IN JUNE 2007, UC Berkeley's police chief retired after nearly 34 years of employment, collected her pension and was promptly hired back at a higher salary under a contract that was most recently renewed just seven weeks ago.
While much has been written about whether the rehiring violated university policy, the other issue is why Chief Victoria Harrison, then 54, and UC Berkeley officials felt the need to jump through those hoops. The answer highlights how some public employee pensions — especially for public safety workers — have reached absurd levels that discourage able-bodied people from working.
"Because Harrison had earned the maximum retirement benefit, her income would have been the same whether she was working or not," her boss, Vice Chancellor Nathan Brostrom, later explained. "In fact, for the year leading up to her retirement and rehiring, she effectively worked for no pay."
It's a familiar refrain in the public sector. When Pete Nowicki, chief of the Moraga-Orinda Fire District, officially retired in January and then signed on under contract to perform the same job, he offered a similar explanation: "Since July, I've been losing money to come to work," he said.
And when the Berkeley City Council approved an 8 percent pay raise for City Manager Phil Kamlarz in January over some residents' objections, Mayor Tom Bates said the increase for the 34-year city employee was necessary to keep him because he could otherwise retire and make the same money. "He's actually working as a volunteer," Bates said.
While the Harrison, Nowicki and Kamlarz situations differ, they all raise the question of why many government worker pensions have become so lucrative that there's no point coming to work. Lest anyone think this is unique to management, it's not. Many rank-and-file employees — especially cops and firefighters — also enjoy plush retirement packages.
Harrison's case is a good example of how the system works. It has an ironic twist that probably cost her hundreds of thousands of dollars. We'll come to that later, but first let's look at the details of the deal to understand the dollars and cents.
UC police, including the chief, enjoy a retirement benefit that has become ubiquitous for cops across the state during the past decade. Under the structure, an officer is entitled to a pension equal to 3 percent of salary for every year on the job. It has become known as "3 percent at 50" because police can start drawing the money when they reach age 50.
Thus, someone on the job for 30 years can draw an amount equal to 90 percent of salary. Think about it: Nearly full salary for the rest of his life, which in many cases could be another 30 years, with cost-of-living adjustments added annually.
The salary used in the formula to help calculate the pension payment varies, but it is usually the average of the top 12 or 36 months. For most police agencies, the benefit caps at 90 percent of salary. But for UC, the benefit maxes out at 100 percent of salary. Thus, someone who worked 33.3 years could retire and make essentially as much as if he were working.
That's the situation Harrison faced. She had crossed that 33.3-year threshold. Her pension was so rich that she could have earned the same amount staying home as reporting for work. She could have also retired, started drawing her full-salary pension of $14,876 a month — $178,512 annually — and taken a job elsewhere. With cost-of-living adjustments, Harrison would have been set for life.
No one would have said anything about it if she had just retired and left. But Harrison wanted to keep working and university administrators wanted her. So they worked out a deal for her to officially retire, draw her pension and continue to work for the university under contract. The deal, reported by MediaNews reporter Matt Krupnick, had several troubling aspects.
To be sure, the UC system has provisions for retired workers to come back to work while still drawing a pension. But the intent is to fill jobs on a limited basis. Under university policy, the reappointment should be part-time (46 percent time or less) and should only be done because of "exigent circumstances" — for example, a suitable replacement could not be found after a search. In Harrison's case, exceptions were made. The chief returned full time and university officials made no attempt to find another police chief to replace her.
Brostrom insists Harrison was the best person for the job and that her rehiring was in the best interest of the university. In these times of tight budgets, it seems this would have been a good opportunity to realize a savings by replacing her with an internal candidate and leaving that person's position open.
Reasonable people can differ on that point. What's clear is that the entire situation was created because public employee retirement benefits are too generous. At too early an age — indeed, when someone is still in her working prime, as the Harrison case demonstrates — employees have little or no incentive to stay on the job.
But this story doesn't have a completely happy ending for the police chief. Harrison took her pension mostly in a lump-sum payment rather than an annuity paid in monthly installments for the rest of her life. Her $2.5 million payout came as $2.1 million upfront and, to comply with IRS regulations, the balance will be distributed to her over 10 years.
"I accepted the lump sum cash out option solely because I was advised by the university that by taking it, rather than the annuity, I could return to full-time employment," she explained in a recent e-mail. "It was my desire and that of the campus for me to continue to work as police chief."
She apparently got bad information from the university. In fact, her return to work should have been unaffected by whether she took a lump-sum payment or monthly installments for the rest of her life. Taking the lump-sum payment was a huge financial loser for her. It's an option offered to retiring UC employees, but one the university retirement plan discourages — for good reason.
For starters, by taking the lump-sum payment, Harrison had to give up the right to retirement health benefits. She probably also lost big money on the deal. The lump-sum payment is calculated by assuming the employee will live an average lifetime and is discounted with the assumption the employee will invest it and earn a 7.5 percent annual return on the money. If the worker lives longer than average or cannot manage to consistently earn 7.5 percent, she is worse off for having chosen the lump-sum payment.
In Harrison's case, she received the payout in the summer of 2007, before the stock market tanked. If she has managed to attain a 7.5 percent return since then, she might be the only person in the country to do so. More likely, her retirement package is probably worth significantly less. Had she instead opted for monthly payments for the rest of her life, the university would have absorbed the investment losses.
Many will have a hard time feeling sorry for Harrison and her multimillion dollar payout. But she is probably a victim of bad advice and a plunging stock market. Ironically, she is also a victim of an overly generous public employee retirement system that presented her with the quandary of whether she could afford to stay on the job.
It's a system that badly needs reform. Pensions should help workers live comfortably in their old age. But they should not be a financial even trade for working. That's too rich for taxpayers to support and creates warped incentives, as the Harrison, Nowicki and Kamlarz cases demonstrate.
Public employees often argue that the plush retirement packages are trade-offs for lower salaries. That's unproven. Academics who follow compensation closely generally concur that blue-collar workers draw higher salaries in the public sector, while high-end management and professional jobs are better paid in the private sector. As for benefits, they are generally more generous across the board in the public sector. Indeed, some studies show that lucrative public employee benefits are overcompensating for any deficiencies in salaries.
But if surveys show total compensation — salary and benefits — is lower in the public sector, government employers would do better to pay more upfront in salaries to match the market rather than hiding the costs in delayed benefits that are often partially paid by future generations. Moreover, creating a retirement program that encourages good workers to leave makes no sense at all.
Borenstein is a staff columnist and editorial writer. Reach him at 925-943-8248 or email@example.com.