Get rid of ‘spiking’ to boost pensions

State legislators were informed last year about the practice of state and county employees booking huge amounts of overtime as they neared retirement to bolster their pensions, but the lawmakers took no action to address the problem. Since then, city auditors have confirmed the practice of senior employees spiking overtime, and the Legislature needs to confront the issue.

Gov. Neil Abercrombie asked the Legislature last year to eliminate overtime and other kinds of extra payments in the final years of employment by the state as factors in determining pensions. He said that would save $13 million in the 2012 fiscal year state budget and $19 million in county taxes, reducing the unfunded liability of the Employees’ Retirement System, now standing at $8.2 billion, by a half-billion dollars.

City auditors determined last month that each of the 10 highest-paid employees of Emergency Medical Services were paid an average of nearly $140,000 annually, more than double their average base salary of $63,252, with the extra pay due entirely to non-holiday overtime. Those cases alone would add up to $5 million to the system’s unfunded liability.

Like pension benefits for public employees in other states, those in Hawaii are supposed to reflect salary levels in the final years of employment. Wesley Machida, the retirement system’s administrator, said the result is "a large unfunded liability, which will grow in the future if things remain the same." Unfortunately, Hawaii is not alone.

"Workers have found ways to boost their salaries in those final years, greatly increasing the level of benefits to which they are entitled," according to a 2010 report by the Pew Center on the States. "Common ways to boost salaries include ensuring that overtime goes to the most senior workers, saving sick leave and getting temporary promotions of last-minute raises. When states allow such actions to occur, retirees who manipulated the system get a higher benefit and states suddenly face an increased liability."

Starting with new employees hired this year, Hawaii pensions are to be based on their five highest-paid years instead of three. That is likely to merely spread the spiking over a longer period, doing little to solve the underlying problem. Simply, overtime should not be factored in with salary when retirement pay is eventually calculated.

The state Senate last year approved a weak proposal to gradually reduce the amount of overtime as a factor in determining pension benefits to 50 percent, beginning in 2017 — but even that was too jarring to public employee unions to win final approval by the Legislature. It could be considered in this Legislature, but merely as a starting point, as much more forceful reform needs to occur.

The retirement system for county and state employees is working on draft legislation that would limit the amount of overtime for determining pensions, which is expected to be introduced this week. While most states allow overtime to be included in determining pensions, one obvious, needed solution to the massive fiscal problem is to end the practice entirely, and that is what Hawaii’s Legislature should do.

Meanwhile, Abercrombie and county mayors should order department directors to spread overtime throughout their staffs and supervise scheduling more tightly. That could go a long way to end what may be a longtime practice aimed at eventually providing an extra-large pension for every employee who eventually will retire. Newer employees should not be allowed to defer to senior colleagues to stay extra hours on the job, and those nearing retirement should be kept from using seniority to rack up the pay — and to add undue burden to taxpayers.