Is spiking the biggest problem for public pensions?

September 5, 2012

The crisis that public pensions face over funding shortfalls is becoming increasingly important in the media. Add to that some concerns about the generous benefits that some public retirees receive. As state after state struggles with new controls on benefits and takes steps to address plan shortfalls, the issues become mired in more and more complexity.

There is one issue in the pension storm that is easy to understand; that is the issue of “pension spiking,” or an employee taking sometimes illegal steps to inflate the final salary on which their pension is based. California State Controller John Chiang has gone so far as to call spiking a “form of public theft.”

The Federal Reserve Bank of Cleveland defines pension spiking as:

The practice of inflating employees’ salaries to increase their benefit base. This can be accomplished through a last-day “promotion,” where the employee receives a new title and a salary far above what he earned in the previous 364 days, or where an employee nearing retirement receives the lion’s share of available overtime.

Here is a particularly crazy example of spiking from Bloomberg. In this case the employee has included every conceivable form of compensation into their salary total for their pension calculation:

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.

The Los Angeles Times did an excellent analysis of 20 California counties that do not participate in the statewide pension system, CalPERS, which bans pension spiking. The prevalence of pension spiking among higher earning public employees is surprising:

An analysis by The Times of partial data from Ventura and Kern counties — two small windows into the problem — shows that spiking is affecting pension systems already staggered by massive obligations.

In Ventura County, where the pension system is underfunded by $761 million, 84 percent of the retirees receiving more than $100,000 a year are receiving more than they did on the job. In Kern County, 77 percent of retirees with pensions greater than $100,000 a year are getting more now than they did before.

I was unable to find any national estimates for the pervasiveness of pension spiking, but there are some striking stories out there. Wesley Machida, head of the Hawaii State Employees Retirement System, said that hundreds of Hawaiian public employees were spiking their pensions. Jim Dooley of reported:

Of 5,000 state and county employees who retired since 2009, 674 of them substantially boosted their pension benefits by a practice called “spiking,” a state senate investigating committee was told today.

A “spiking” employee arranges to work as many hours of overtime as possible over the last three years of service, knowing that the extra pay will disproportionately boost pensions at retirement.

The data from Hawaii show that 11 percent of retirees are spiking their pensions in the state; an enormous drain on underfunded pension systems. It is clear from other reports that pension spiking is not an isolated problem.

In a forward-looking move, California outlawed pension spiking in legislation enacted last week. But how do state and municipalities claw back the illegal benefits from spiked pensions?

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