Daniel Borenstein: Calculation error inflates Contra Costa pensions

THE CONTRA COSTA County retirement association has mistakenly overpaid former public workers for more than a decade, according to a new legal analysis that will set off a battle over tens of millions of taxpayer dollars and could send government workers rushing into retirement before fixes are made.

The analysis concludes that the Contra Costa County Employees' Retirement Association, which manages pensions for 18,500 current and retired employees, improperly allows workers to boost their retirement pay by including unused vacation time in the calculations.

To correct that, the association could retroactively recalculate nearly 4,000 pensions for retirees who stopped working after Sept. 30, 1997. Even if changes were only made for future retirees' pensions, county taxpayers could immediately save about $20 million a year.

The mistake puts retirement association trustees in a difficult political position. The further they go to correct the error, the more they will anger current and future retirees, who have come to view the pension spiking as an entitlement. On the other hand, ignoring the problem, or taking minimal steps to fix it, will shortchange taxpayers, who pay most of the pension costs.

Trustees requested the legal analysis, by association attorney Harvey Leiderman, in response to my columns documenting examples of excessive pension spiking. The columns showed that outgoing fire officials

Pension payments are usually based on years of service, age at retirement and, commonly, final-year salary. The fire officials boosted their final-year salary by about 10 percent by counting the payout they received at termination for unused vacation. That, in turn, boosted their annual pension payments by about 10 percent.

The multiplier effect of such spiking is huge. In one case of a retired San Ramon Valley fire chief, the "terminal pay" for six weeks of unused vacation was $28,000. Counting that sum in the 51-year-old chief's final salary raised his pension by $25,500 annually for every remaining year of his life. Thus, if he were to live another 25 years, the credit for just the unused vacation would add more than $637,000 in pension payments.

The practice of counting pay for unused vacation in pension calculations is not limited to top managers. Indeed, it is common among public workers covered by the retirement association. Contra Costa County employees and workers for 16 other local government agencies, including fire districts, participate in the association's pension programs. Those workers with greater vacation time and higher salaries can benefit more from the spiking, but the principle is the same at all pay levels.

I first suggested in May that terminal pay could legally be omitted from retirement calculations. In August, a pension attorney hired by the San Ramon Valley Fire Protection District said the retirement association could and should stop the practice. Now, Leiderman, the retirement association attorney, has concurred in his legal analysis that such payments "ought not be included" in pension calculations.

The genesis of the mistake is a 1997 state Supreme Court ruling in a Ventura County case that has been widely misinterpreted in Contra Costa. In that ruling, the high court held that counties that operated their own retirement systems had to include in the final-year salary credit for enhancements such as uniform allowances, educational incentive pay and longevity pay.

The Supreme Court did not address the question of whether to count accumulated vacation that is paid off upon termination. That came later, in 2003 and 2004, when two appellate courts ruled that it need not be counted. In one of the cases, the court correctly noted the "distortions" that would be created by basing pensions in part on unused vacation.

Meanwhile, after the Supreme Court ruling, but before the appellate court rulings, Contra Costa pensioners sued the retirement association to increase their retirement payments. Under a legal settlement, it was agreed that accumulated vacation would count toward pension calculations. It turned out to be a huge giveaway because the subsequent court rulings held that the retirement association need not be so generous.

Fortunately, the Contra Costa settlement agreement only applied to pensioners who retired by Sept. 30, 1997. However, the retirement association has been applying it to all retirees. As a result, post-1997 retirees have unnecessarily been credited for unused vacation when their pensions were calculated.

The retirement association currently has about 7,000 retirees, about 3,900 of whom started drawing a pension after 1997. It's unknown how many of them boosted their pension calculations by saving vacation until retirement, although it is widely believed that most departing employees took advantage of the spiking provision.

For those retirees, the association trustees will have to decide whether to review more than a decade of records and correct the pension calculations. If they do, they will also have to decide whether to apply the changes retroactively or only make corrections for future pension payments.

The association also has about 9,400 active employees, for whom the government agencies are making payments into the pension system to ensure there is enough money available when the workers retire. Those payments totaled $207 million in 2008. The payments are calculated by an actuary based on many assumptions, including that employees will spike their pensions with unused vacation.

Eliminating that spiking for future retirees would reduce the annual pension payments. According to an actuary I consulted, the savings to the government agencies would be about $20 million a year. The biggest beneficiary, by far, would be Contra Costa County, which covers about 85 percent of all employer costs.

Interestingly, elimination of the spiking would also save current employees money in the short run. That's because they also make pension contributions, although usually much less than their employers. The savings for those employees would total about $2 million-$4 million a year, according to the actuary I consulted.

If the retirement association trustees make changes for existing employees, they will need to impose them immediately. Otherwise, those close to retirement will likely rush for the exits before new pension calculation rules take effect — before they lose the opportunity to spike their pensions with unused vacation.

There are nine trustees on the retirement association board. Four are appointed by the county Board of Supervisors; three are elected by active workers; and one is selected by retirees. The county treasurer, Bill Pollacek, is the ninth member and currently the chairman of the board.

They are scheduled this week to set a date for tackling the terminal pay issue. Look for an announcement Wednesday on the retirement association's web site, www.cccera.org, about the time and location of the meeting.

This costly mistake has gone undetected for a decade. We'll see how far the board is willing to go to make taxpayers whole.

Daniel Borenstein is a staff columnist and editorial writer. Reach him at 925-943-8248 or dborenstein@bayareanewsgroup.com.