When it comes to pension spiking — the artificial inflation of retirement benefits — the state Public Safety Personnel Retirement System appears to be on both sides of the fence in two lawsuits in Maricopa County Superior Court.
The key issue in both cases is whether payment for unused vacation time, sick leave and other benefits should be counted as salary to enhance the calculation of a person’s pension. The larger the ending pay, the bigger the “spike” in lifetime retirement benefits.
In one lawsuit, the system is being sued for allowing the practice to occur in Phoenix. In the other, the trust, which manages state pension funds, is alleging that its former administrator improperly spiked his pension benefits.
The system runs a $7.7 billion trust for 52,000-plus members in three state retirement plans: the Public Safety Personnel Retirement System, which covers police and firefighters; the Elected Officials Retirement Plan; and the Corrections Officer Retirement Plan.
The trust is significantly underfunded and has enough money to cover only 59 percent of its liabilities, largely because of investment losses. Pension spiking, however, has also contributed to the trust’s poor financial health and has drawn the public’s ire as more tax dollars are needed to prop up the system.
Pension system defended
The Public Safety Personnel Retirement System is among the defendants in a case filed by the Goldwater Institute, a conservative think tank, which accused the system of allowing Phoenix to illegally let police officers and firefighters spike their retirement benefits at the end of their careers.
The system contends it only pays the benefits and has no control over Phoenix.
Supporters of the practice say those who benefit are not breaking the law because the excess vacation and sick leave are not being cashed out in a lump sum. Instead, they are being paid in the form of extra pay over numerous paychecks.
Documents obtained this month show that the practice allows some retired Phoenix public-safety officers to significantly enhance their annual and lump-sum retirement benefits, called the Deferred Retirement Option Plan.
Those records show 59 retirees receive annual pensions in excess of $100,000, while 97 received lump sums in excess of $500,000 when they retired. One Phoenix Fire Department retiree last July received a record $911,567 DROP payment after 32 years of service.
Those with the larger benefits typically are veteran public-safety officers with higher base pay, also key factors in determining pension benefits.
A status conference hearing on the Goldwater Institute’s case is slated Friday before Maricopa County Superior Court Judge John Rea.
Allegations of spiking
In another lawsuit, the pension trust alleges that Jack Cross, its former administrator, improperly spiked his pension by including lump-sum vacation and sick-leave payments in his ending salary.
The trust temporarily suspended his retirement benefits, now at $221,769 annually. Cross sued, and in August 2012 had his benefits restored. The retirement system, however, has appealed. The Arizona Court of Appeals is expected to rule this fall.
Cross, who runs an investment firm from his Scottsdale home, claimed the trust violated his retirement contract.
The case began in November 2010, when current trust Administrator Jim Hacking notified Cross that there were questions over his effective retirement date and that his benefits would be reduced, even though the trust had been paying him retirement benefits for about eight years.
In February 2011, Cross was told he had to repay more than $600,000. The trust also alleged he should not have been able to enhance his ending compensation, and it claimed Cross retired in 2004 instead of 2002.
Cross contended the trust board approved his retirement in 2002 and then rehired him as the interim director for two more years. In court records, he produced documents showing a system supervisor approved his pension.
Judge Crane McClennen agreed with Cross and ordered the trust to restore his retirement benefits and pay $126,862 for his attorney fees.
The trust, in a written response to The Arizona Republic, said it sought to recoup payments made to Cross to protect the pension fund.
The trust also said Cross, as administrator, was allowed to be in the elected officials’ plan, which does not allow members to count lump-sum vacation or sick-leave payments in their salary to determine pension benefits.
In the Phoenix case, the trust said it has not been presented with evidence that the pension of “any other particular claimant has been calculated based upon unlawful compensation.”
Over the last several years, The Arizona Republic has revealed problems with the practice in Phoenix. The state has been aware of those problems since at least last year, when it provided calculations to the newspaper showing what the pension of one high-ranking former Phoenix fire official would have been with and without spiking.
Hacking also has acknowledged to the newspaper that the trust is aware of pension spiking in Phoenix.
Jon Riches, a Goldwater Institute lawyer, said it’s ironic that the trust continues to battle Cross while also defending itself against similar claims.
Riches said he believes Public Safety Personnel Retirement System Chairman Brian Tobin, a Phoenix assistant fire chief, has a conflict of interest because Tobin on Friday publicly defended the spiking practice.
Tobin made his comments before the Phoenix Police Pension Board, also a defendant in the Goldwater Institute suit.
Tobin told the five-member board, which was reviewing the case at a public workshop, that whatever decision it made would influence firefighters because Phoenix public-safety employees have essentially the same pension rules.
That board took no action Friday on whether to end spiking.
Tobin said he has publicly acknowledged to the Public Safety Personnel Retirement System Board that he has a conflict of interest and has not participated in discussions involving the lawsuit against the Goldwater Institute.
Pensioners First – So if Tobin admitted there is a conflict, how might that taint his decision-making and the official actions of the board he leads when it comes to putting all beneficiaries first (beneficiary interests above all else)?