Pension spike

by Russ Roberts on July 15, 2010

in Budget Issues

More hard-to-believe info on the world of public employee compensation in California. From the Contra Costa Times (HT: Roman Hardgrave):

PETER NOWICKI, the chief of the Moraga Orinda Fire District, knows how to play the retirement system. That’s why he was able to convert a $185,000 annual salary into a $241,000 yearly pension.

The losers are taxpayers and employees of the fire district who are left to help finance the outrageous payments. They should insist that elected officials put a stop to similar deals. And other public agencies, including Contra Costa County, should take note. Pension spiking is widespread and should be ended.

To be sure, the case of Nowicki, a 26-year fire department veteran, is extreme. Pension experts who looked at the numbers in his case were amazed. Residents of Orinda and Moraga should be appalled.

How did he do it? Primarily by taking maximum advantage of rules that enabled him to sell back unused vacation and holidays. As a result, he increased his starting annual pension payment 46 percent, from $165,000 a year to the $241,000 yearly total.

Nowicki’s only 50 years old. Assuming he lives to 80, those moves alone will add $2.3 million in today’s dollars to his pension.

Ironically, after taking retirement Nowicki turned around and went back to work for the district on a five-month contract at an annual rate of $176,000, which he collects on top of his pension payments. Moreover, it’s Nowicki who is in charge of overseeing the district’s finances.

I would not use the word “ironically.” Cynically? Despicably? I think the reporter meant it to refer to the last sentence of that paragraph.

The story continues:

By his own admission, the district needs to trim back its pension program if it hopes to maintain services. “There are changes that need to be made to the retirement system,” he told me, “and we are actively pursuing different options and working with labor to see what kind of changes we can make.”

Lots of luck convincing the rank and file to recognize the financial realities while you’re personally sucking money out of the system at a staggering rate. Indeed, Nowicki’s retirement payments are a perfect example of what’s wrong with public pension systems.

The chief, like most police and firefighters in the state for the past decade, has been granted a pension that allows him to retire as early as age 50 and collect 3 percent of his final salary for every year of service. One of the key tricks of the system is boosting that final salary. Here’s how Nowicki did that.

For starters, the fire district’s generous vacation policy provides up to 10 weeks off per year for employees with more than 30 years’ experience. In Nowicki’s case, he was earning 8.4 weeks a year when he retired. Not surprisingly, he had a hard time getting his job done and taking all that vacation.

Next, management employees in the district can sell back some of their unused vacation each calendar year. And, if they sell it back during their final 12 months of employment, they can count it as income for purposes of calculating their pensions. Notice that if the final 12 months of employment straddle two calendar years, the employee can sell back vacation twice and count all the income toward the pension calculation. That’s exactly what Nowicki did. He sold vacation in 2008 and again in January 2009, just weeks before his retirement.

But, even after selling back vacation time, he still had more left. So when he retired the district paid him for that time as well as for unused personal holidays. And, under the district’s policies, those payments were also counted as income when computing his pension payments.

The combined effect of the vacation sell back and the further cash out of unused vacation and personal days added about $76,000 a year to Nowicki’s pension — for the rest of his life. And, yes, the pension payments increase with inflation.

The story was last updated in August of 2009. I’ll try to find out if anything has changed in the law.

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