By Bryon Schlomach, Goldwater Institute
Have you ever squeezed a balloon and had parts of it squeeze out between your fingers? Unless you pop the balloon with a pin, it will reemerge somewhere else when you squeeze it. Public employee pensions have become balloons, and abuse of public pension systems keeps oozing despite attempts to put the squeeze on it.
In 2011, after the Arizona Republic published a series of articles exposing pension abuses, a number of reforms to prevent costly abuses were put into place. One reform restricted what could be considered income for someone near retirement. Before the 2011 reforms, the pension amount was set based in part on the last three years of income. So a common abuse was to boost income during the last three years by counting income not part of one’s regular salary, including overtime and payouts for unused overtime and sick leave. Padding one’s income in this way set a higher pension level.
It turns out the practice is still alive and well – it has just emerged in a new place. The City of Phoenix is padding retirees’ pensions by counting compensation for unused vacation and sick time as income. The loophole is that Phoenix pays this compensation over time instead of in one big check, making the practice harder to discover. This is so lucrative that one retired employee is making more retired than when he showed up for work.
Lest you snicker at the cleverness of it all, keep in mind that all four of the state’s public employee pension systems are in financial trouble and taxpayers are paying more into the system to keep them afloat. Pension contributions have increased six times faster than the state GDP. We are paying more taxes and giving up services to fund lucrative retirements.
Pension plans will always be gamed. One loophole closed today will turn into another loophole tomorrow. There is just too much temptation in giant, multi-billion dollar funds for someone not to think of ways to loot them. Phoenix officials should be prosecuted for violating the law, but the only long-term solution for taxpayers is to pop the pension balloon and move public employees to defined contribution (410(k)-style) retirement benefits.