POLICEPAY.NET
By: Ron York
All defined benefit plans use a similar formula to calculate the pension benefit. There are three variables:
The total years of service – e.g. 30 years
The accrual rate per year of service – e.g. 2.5%
The ending pay – e.g. average of last three years - $80,000
The pension benefit is determined by plugging these three variables into the following formula:
(years of service X multiplier) X (ending pay) = pension payment
(30 years X 2.5%) X ($80,000) = $60,000
(75%) X ($80,000) = $60,000
Spiking occurs when an employee manipulates any of the variables in the equation to cause the pension payment to be larger. The years of service cannot be increased by an individual employee, unless an employer allows it – purchasing of credits. An individual employee cannot change the multiplier, but his union might. This leaves the only variable, ending pay, which can be manipulated. Obviously, a single employee cannot change his rate of pay, but there are ways to increase the amount paid to the employee.
Many places fix the measurement pay by limiting it to the “normal” paycheck – 40 hours per week, without overtime and paid time off (PTO) payouts. If this is the case, then the door is slammed shut on the employee, leaving no opportunity for manipulation. However, if the ending pay is based on W-2 wages, pumping up that number is possible. As a corollary to an old axiom, I offer the following – “Where there is a way, there is a will.” Using the numbers in the above illustration, let us assume that the combined overtime and PTO payout is $20,000 for the last year and the measurement period is the last year. Our employee would now have an ending pay of $100,000. A pension based on that number is $75,000 – twenty-five percent more than what would have been available using the “normal” pay basis.
If spiking is an option, most employees will accumulate PTO until retirement and work as much overtime as they can during the ending measurement period. This results in a wide disparity among department employees. Some officers may work in an area that provides little or no overtime. The achievers in the department who retire in upper management positions are exempt from overtime. While PTO accumulations are available to everyone, the bulk comes from comp time banks built with overtime credits. Two employees with the same start dates, retirement dates, and career paths could retire with vastly different pension benefits.
Several weeks ago, I read an article where the writer was using the term “pension spiking” to describe the sudden increase in accrued benefits when the accrual rate is increase and current employees are given credit for prior years at the new rate. I think spiking is probably the wrong word, but it does not matter. We all understand what he means. A better term is “prior service credits.” An employee with 20 years at an accrual rate of 2.5% would have earned a pension benefit of 50%. If the accrual is raised to 3% and he is given credit for prior years at 3%, he would then be entitled to a 60% pension, which is a 20% increase (50% X 20% = 10%). This is why there is a sudden funding shortfall in pension systems when this occurs.
Obviously, if you are on the receiving end of either “spiking” or “prior service credits” this is a good arrangement. Besides the problem of not being applied equally, there is the public perception problem. A few weeks ago, there was an article in an Omaha newspaper talking about a police officer whose retirement benefit was more than his normal pay at the time of his retirement. I am sure you know what the angle of that story was and where it is going. You are right, a full frontal attack on the pension system. No pension, regardless of how generous or stingy, is any good if it is not politically sustainable. If your pension has a stated benefit of 75%, but the average officer is getting 85% of normal, work to get it changed to 85% of normal pay.
Not convinced? Maybe you think that people who work more hours should have a larger pension benefit. That could be one of the benefits of a defined contribution plan. Contributions could be based on W-2 wages over an entire career, not just during a short measurement period at the end of a career. This would also eliminate any advantage of accumulating PTO and cashing out in the end. This scenario would favor the guy who cashes out each year.
Public safety pension plans are coming under total battlefield assault. The attack is coming from all four sides. The old “tried and true” strategy of hunkering down and weathering the storm will not work. This is an area where there truly is “climate change” and we are being hit by a perpetual tsunami (Jack’s terminology). What should be done? The best option is converting to defined contribution plans (read my September 5, 2008 article). Under a defined contribution plan, there is never a discussion of the benefit, or spiking, or prior service credits.
If you find the defined contribution route too risky, start bullet-proofing your defined benefit plan. Fix things, like spiking, that cause the plan to come under scrutiny, which leads to condemnation and eventually a reduction in benefits. If you give the opposition a chance, they will be inside the house wreaking havoc. Pull up the drawbridges and put the alligators in the moat. A battle is about to begin.
I realize that few of you are willing to buy into what I have presented, maybe none of you. All that I ask is that you honestly think about what I have said. After you get over being angry with me, ask yourself this question:
“Why would
Then begin trying to analyze the possible thought process that would lead me to these “wrong” conclusions. Try to read my mind before you knock me out-of-the-box. If you have a good idea, pro or con, email it to me. If you just want to ventilate, leave a comment on the POLICEPAY Journal or the POLICEPAY Daily Update. You can browbeat me all you want, just keep it clean.
