Goldwater Institute Takes On Phoenix Pension Spiking

On August 15th, the Goldwater Institute filed a lawsuit against the city of Phoenix for failing to reign in the costly, and illegal, practice of pension spiking among Phoenix police department employees represented by the Phoenix Police Sergeants and Lieutenants (PPSLA). Phoenix public safety employees participate in statewide Public Safety Personnel Retirement System (PSPRS) for their pensions.

The PSPRS is the most generous retirement system in Arizona. The average retiree enrolled in PSPRS retires at the age of 51, with 23.6 years of service, and receives an annual pension of $48,842. In Phoenix, the average police officer actually receives closer to $60,000.

The PSPRS, like most public employee pension systems, is a defined benefit plan. Rather than tying pension benefits to the contributions an employee makes throughout their career (e.g. 401(k)-plans), defined benefit plans use a set formula to calculate pension benefits a retiree will receive for life.

For example, the formula for employees hired before 2011 who have worked 25 or more years: “50% of average monthly compensation for first 25 years + 2.5% of average monthly compensation for each year of service above 20 years. Maximum benefit is 80% of average monthly compensation.”

At issue in the lawsuit is the arrangement between the PPSLA and the city of Phoenix to define “compensation” in a manner at odds with how state law governing the PSPRS does.

According to Arizona law governing the PSPRS, “compensation” may include base salary, overtime pay, shift and military differential pay, holiday pay, and longevity pay. For the purposes of calculating pension benefits, Arizona law is clear in excluding “payment for unused sick leave, payment in lieu of vacation, payment for unused compensatory time or payment for any fringe benefits.”

However, in the 2012-2014 memorandum of agreement (MOA) between PPSLA and the city of Phoenix, multiple sections enable the inclusion of payments explicitly prohibited by state law. For example, on page 16 of the MOA, the contract provides that “a unit member who has accrued 1,714 hours or more of unused sick leave may elect to have the additional sick leave that he earns paid to him as salary on a monthly basis.” In other words, the contract allows those represented by PPSLA to inflate their salaries.

Phoenix Mayor Greg Stanton has reportedly called for an end to the provisions that enable instances of pension spiking. Considering that the $5 billion pension plan itself is only between 56.6% to 65.8% funded, and the city of Phoenix has had to dole out increasing portions of its budget towards pensions, any gaming of the system takes advantage of taxpayers while contributing to the unsustainability of the system itself.

According to The Arizona Republic, a police union official said that “if the city takes away pension benefits, then Phoenix must increase other forms of compensation for public-safety officers.”

This is a common counterproposal by public employee unions facing any reforms to pension plans. In California, police officers in the city of Santa Barbara demanded pay increases to “offset” an end to “pension pick-ups,” a practice by which government employers, in addition to making their contractually obligated contributions to the pension systems, “pick-up” the payments employees are supposed to make. In Ventura County, the Service Employees International Union similarly negotiated for a one-time payment of $750 and salary increases in exchange for agreeing to end pension pickups.

If it is any indication of how flawed the pension system in Phoenix is, the outgoing city manager of Phoenix was recently in the news for using $200,000 worth of unused sick leave to spike his own pension. According to one calculation, he will be receiving an annual pension of over $200,000 for life. As icing on the cake, he will soon be assuming his role as the new city manager of Santa Ana, California, where he will receive a salary of $315,000 and a housing allowance with a combined worth of nearly $500,000.