Despite Reforms, Pension Spiking Still Stinging Taxpayers

Roughly 450 municipalities have given employees end-of-career raises in recent years that translated to higher pensions. Taxpayers are paying the price in more ways than one.

pension spiking

 

Just before Emily Bell retired as the City of Bloomington’s human resources director late last year, the municipal government paid her almost $92,000 for unused sick time she accrued over her 35-year career.

The payment honored a long-held practice in Bloomington – unused sick time gets cashed out. The amount also is factored into annual pension payouts.

But there’s a new twist. Because of a change in state law three years ago, that sick-time compensation to Bell required Bloomington to quickly pony up $360,000 to the public-sector pension manager who requires that retirement accounts are properly funded.

The reason for Bloomington’s big bill: Bell’s sick time actually helped boost her pension payouts almost 30 percent, from about $89,000 to around $113,000 a year. That, in turn, required the city to pay the Illinois Municipal Retirement Fund (IMRF) additional money to fund her retirement.

And as a result of the 2012 law, Bloomington has only three years to make that payment to IMRF, compared with a previous requirement that allowed the city to account for additional costs over a 30-year period.

Bloomington’s not alone. Since the law change went into effect, roughly 450 local governments are on the hook for almost $29 million to cover higher pension payments for retired employees, an analysis by the Better Government Association shows.

The 2012 law aimed to shed a light on pension costs, said former state Rep. Karen May (D-Highland Park), who sponsored the legislation.

May said she also hoped to discourage so-called pension spiking, a practice in which bosses give employees raises just prior to retirement. Those end-of-career raises increase the payouts employees get when they retire."The purpose was really to end it," May said, referring to pension spiking. "The excuse for doing it locally was, ‘He was a good guy and we just wanted to send him off well.’"

To be sure, retirees collect money according to rules set by the government employers. Proponents of the state law say it provides much-needed transparency in the pension accounting process and is leading to governments changing their exit package policies."It is bad pension policy to pay large sums of money to people retiring, which, in turn, boosts their pensions," IMRF Executive Director Louis Kosiba said via email. "By spiking salaries to enhance pensions, the costs to the employer [and] taxpayer are increased. . . . Spiking is antithetical to both the design, goal and spirit of these plans."IMRF is the taxpayer-supported pension fund that covers many suburban and Downstate government employees in Illinois.Bloomington, which is paying $1.3 million in total for exit packages that boosted pension payouts, began terminating compensation for unused sick time for new hires three years ago. The decision was made, in part, because of the 2012 law, city officials said.

For a cash-strapped municipality, the payments are a challenge. Bloomington is facing a $7 million budget deficit for its next fiscal year and is contemplating raising taxes and fees, spokeswoman Nora Dukowitz said.Joliet is paying more than $960,000 in pension spiking charges to IMRF and recently drained $8.5 million from reserves in part because of the issue, City Manager James Hock said.

Joliet is considering doing away with at least some end-of-career payments. Hock said the city wants to negotiate it out of union contracts first and then deal with other employees.

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Springfield is paying IMRF more than $4 million for end-of-career payouts – the most of any local government, according to IMRF records.Most of that cost relates to employees cashing out unused vacation time close to retirement, Springfield budget director William McCarty said.

Springfield recently passed a law that will curb unused vacation time counting toward pension calculations by June 2016."It was basically a pension spike, a very significant pension spike," McCarty said. "It [exposed] the city to tens of millions of dollars [in] additional pension liability."Will County is paying almost $3 million to IMRF. The majority of payments come from the sheriff’s office for unused vacation, sick and comp time, according to Will County Executive Larry Walsh’s office."It’s a problem," Walsh’s chief of staff Nick Palmer said. "That’s money we can’t spend on other services. We’re pretty strapped for cash."The sheriff’s office didn’t respond to questions from the BGA.Usually IMRF pension calculations are based on a retiree’s highest total earnings during any 48 consecutive months within the last 10 years of service.

Many increases of 6 percent or more in those 48 months trigger an IMRF charge to the government employer. Payments for unused sick and vacation time typically result in a charge.Increases that come from promotions, overtime and the like are exempt. The three-year clock on when government agencies need to pay IMRF starts when a person retires.It is fairly easy to determine the cost to government agencies for pension spiking charges since they must be paid within a few years. That hasn’t always been the case. When payments were spread over 30 years it was difficult to determine what governments were actually paying to cover the spike.IMRF is in relatively sound financial shape, in part because of the payments it requires. The fund is about 90 percent funded, meaning the pension agency has 90 cents for every dollar owed in long-term benefits, according to financial documents from the system. Generally, a minimum of 80 percent funded ratio is considered healthy. By comparison, the State of Illinois’ Teachers’ Retirement System was only a little more than 40 percent funded as of June 30, 2014.