The Gaming of Public Pensions
Nothing illustrates the unsustainability of traditional public-sector pensions better than the practice of “spiking.”
It seems as though no more than a few weeks can go by without another story highlighting why traditional public-sector pension plans are no longer sustainable. Last month, it was the fact that state and local governments were going to have to make up shortfalls caused by lower-than-expected pension-fund returns just when those governments could least afford it. Now it's the all-too-common practice called "spiking" that's in the news.
In Ventura County, Calif., Chief Executive Marty Robinson was earning $228,000 annually as she approached retirement last year. As in 19 other California counties, Ventura bases its pension calculation on an employee's final salary. It also allows things like cashed-in vacation time, educational incentives, car allowances and bonuses to be counted as part of that salary.
Earlier this month, the Los Angeles Times reported that $34,000 in unused sick time and an $11,000 bonus for earning a graduate degree were among the benefits Robinson cashed in during her final year. As a result, the 62-year-old will receive a $272,000 annual pension for the rest of her life, more than she earned while working.
And Marty Robinson isn't alone. Among Ventura County retirees with six-figure annual pensions, an astounding 84 percent are collecting more than they earned on the job. Meanwhile, the county's retirement fund is underfunded by $761 million.
In his 12-point pension-reform plan, California Gov. Jerry Brown proposes to stop spiking by basing pensions on an employee's three highest-earning years and not including add-ons as part of the salary calculation. If he wants to see how the proposal would work, Brown need only look to Massachusetts, where both of those provisions are already law. Specifically, he should examine the case of Charles Lincoln.
In 2000, Lincoln, a Brockton police lieutenant, was a key supporter of Joseph McDonough's candidacy for sheriff of Plymouth County. After McDonough was elected, he hired Lincoln as security director at the county jail, a full-time job that Lincoln held concurrently with his full-time position as a Brockton police officer.
During the three years he held both jobs, Lincoln called in sick 29 times to his job at the county jail and 222 times to the Brockton police department. According to a Massachusetts inspector general's report, he worked a full shift at the jail on 148 of the 222 days he called in sick to Brockton,
On January 15, 2004, Lincoln retired from the Brockton police department. Eight days later—three years to the day after he started—Lincoln retired from his position at the Plymouth County Jail. As a result of logging three years with two "full-time" jobs, he collects $139,787 annually, the biggest pension in Plymouth County history.
It may have taken three years instead of one, along with the use of sick days to juggle two full-time jobs, but even in a state that already has the laws Gov. Brown is proposing for California, Charles Lincoln gamed the system in a way that wasn't all that different from Marty Robinson's spiking. And it appears that Lincoln did it without breaking any laws. (While he was subsequently accused of mail fraud in connection with his actions, Lincoln was ultimately acquitted.)
The moral of the story is that it will take more than tweaking to fix state and local governments' pension mess. The fairest solution is to base what retirees get on how much they contributed.
There are at least two ways to achieve that goal. One is to do what many private-sector employers have already done and move from traditional defined-benefit pension plans toward defined-contribution plans. Alaska, Colorado, Georgia, Michigan and Ohio are among the states that have moved in that direction.
Another alternative is cash-balance pension plans, which guarantee an annual interest rate on employee contributions and the employer's match. The interest rate on a cash-balance pension changes annually and is often tied to the return on 10-year Treasury Bills, currently around 3.25 percent. Over the past 20 years, it has averaged closer to 5 percent.
These reforms cannot and should not affect the pension benefits of current long-time employees. But fundamental change is the only way to stem the never-ending tide of ways to game the status quo.