Out of Control Policy Blog

Pension Spiking Fueling Budget Problems in California

Ever wonder why state and local governments just can't seem to get a hold of their structural deficit problems?  Overly generous, unsustainable pension benefits are a big reason why.  Unaffordable pensions are the main reason the City of Vallejo went bankrupt, and many others have been brought to the brink.  Sure, the recession has led to diminished revenues and made things that much more difficult, but state and local governments--including a disproportionate number in California--have been struggling with increasing pension costs for years, long before the recession kicked in.  The State Legislature didn't help matters when it passed a bill in 1999--at the height of the "dot-com" bubble--to increase pension benefits significantly.  The deal allowed public safety workers with 30 years' worth of work experience to retire with pensions equal to 90% of their salaries.  Many local governments soon raised their benefits to match the state's formula.

The problem is exacerbated by pension spiking, whereby public employees are allowed to count perks such as unused vacation time and sick leave toward their final compensation just before they retire, so that their pension benefits will be higher.  In some cases, this increases the government's retirement costs dramatically.  Contra Costa Times columnist Daniel Borenstein illustrates this well in an article about pension spiking by officials of the San Ramon Valley Fire Protection District.  Borenstein notes: "[T]wo fire chiefs, a deputy chief and an assistant chief who all retired in the past seven years are now each bringing home annual pensions of roughly a quarter-million dollars or more. The pensions far exceed the base salaries the officials were earning during the final year of their employment."  Officials of the San Ramon Valley district were able to spike their final year's pay as much as 24% to 49% by including unused sick time, administrative leave, and vacation time; auto allowances (annual payments to an employee for using his or her own vehicle instead of one provided by the district); and management pay and standby pay ("redundant benefits that essentially provide extra compensation for performing work that is fundamental to the job," as Borenstein affirms).

Those perks add up rapidly.  As Borenstein explains, "The pensions increase quickly in part because for every dollar of salary added to final year pay, almost a full dollar is tacked on to the retirement benefit each subsequent year. Thus a $1,000 raise in the final year could translate to $30,000 in additional pension benefits over a retiree's remaining life."

What's even more maddening is that governments need not allow such pension spiking, but they do anyway.  The state Court of Appeal has ruled that such "termination payments" do not have to be included in pension calculations, so governments should stop giving away the public's money!  One would think that would be a no-brainer, especially at during a time in which state and local governments are struggling to balance their books.  The silver lining to the current economic crisis is that perhaps it will finally force legislators to sit up, take notice of the unsustainable costs they have imposed on taxpayers, and finally return to more sensible public employee compensation rates.  Borenstein is absolutely correct when he writes that the pension spiking example of the San Ramon Valley Fire District "should alarm residents and prompt taxpayers across California to ask whether public employees in their communities are similarly benefiting from broken retirement systems."  Given legislators' reluctance to address budget imbalances with any significant reforms, it may take a little more voter anger to really get their attention.

Adam Summers is Senior Policy Analyst


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