Guest Essay: How to stop pension spiking

Monday, October 11, 2010

The recent exposing of salary spiking and their resulting pension increases by governments that participate in the Illinois Municipal Retirement Fund has led to public outrage.

The people want change.

Yet there is an obstacle to simply adopting a system that prohibits such spikes from being included in a retiree's pension. Public pension benefits are constitutionally protected in Illinois. Changing the definition of salary may result in a successful court challenge.

That doesn't mean there isn't an answer. Three actions can be taken by the legislature to blunt this abuse without violating the constitution.

First, state law should require that any retirement bonus or payment to a retiring public employee for accrued leave be paid as continuing salary on the payroll, even though the person is no longer working. Lump sum payments should be prohibited.

During this extra time on salary, the retiree would be ineligible for his pension and would continue as an employee. This time could be called "terminal leave." At the conclusion of the terminal leave, he would go off the payroll and be eligible for his pension based on his final salary and total service, including the time on terminal leave.

But if he receives a $96,000 lump sum payout in his last year, his final average salary spikes to $9,712 and his pension increases to $6,313. This results in a $14,900 increase in annual pension or $380,000 over his lifetime.

This is the type of abuse highlighted in the Highland Park News and Chicago Tribune.

However, if my new law requires that he take his $96,000 payout in terminal leave on the payroll, his final average salary increases only to $7,855 and his pension for 36 years increases to $5,253. The gradual payout of bonus and accrued leave increases his pension by only $2,305 per year.

And remember, he gave up a year of pension when he was on his 12-month run-out of his terminal pay. Overall, the municipality, park district or school district achieves a gain through this change.

This approach might increase other compensation normally paid to employees, such as health insurance premiums. Local governments could control this by adopting or negotiating policies that limit other benefits during terminal leave. Or they can modify their policies and practices so that large amounts of leave do not accumulate.

No valid reason

As a second suggestion, all local governments should be prohibited from compensating any employee by transferring to his ownership any city or district property, including an automobile. There is no valid reason to pay anyone this way.

Unless the practice is prohibited, the gift of a car can only be recognized for salary purposes as a lump-sum spike.

The final suggestion involves controlling rate-of-pay spikes given because a person has announced his retirement. This is a mechanism used sometimes by school districts.

When schools allow such a spike, the resulting higher pension cost is transferred to every taxpayer in Illinois. This is because the basic teacher's pension is not funded by the local school districts; it is funded by the state's taxpayers (although the local districts pay for certain pension "sweeteners.")

A law should be considered that would prohibit towns and districts from adopting personnel policies that allow for an increase in an employee's salary that is predicated upon his announcement of a planned retirement. Further, governments and unions should be prohibited from entering into a contract that provides for such a means of compensation.

Other applications

If adopted, these three suggestions would act to end much of the abuse recently reported. These changes can and should also apply to the individual police and fire pension systems operated locally but defined and regulated by the state.

The proposals are fair and workable. There are no constitutional issues. The state can regulate how local salaries are paid as long as home-rule pre-emption is a part of the solution. This can be done on a vote of the legislature and signature from the governor.

I actually don't like the idea of the state closely controlling the manner in which local employee wages are paid. But the public is angry, the media is focused and every hint of abuse lights the fire against pension systems.

Local officials now must accept previously unacceptable mandates in order to restore confidence in the system.

Daniel Ryan is a trustee with the village of Skokie Police Pension Fund. He also is an adjunct professor, public finance, for Lewis University and Southern Illinois University.