California Takes Aim at Public Pension Spiking

Robb Quincey made $460,000 last year as city manager of Upland, California, a middle-class suburb east of Los Angeles at the foot of the San Gabriel Mountains. His duties included overseeing 325 employees, a police department with 25 cars, four fire stations and a library for the community of 76,000.

Last year, Quincey, 51, negotiated a new contract in which the city agreed to add reimbursements for his car, housing and other costs directly into his paycheck, according to public records. When he retired, the combined payments would be counted in his final year’s salary and used as the basis for calculating his pension for life.

Such loopholes allow some public employees to manipulate overtime, unused vacation and special compensation to boost their retirement pay. The practice, known as pension spiking, has drawn protests at a time when U.S. state pension assets are $479.5 billion under what is needed to pay promised benefits, according to data compiled by Bloomberg.

“It’s upsetting and confirms that we need change in local government,” said Gino Filippi, who was elected to the Upland City Council in November, after Quincey’s new contract was struck. “It’s an abuse of the system.”

The city manager was fired May 4 after using municipal funds to settle a claim filed by a city police officer who said he was passed up for a promotion as retaliation for investigating a domestic dispute involving Quincey, according to the Inland Valley Daily Bulletin. Quincey declined to comment about the contract, said his lawyer, Michael Zweiback, a partner with Nixon Peabody LLP in Los Angeles.

In San Diego, a city 17 times bigger than Upland, the chief operating officer made $269,740 in 2009, according to the state controller’s office. In Merced, a city in the Central Valley farming region with about the same population as Upland, the city manager earned $182,000 that year.

Drawing Scrutiny

Spiking is not the only pension-related abuse drawing scrutiny. Lawmakers from Washington state to New Jersey are taking steps to curb so-called double dipping, where government retirees go back to work on the public payroll while still collecting a pension, such as a New York school superintendent who earned $225,000 and also collected a $316,245 pension.

Lawmakers in California, under pressure in the wake of a scandal in the small city of Bell, where the city manager gave himself almost $1.2 million in 2009, are working on legislation to clamp down on spiking and curtail public pension costs.

Backing From Brown

Governor Jerry Brown, a Democrat who won office with the help of public employee unions, has said he supports efforts to curb pension spiking by requiring all newly hired state and local government workers to base their pensions on an average of their base pay for the final three years and prohibit unused vacation or sick leave in that calculation.

Assemblyman Warren Furutani, a Long Beach Democrat, has sponsored an anti-spiking bill now working its way through the legislature.

“We’ve had some real bad apples that have manipulated the system for their benefit,” Furutani said. “And we are moving to correct it.”

California until recently based pensions for state workers on a single year of salary, a practice that made it easier to spike retirement payments by inflating salaries for a short time. That increased to three years’ of salary beginning with labor contracts in 2007, said Lynelle Jolley, a spokeswoman for the Personnel Administration Department. The Legislature wrote the three-year provision into state law in January.

Just how often pension spiking occurs in California is unknown because there are more than 20 independent public pension funds. The Pacific Research Institute estimated in 2007 that spiking cost California pension systems $100 million a year. The San Francisco-based institute hasn’t produced a more recent estimate.

Spiking ‘Institutionalized’

A San Francisco civil grand jury in 2009 concluded that pension spiking “may be institutionalized and ongoing” in the city’s police and fire departments. About 25 percent of those who retired in the preceding 10 years received a salary increase of 10 percent or more in their last year, costing the city at least $132 million, according to the grand jury.

“It’s a fairly widespread practice to greater and lesser degrees,” said state Senator Joe Simitian, a Palo Alto Democrat. “Sometimes it’s pretty modest, other times it’s pretty aggressive.”

The California Public Employees’ Retirement System, the largest public pension in the U.S. at $236 billion, has rules intended to limit spiking.

Bonuses that pad a salary during the last year of employment, for example, must be offered to all employees in the same class. And the pension doesn’t allow accrued vacation that is cashed out at retirement to be counted toward pension calculations.

‘Very Clear Guidelines’

“We have some very clear guidelines about what is reportable compensation and what is not,” said Calpers spokesman Ed Fong.

Yet with more than 2,000 public agencies participating in the pension system, Fong said, legal pension padding is often written into contracts at the local level.

The California State Teachers Retirement System bases pensions on three years of salary for retirees with less than 25 years’ service and the top single year of salary for those with 25 years or more.

The Calstrs Benefits and Services Committee heard proposals for limiting spiking April 7. Officials with the second-largest pension system are proposing a unit to review cases where salaries jumped unexpectedly, as well as a whistle-blower hotline for people to report suspected abuses.

Employer Cooperation

“None of these are going to be foolproof internally to Calstrs without the cooperation of our employers,” Peggy Plett, deputy chief executive officer for benefits and services, told the committee. “Key to that is that our employers set salary.”

In February, a state oversight panel called the Little Hoover Commission released a report saying California should scale back pension promises to public workers and reshape the benefits system to make it similar to those used in industry to rein in costs.

The commission noted a 50-year-old fire chief in Orinda, about 10 miles east of Berkeley, retired in 2009 with a final salary of $185,000 and pension of $241,000. The district hired him back as a consultant earning $176,000.

The Hoover commission recommended a cap on the salary used to determine pension benefits, or alternatively, a cap on pensionable income. Under such an arrangement, compensation above the cap would be factored into contributions toward an employee’s hybrid or 401(k)-style plan.

The commission also said the state should set a uniform definition of final compensation, computed on base pay only, over a five-year average to discourage pension spiking.

To contact the reporters on this story: Michael Marois in Sacramento at mmarois@bloomberg.net; James Nash in Sacramento at jnash24@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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