The Golden State’s Pension Reforms Get Spiked

Commentary

The Golden State’s Pension Reforms Get Spiked

This Article First Appeared on Reason.com on August 23, 2014

On Tuesday, a California Public Employee Retirement System (CalPERS) committee approved a proposal that would allow 99 types of supplemental pay benefits to count toward state and local government employees’ pension benefits, nullifying, by administrative fiat, one of the key anti-spiking provisions in California’s Public Employees Pension Reform Act of 2013 (PEPRA).

Several of the 99 special pay categories are questionable in nature, but the biggest controversy was whether “temporary upgrade pay,” for employees receiving temporary promotions, should be allowed to factor into pension calculations. Earlier this month, California Gov. Jerry Brown sent a letter to CalPERS Board of Administration President Rob Feckner, in which he stated his opposition to counting temporary upgrade pay as pensionable compensation for employees hired after Jan. 1, 2013.

PEPRA was quite clear in what does and doesn’t constitute pensionable compensation for employees hired in 2013 or later (PEPRA’s pensionable compensation limits do not apply to employees hired before PEPRA went into effect in 2013). PEPRA states that pensions for new employees must be based on employees “normal monthly rate of pay or base pay,” and the law specifically excludes one-time or ad hoc payments from being counted towards pensionable pay. However, the CalPERS committee determined during the August 19 hearing that temporary upgrade pay, along with 98 other different types of special pay items, will be counted as normal pay and will count toward pensions for all employees.

Gov. Brown wasn’t the only one against factoring in temporary pay upgrades in pension calculations. Before the CalPERS committee ruling, Elk Grove City Manager Laura Gill told the Sacramento Bee that including temporary upgrade pay “really does invite spiking” and that it may erode savings from pension changes Elk Grove has enacted the past couple of years. Temporary pay increases lead to pension spiking when in the final years of their careers, public employees find a temporary assignment and earn a higher salary for six months to a year or even longer, boosting their pensionable salary. As Gill notes, if such practices become the norm for new employees, “it would put us backward from all the work we’ve done to have a sustainable and sound pension system.”

CalPERS did not provide a cost estimate for how much employers’ pension costs might rise due to the inclusion of the 99 special pay categories to newer employees’ pensionable income, but the costs of special pay items do add up. As the San Diego County Taxpayers Association noted in a 2013 study, if a 60-year-old pads his or her salary with $7,850 in special benefits in the final year of employment and lives to be 80, the specialty benefits result in an extra $118,000 in pension benefits over the retiree’s lifetime. It’s easy to see cash-strapped cities and counties incentivizing well-paid employees’ to retire, with late raises that will boost their pensions, for budget relief purposes. This practice isn’t just limited to California; it has already been happening in other states as well.

Several of the other 99 special pay items are antiquated, vague, and seemingly unnecessary, too. As CalPERS board member Steve Cooney pointed out during the August hearing, the list hasn’t been revised since 1993. The list calls for special bonus compensation for librarians with “routine circulation or reference desk duties.” It doesn’t make sense in the Internet age to provide special compensation for librarians when libraries are becoming obsolete. The list also calls for premiums for questionable and seemingly random skills, such as auditorium preparation, which CalPERS explains is for employees who are “routinely and consistently assigned to prepare auditoriums.” There is also a parking citation premium for employees who “are routinely and consistently assigned to read parking meters and cite drivers who have violated parking laws” as well as a marksmanship and physical fitness premium for officers who pass certain tests.

Good marksmanship, being physically fit, and being able to read parking meters should not be considered “special skills.” They are skills that every police and traffic enforcement official should have anyway and should not require additional pensionable compensation.

PEPRA was a weak effort by the California legislature at passing pension reform. While it left a lot to be desired it did have a few good, cost saving provisions in it like the special benefit pay anti-spiking provision. The CalPERS board ruling eliminating this anti-spiking provision will further reduce the effectiveness of PEPRA as a law that can make California’s pension system sustainable.

Victor Nava is a policy analyst at Reason Foundation, where he researches public sector pensions, federal and state economic policy, and crony capitalism.