What Happened?
Tucson is eliminating opportunities for pension spiking among public safety employees to cut a $30 million deficit. Phoenix, on the other hand, is allowing the practice to continue at the expense of local taxpayers.
The Goal
Pension spiking occurs when public employees cash in on unused sick days they have accumulated right before they plan to retire. This increases their total salary at retirement, which then increases how much pension payout and benefits they are entitled to in the future.
Because Tucson is $30 million in debt, the city will have to either cut at least 92 public employee jobs or reform its current pension plan. By eliminating pension spiking, Tucson will be able to salvage some of those jobs while proactively preventing more debt accumulation in the future.
Phoenix Standoff
Similarly, Phoenix is facing a $38 million deficit of its own. But the city’s Police Pension Board recently voted to keep pension spiking practices in place for public safety workers. The board decided to maintain three policies that allow police officers to count uniform allowances as part of their salaries, as well as cash in on unused sick and vacation days near retirement. The enhanced lump sum retirement payout falls under the state’s Deferred Retirement Option Plan, or DROP.
When salary counts are altered at the end of public employee careers, this income is used to calculate pension payouts, and therefore artificially hikes up pension costs. Recently retired public safety retirees of high rank were able to become millionaires once they ended their careers due to pension spiking.
Looking back, 59 Phoenix public safety retirees received annual pensions of more than $100,000, and 97 employees reported lump sums exceeding $500,000 just before retirement. Last year, an employee from the Fire Department received a record-high $911,567 DROP payment after 32 years of public service.
This spending, as well as other budgetary concerns, are forcing Phoenix officials to consider major cuts to employees, benefits or public services. Phoenix is the largest member of the pension system, and currently contributes about 35 percent of wages earned by police and firefighters to the fund. Individual employees put less than one-third of their salaries toward the fund. Phoenix will be increasing its contribution rate to 37 percent starting in July. This cost is another factoring impacting potential public worker layoffs.
Push Back
Arizona law supposedly forbids pension spiking, which has led to several lawsuits against the Phoenix Police Pension Board arise as of late. Because many taxpayers and organizations have recognized the rampant pension spiking in Phoenix, voters in the city will likely have the opportunity to support the City of Phoenix Pension Reform Initiative this year.
The Phoenix 2013 Actuarial Value Report found $1.5 billion in unfunded pension liabilities, and the fund being only 56 percent funded. Since 2011, pension costs in Phoenix have jumped 40 percent, totaling $253 million in 2013 alone.
The Citizens for Pension Reform and The Arizona Free Enterprise Club have teamed up to raise awareness of the illegal practice and push for pension reforms.
Pension Problems
Gov1 has kept an eye on the Phoenix pension situation as well as other cities’ efforts to cut down on pension costs.