Save $25 Million With No Program Cuts : L.A. County: Where’s this magic money hidden? In a pension program that counts benefits as base pay. Fix it now.
Surely, you’d think, Los Angeles County Supervisors would jump at the chance to save upward of $25 million a year, without cutting any vital public programs. On Tuesday, we’ll have that chance. But because it involves county employee pensions, it’s been a hard sell so far.
The issue is pension reform--or, more precisely, ending the county’s ill-conceived practice of “pension spiking.” It is an obscure, complex, technical and often difficult issue to understand--but too important to ignore.
Not only will $25 million a year be saved if the reforms are adopted, but a wrong will be righted. By all standards, pension spiking is unethical. But because of a series of complicated political maneuvers and questionable legal opinions, Los Angeles County, since 1991, has been doing it--adding the cost of an employee’s benefit package to his or her base salary for the purposes of determining the amount of future pension pay.
Here’s how it works: If a county manager earns $50,000, he or she might have an annual benefits package of $7,000 (with which to buy medical, dental, life insurance, etc., under the county’s “cafeteria” style benefits plans). Even if the employee spends all of the $7,000 on benefits, and takes none of it as cash, that money is still considered “pensionable.” Thus, for pension purposes, the employee’s salary is not $50,000, but $57,000. That is called “spiking.” Each time the cost of benefits rises, so too does the cost to our pension system. And to each of us--the taxpayers.
Is this unusual? You bet! For the most part, L.A. County is unique in this practice. When it was applied to all employees, the county’s unfunded pension liability jumped up by $400 million, requiring higher county payments into the fund. That costliness is why most public and private entities do not allow spiking.
How did this happen? The county’s former chief administrative officer, now receiving a lucrative county pension, ordered it three years ago, before he retired. No cost studies were ever done. The Board of Supervisors never publicly debated its fiscal impact; nor did the county Board of Retirement, which runs the pension system and must approve all changes. It was done behind closed doors.
Who benefits most? Since the county rewards its employees with a large percentage of their salary for benefits, the highest paid get more. In fact, the problem was much worse when transportation allowances and deferred merit pay were also used to spike the pensions of the county’s elite--a trick foiled by the intensity of public outcry.
How do we fix the problem? The Board of Supervisors asked our Economy and Efficiency Commission to study the issue and bring back a series of recommendations. Now, an expertly crafted plan of action is at hand.
Briefly, the commission’s recommendations include:
* For future employees, eliminate “spiking” simply by excluding benefit costs from pension calculations.
* For current employees, diminish the impact of pension spiking by freezing or reducing the dollar amount of benefits taken in cash or equivalents.
* For all employees, fund the cost of health-care increases outside the current benefits package so they won’t be pensionable.
* To prevent any more such abuses, require public votes and financial impact studies for all future changes to the pension system.
* Support strengthening of the new state law that addresses the problem of pension spiking.
This quiet, complicated little scandal is costing us roughly $300,000 every week that we do nothing. We must put this public-policy embarrassment behind us by voting, without a minute’s more delay, for the most aggressive version of the reforms being presented. It’s not exactly making lemonade out of a lemon, but it’s close.
