to the criticisms in a statement sent out to numerous newspapers, including the Daily Bulletin:

CalPERS has approached this issue with full transparency and sought stakeholder input along the way, including employee and employer feedback. The purpose of the public hearing is to seek even greater input on what compensation should and should not be counted toward pensions.

While reasonable people may disagree about what aspects of a public servant’s compensation should count toward a pension, an editorial should stick to the facts and not try to inflame readers with inaccurate terms like pension spiking. Pay for a service is still compensation at the end of the day. Our staff made a recommendation based on a good-faith interpretation of the law. If changes need to be made, we welcome the public’s input.

CalPERS is holding a hearing today to gather the public’s comments on the proposed rules. Once the hearing is wrapped up, the full CalPERS board will vote on the rules, likely on Wednesday.

North Carolina Ends Pension Spiking By High-Paid Officials


As of January 1, 2015, highly paid government workers in North Carolina will no longer be able to “spike” their pensions, thanks to a law signed yesterday by North Carolina Gov. Pat McCrory.

Pension spiking happens when public workers accumulate sick leave, vacation time, bonuses and other benefits until the year before they retire. In their final year on the job, they cash out all those benefits—inflating their final year salary.

Since final year salaries play a big role in calculating a worker’s pension benefits, spiking can increase a retiree’s annual pension by thousands of dollars per year. The practice is currently legal in most states.

But the practice is now outlawed in North Carolina for all state and local workers who make $100,000 or more annually. From the News & Observer:

The new law, which takes effect Jan. 1, comes after The News & Observer in November reported how four community college presidents and their boards converted tens of thousands of dollars in perks to pay as they neared retirement age, creating pension boosts the retirement system will have to subsidize. The retirement system is funded by contributions from employees, taxpayers through employer contributions, and investment returns.

“This law prevents North Carolina state employees from having to subsidize artificially inflated pensions of high earners at the end of their careers,” McCrory said in a statement. “It protects the retirement system from abuse and ensures state employees are rewarded for their important investments in our state.”

State Treasurer Janet Cowell has claimed in the past that pension spiking in the state is limited to only the highest-paid state workers. Thus, the current legislation outlaws spiking for those workers by creating a “contributions cap”. The News & Observer explains:

The law creates a new method of identifying pension spiking through a contributions cap that is based on the actual amount of money state and local employees and employers put into the retirement system. Those hired before Jan. 1 would continue to receive the difference created through the pension spiking, but it would have to be paid for by that unit of government, not the retirement system. Those hired after Jan. 1, would have the choice of the employer paying, the employee paying or a reduced benefit.

The law also returns the pension vesting period for state and local employees to five years. Three years ago it was doubled to 10 years as a cost saving measure, but Cowell’s staff said the savings were minor, roughly $1 million a year, while making the state less competitive in the job market.

“Returning to a five-year vesting period is critical step in North Carolina becoming more competitive in recruitment and retention relative to other public and private employers,” Cowell said in the release.

Some NY State Police Officers Use Private Jobs to Boost Public Pensions


Publicly employed police officers are often contracted to work private events—from keeping the peace at retail stores around Christmas-time, to keeping an eye on the crowds at music festivals.

But an investigation by a New York newspaper found that several police departments in the state are letting the overtime racked up at private events count towards an officer’s public pension—a practice which the state Comptroller’s Office says is not allowed.

From the Times-Union:

The state Comptroller’s Office says overtime reimbursed by a private company does not count toward an officer’s pension benefit.

But the Times Union found that several Capital Region police departments — including those in Colonie, Schenectady and Troy — report private duty overtime to the retirement system.

“I think a lot of people might be surprised to the extent with which this happens around the state,” said E.J. McMahon, president of Empire Center for Public Policy, an Albany think tank. “You can actually bolster your pension with time spent working in uniform on private time.”

Taxpayers should care about the practice, McMahon said, because pensions are lifelong payments backed by taxpayer dollars.

The legality of using private duty details as part of the pension calculation is murky. Several retirees are appealing the comptroller’s position in state Supreme Court.

The retirement of a Guilderland police officer who worked overtime at Crossgates Mall brought the issue to the attention of many Capital Region police chiefs. As a result, Guilderland stopped reporting private work to the retirement system and, last month, Bethlehem prohibited officers from working the jobs.

Albany and Saratoga Springs also comply with the comptroller’s view that private overtime is not pension eligible.

But several high-ranking police officials have publicly raised concerns about whether its fair to disallow private jobs when calculating pension benefits. From the Times-Union:

“Anytime a man or woman is in police uniform, they are on police duty, period,” Colonie Police Chief Steven Heider said.

Heider considers the officers on-duty, accountable to the police department and exposed to the dangers of police work.

Last year, Colonie police collected about $120,000 in reimbursements from private entities for police details, which Heider said are assigned by rotation. About 40 percent came from patrols at Colonie Center mall.

The town reported the wages to the retirement system as pension eligible.

Colonie requested guidance from the comptroller about whether to report the wages as pension eligible, but never heard back, Heider said. If the comptroller advises Colonie to stop, the town will, he said.

Of the seven police departments in upstate New York’s Capital Region, three departments allow private duty overtime to count toward public pensions. Officers in those departments have racked up nearly $200,000 in private duty overtime last year, according to the Times-Union investigation.

Photo by Giacomo Barbaro via Flickr CC License

North Carolina Nears Pension Spiking Ban For Top State Officials


The practice of pension spiking has garnered more media attention than ever over the past few years, and that is leading to the practice being examined in the halls of numerous state-level legislatures.

Pension spiking happens when public workers accumulate sick leave, vacation time, bonuses and other benefits until the year before they retire. In their final year on the job, they cash out all those benefits—inflating their final year salary.

Since final year salaries play a big role in calculating a worker’s pension benefits, spiking can increase a retiree’s annual pension by thousands of dollars per year. The practice is currently legal in most states.

Pension360 previously covered the outlawing of spiking in Phoenix, Arizona. Now, lawmakers in North Carolina are on the brink of prohibiting the practice in their state as well. From the Raleigh News and Observer:

The state Senate tentatively approved legislation Monday night that would prevent state agencies and local governments from using the state retirement system to boost the pensions of top officials when they finish their careers.

The bill, approved 44-4, requires the agencies, local governments or the top officials themselves to put the money into the retirement system to pay for the pension spiking. The legislation cleared the House last month with no votes in opposition, making it likely a second approval from the Senate would make it law.

The legislation followed a report in The News & Observer that four community colleges in recent years converted tens of thousands of dollars in perks such as car and housing allowances into salaries for their presidents as they neared retirement.

In November, the N&O’s Checks Without Balances series reported on four community college presidents whose boards allowed for as much as $92,000 in perks to be converted into salary. The colleges are Cape Fear, Central Piedmont, Sandhills and Wilkes.

Their boards used the removal of a state salary cap on the local share of community college presidents’ salaries to convert the perks to salary. As perks, the pay was not eligible for pension purposes, and no contributions had been made out of them to the state retirement system. But when the perks were converted into salary, they became pension-eligible compensation.

Taxpayers support the retirement system through contributions made by state and local governments on behalf of their employees. The employees are also required to contribute a small percentage of their pay.

Two of the four community college presidents – Eric McKeithan at Cape Fear and Gordon Burns at Wilkes – have since retired. Burns, whose $80,000 in perks converted to pay before he stepped down in June, could see his pension bumped up as much as $52,000 a year.

The other two presidents are Central Piedmont’s Tony Zeiss and Sandhill’s John Dempsey. Their boards each converted roughly $40,000 in perks to pay.

There are, however, some worker-friendly provisions in the bill to make it more palatable. From the Raleigh News and Observer:

• It would return the vesting period to become eligible for a pension to five years. Three years ago, lawmakers raised it to 10 years, thinking it would save the state money. But the treasurer’s office found it wasn’t saving much money and was making the state less competitive for job candidates.

• It allows all state and local employees who leave their jobs within five years to recoup their pension contributions plus accumulated interest, which currently is set at 4 percent. Currently, only fired employees can receive the interest. The treasurer’s office says North Carolina is the only state retirement system in the country that does not pay interest in returning the pension contributions to all employees who leave before five years of service.

If officially passed, the law wouldn’t take effect until January 1, 2015. It wouldn’t affect employees who make less than $100,000 a year.

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