Local Pension Spiking Bills Total $3.9 Million

Several Orange County cities and agencies have been billed a combined $3.9 million by the state retirement system because they allowed near-retirement employees to pad their pensions--a little-known, but common abuse that will become illegal come July 1.

In Huntington Beach, 34 employees got an average raise of $79,000 in the year before retirement, according to a report compiled by the state Public Employees Retirement System. In Orange, five employees got an average increase of $58,000 in their next-to-last year.

Employees’ pensions can be increased by hundreds of dollars a month if they are allowed to tack unused sick leave, vacation, car allowances and other perks onto their final year’s salary, which is the basis for determining pension payments.

The abuses in Huntington Beach and Orange were among the worst in a recently released report in which the state also dunned Anaheim, Costa Mesa, La Habra, Los Alamitos, Newport Beach, the Santa Margarita Water District, and more than 70 other cities and agencies around the state for so-called “salary spiking.”

“They do it selectively. They don’t do it for everybody,” said Gary M. Jones, chief of the state retirement system’s member services division.

A common practice since the early 1980s, salary spiking sparked a public outcry about three years ago when a handful of especially egregious cases received statewide publicity. Among the most notorious was that of ex-Anaheim City Manager William O. Talley, whose salary was increased from $97,390 yearly to $159,109 within the year before he resigned in 1987.

While not illegal, spiking was--and is--considered an abuse by state officials because it doesn’t give the retirement system enough time to save the money required to pay an inflated pension.

Although most city officials aren’t willing to defend extreme cases, some view spiking as a legitimate way to reward longtime employees and managers, who don’t make nearly what their counterparts in private industry do.

In Anaheim, for example, police and fire officials have been routinely allowed to boost their final year’s salary the equivalent of 2% to increase their retirement pay. Managers in Anaheim have been allowed to add 7% to their last-year pay.

The case that attracted so much attention in Anaheim, Talley’s, was an anomaly, according to the city’s acting human resources director H. David Hill, because Talley had negotiated the spike when he was hired.

“From our point of view,” Hill said, “the state encouraged this and permitted it. It was just part of the system.

“In fact, PERS issued guidelines, bulletins, to us on how to do this.”

If any PERS bulletin was interpreted as advocating salary spiking, said PERS’ Jones, then it was “misinterpreted.”

“It may have been routine, but we weren’t aware of it,” Jones said. “I think they (cities and agencies) were either operating between the lines of the law, certainly stretching the law, and, in some cases, breaking it.”

A law passed by the Legislature last year, SB53, bans the manipulation of retirement benefits in this fashion as of June 30.

All told, PERS has sent bills to cities and public agencies throughout the state totaling $24 million for allowing retirees to artificially inflate their final-year salaries. Torrance in Los Angeles County had 27 employees with inflated salaries totaling $3.6 million, an average of $133,000 each, a figure that would substantially increase their retirement pay rates.

Cities can pay the state money to cover the inflated sums with a lump payment, work out a payment plan or have it deducted from any surplus funds in their retirement account. In many cases, the cities have already anted up; in Orange County, $3.1 million of the $3.9 million has already been repaid.

Costa Mesa had one employee with $12,433 of inflated funds; La Habra had five employees and a combined $161,000 in final-year salary boosts; Los Alamitos had two employees and $38,000 in artificial pay hikes. For Newport Beach, it was 15 employees and $589,000. The Santa Margarita Water District had one employee with $21,800 in inflated funds. And Anaheim had nine workers whose final-year pay hikes to boost their pensions totaled $101,000.

“The new law makes this all go away,” said Hill from Anaheim.

Padding the Pension

The state Public Employees Retirement System says seven Orange County cities and one special district inflated pensions. Here’s how much the various entities increased pensions and how much PERS has paid. All numbers are rounded:

City Amount inflated Employees Amount paid Huntington Beach $2,700,000 34 $2,300,000 Newport Beach 588,962 15 274,346 Orange 289,096 5 195,683 La Habra 161,058 5 161,058 Anaheim 101,390 9 80,886 Los Alamitos 38,071 2 38,071 Costa Mesa 12,433 1 12,433 Santa Margarita Water District 21,791 1 21,791 TOTAL $3,912,801 72 $3,084,268

Source: Public Employees Retirement System