Pension Spiking: Who Really Gets Stuck?

Periodically, the courts have issued opinions regarding provisions of the Law. The CCCERA Board consists of: • Four members representing retirees and employees • Four members appointed by the Board of Supervisors • The County Treasurer/Tax Collector The cost of the retirement plan is covered by employer and employee contributions and CCCERA investment income. If these resources are not sufficient to cover pension costs, it is ultimately the responsibility of the taxpayer to pay the shortfall. In February 2010, two bills were introduced in the California Legislature to reform California public pensions and pension spiking.1 As of April 2010, these bills have not been debated. If passed, these laws will take precedence over current CCCERA policy. The County pension shortfall has been increasing over the last several years and is projected to increase in the future. From 1999 to 2009 pension shortfalls have increased from $67,000,000 to $202,000,000 and the shortfall is projected to be $293,000,000 by 2016. Past pension shortfalls have been funded through the general budget. In the past ten years, two previous Grand Jury reports made findings and recommendations regarding public employee retirement issues. The final compensation used to determine an individual’s retirement amount is not limited to the employee’s annual salary. It may also include many other cash benefits (pay elements), such as: • Sale back of vacation leave • Uniform allowance • Educational incentive pay • Vehicle allowance • Others (Appendix) The compensation must have been earned by and payable to the employee during the final compensation period. Within the law, employer members have discretion over 1 Assembly Bill 1987 and Senate Bill 1425 certain pay elements which may be included as part of final compensation. For example, subject to contractual rights, some employer members cap the number of vacation hours that can be accrued or counted towards final compensation. An employer member providing a vehicle for official use to an employee rather than providing a cash allowance is another example. Employer board members, as well as a CCCERA retiree, stated during interviews they did not fully comprehend the consequences of long-term pension liabilities with respect to the approval of an employee agreement. Spiking elements occur at the levels of rank- and-file, supervisor, manager and executive. Collective bargaining negotiations which deal with retirement benefits among other benefits, are held between managers and represented employees. Managers, in turn, negotiate with their respective employer. The current process provides for the opportunity of managers “to get what the staff gets” in spiking benefits. This may provide a disincentive for managers to be objective in negotiations with staff. Managers generally have more facts and knowledge about compensation impacts than employer board members. The salaries and benefits resulting from these negotiations may have a ‘trickle up” effect in the determination of the salary and benefits for managers. Current law (Lexin v. Superior Court 2010 Lexis 115.) holds that there is neither a conflict-of-interest nor an ethical issue with managers negotiating on self-benefiting issues. Although employer members cannot adopt less stringent conflict-of-interest or ethics codes than required by law; they can adopt more stringent codes. Current circumstances would suggest that employer members adopt more stringent procedures in salary and benefit negotiations. METHODOLOGY In September of 2009, the Grand Jury began looking into the issue of pension spiking and its financial and service delivery impact. The Grand Jury interviewed current and former employer members. Members of the Grand Jury attended several public meetings of CCCERA and the San Ramon Valley Protection District at which pension policies and spiking were discussed. Opinions prepared by legal counsel for the San Ramon Valley Fire Protection District and for CCCERA, which were made available to the public, were reviewed. The Grand Jury also received and analyzed County Administrator’s financial report which included pension shortfalls. FINDINGS: 1: Increased pension costs directly reduce funds available for services. Higher pension obligations also become a debt to taxpayers of Contra Costa County. 2: Some CCCERA employer members are not fully knowledgeable about pension law and the financial impact of their decisions relating to the calculation of pension obligations on revenues and services. 3: Some employer board members rely heavily on input from staff. As members of the same pension system, the staff may benefit from actions recommended to their employer. 4: Many of the pay elements and policies related to calculating final compensation are at the discretion of the employer member. 5: Some employer member policies permitting pension spiking increase pension obligations, which in turn will annually increase the amount of pension funds needed.