Pension maneuvers hit state fund hard

LAKEWOOD, Wash. – By the end of 2009, three veteran managers at Lakewood Fire District 2 earned salaries that topped $175,000 annually – more than Seattle’s fire chief, who was overseeing a department roughly 10 times as large. Their salaries would soon grow even bigger, if only temporarily. Just four days before Michael McGovern and Greg Hull were set to retire, a late contract addendum helped boost their pay by $20,000 each. Bob Bronoske got a similar increase just 13 weeks before he departed, pushing his compensation to more than $200,000. The last-minute pay raises cost taxpayers in the Tacoma suburb for only a brief time. In the long run, however, they may end up draining a state-run pension plan of $1 million or more since the adjustments boosted each of the men’s lifetime retirement payments by more than $1,000 per month. Bronoske and McGovern retired in their mid-50s, and they are now drawing more than $150,000 pensions every year. Hull’s pension is $184,000 annually. He has separately taken a job as the fire chief in the small city of DuPont – hired as a “contractor” in a way that doesn’t disrupt his retirement payments – bringing his total current compensation to over $300,000. Lakewood’s case is not an isolated one in Washington, according to a two-year Associated Press investigation that included more than 100 interviews, 94 public records requests and a review of thousands of pages of government emails, meeting notes, contracts, actuarial reports and payroll records along with more than 30 government datasets. In part, the investigation found: • Amid state and local budget cuts that included salary reductions over the past five years, the average first responder retiring into the so-called LEOFF-1 pension system had a pay rate in their final three months of work that was 5.5 percent higher than the same year-before period. The increase was much larger than workers received in any other pension system in the state and more than double the average raise for all workers who departed over that time period, according to the AP’s analysis. • Local officials seeking to cut their budgets approved late pay increases to encourage retirements. Those alterations shifted local costs to the state, saddling the taxpayer-funded pension system with millions of dollars in liabilities. • Veteran firefighters and law enforcement officers were able to abruptly and permanently reshape the value of their retirement plans, thanks to unique provisions that are unavailable to teachers, judges, newly hired first responders or any other government worker in Washington. Responding to AP’s findings, former State Auditor Brian Sonntag said local officials and retirees involved in the pre-retirement raises show a clear disregard for what is right. “They’re thumbing their nose at colleagues – the people who follow the rules – as well as the public,” Sonntag said. Rules adopted by the Department of Retirement Systems are designed to prevent so-called “pension spiking” by prohibiting pay linked to retirement from being counted as pensionable salary. Local governments, however, have reported the late pay raises as being part of normal compensation. While Hull said in an interview that his final salary bump wasn’t designed to inflate his pension, emails show part of the Lakewood raises were developed over the span of several weeks, with retirement in mind. The men were already slated to get a salary bump at the beginning of 2010 but that was pushed even higher by an addendum approved in November 2009. Then-Fire Chief Ken Sharp and finance director Koree Wick said in interviews that the late raises were designed to drive retirements by boosting pension values. They said the local fire officials were having budget troubles and were interested in some staff retirements to help with a potential merger with a nearby fire district.

LEOFF-1 retirements

The pensioners who earned late raises were all part of LEOFF-1, short for the Law Enforcement Officers’ and Fire Fighters’ Retirement System Plan 1. About 1,000 veteran public servants have retired into the LEOFF-1 system over the past decade, leaving only about 200 active workers remaining. Pension values for most Washington government employees – who work under more than a dozen different retirement plans – are based on a snapshot of their salaries over a long period of time, such as a five-year window for many teachers. But workers hired into the LEOFF-1 system before October 1977 have benefited from unique provisions in their plan that typically calculates pension values based largely on the final paycheck they earned. States have dealt with pension spiking problems around the country even when retirement values are based on earnings over the span of 12 months, said Jun Peng, an associate professor at the University of Arizona who has studied pension systems nationwide. He said the idea that Washington state would allow pension values to be determined by a final paycheck was “scary.” “That seems outrageous,” he said. The pay raises in Lakewood were approved legally by a board of fire commissioners, which meets for hearings with minimal public attendance, though it’s not clear whether the raises should have qualified as pensionable earnings under state rules. All of the late salary increases reviewed by AP came during times of budget and economic struggles over the past five years. At the meeting during which the Lakewood salary addendums were approved, in the middle of national economic turmoil, commissioners talked about their own financial problems and the need to find cost-saving measures. That same night, the board asked some workers in the district to contribute more to cover their medical costs.

Incentives

Over in Bremerton, a contract clause brokered between city officials and the local firefighters’ union in 2009 provided a temporary pay increase of 12 percent to a remarkably narrow group: lieutenants and captains in the LEOFF-1 system who had served 30 years and one month with the department. The unusual pay increase, according to the negotiated contract, lasted only 30 days. During that month, three workers retired with salaries that were each roughly $1,000 a month larger than they were just weeks prior. Among them was fire marshal Scott Rappleye, who saw his annual pension benefits jump by more than $9,000 per year courtesy of the brief pay raise. The negotiations in Bremerton illustrate both the deliberative effort that officials take to boost pensions and the animosity it can cause among other workers who don’t qualify for such a windfall. In drafting the contract language, officials carefully worked to ensure that it would help boost pensions. After assessing one draft proposal, internal emails obtained by the AP show that budget analyst Caroline Tompson suggested removing a clause that required retirement in order to get the raise, fearing that it would cause state officials to consider it specialized pay not to be counted for pension calculations. That clause was removed in the final draft. Rappleye initially had given notice of retirement in December 2008, and said in late January that he would officially retire after the contract was in effect, according to emails. Three days after he announced his official departure, Rappleye wrote to some colleagues to note that some of his other peers who would not qualify for the benefit were clearly angry with what he described as the “severance package.” He expressed concern that colleagues complaining about the issue could upend the whole effort. “So please let us know if we should still retire, will all this work out? Someone wants to make sure it does not happen. Believe me, I want this to happen,” Rappleye said in one email obtained by AP. The city’s human resources manager, Carol Conley, checked the language with state retirement officials, who gave the OK. “We’re good to go,” Conley said in an email to Rappleye and others. Bremerton Fire Chief Al Duke said in an interview that the city was hoping to encourage some retirements in order to save on salaries and bring in younger workers who don’t cost as much. He said officials told the LEOFF-1 retirees that it was a one-time deal that they could take but that it wouldn’t be offered again. “We were actually saving quite a bit of money,” Duke said. The raises for the three workers now cost the state pension system about $30,000 extra per year. Across the Puget Sound, officials in Renton also cited the budget in an even broader effort that boosted pensions. A contract clause implemented in 2008 gave veteran fire officials a 22 percent “longevity” supplement for serving more than 27 years in the department. Fire workers in Renton typically received only a 12 percent supplement after serving 25 years. The extra benefit, which prompted eight people to retire, was negotiated only for the 2008 calendar year and has not been renewed. Lee Wheeler, who was fire chief at the time, said the city was looking to shed older staffers and replace them with younger workers who would be lower on the salary scale. “It worked out dollars and cents-wise – from the city’s standpoint, that is,” Wheeler said. For the state pension system, the changes are costing taxpayers about $90,000 a year.

Long service, big raises

Walla Walla Police Chief Chuck Fulton had already set his retirement plans, telling colleagues several months in advance that he would depart in March 2012. But even as officials were planning a retirement bash that would include chicken piccata, wild mushroom lasagna and a fresh fruit display, they were also exploring whether to give him a raise. Handwritten notes suggest the idea first came up during a January meeting, a couple of months before Fulton’s last day. Nabiel Shawa, the city manager in Walla Walla, said the City Council wanted to “do something” for Fulton ahead of his retirement considering his many years of service, but Shawa said he recommended that officials pursue a pay raise only in line with other directors. Other leaders only received a 2 percent raise last year. Three days before Fulton’s retirement, however, City Councilman Jerry Cummins made a successful motion to increase the chief’s salary by more than 9 percent, from $9,399 to $10,279 per month. Cummins said the raise was made because the police chief’s duties had changed due to the department moving into a new police station. “Was it a big hit to the taxpayer? No,” said Fulton. “I don’t necessarily feel like I came out really way far ahead.” The raise increased Fulton’s retirement pay by about $10,000 per year. Walla Walla wasn’t the only jurisdiction where local leaders said their public servants simply weren’t being properly compensated, with raises occurring shortly before retirement. Richard Knight was the longest-serving fire chief in the state’s history, holding the job for 55 years. It was during his last year as a chief in Mason County that he got a 25 percent raise. Tom Taylor, one of the commissioners who approved the raise at Mason County’s Fire Protection District 5, said the goal was to simply raise Knight’s salary to a range the commissioners thought was fair. Knight said it wasn’t his style to request more compensation but he welcomed the idea when it came up, noting that it helped ease his transition into retirement. “Whether I was worth it or not, I wasn’t going to turn it down,” Knight said. The raise went unnoticed by other leaders in Mason County. Tom Nevers, who was elected to the fire commission later that year, said he had attended commission meetings throughout 2011 but wasn’t aware that Knight had received such a raise.

Individual carrots

In some cases, individual workers received targeted pay raises in order to hasten their departure from public employment. That’s what happened with Bill Gonzales, a police chief at the small central Washington city of Quincy who was on the outs in the middle of 2009. Amid some public outcry about a perceived gang problem in the area, city leaders were looking to make changes in the police department and exploring candidates to replace Gonzales. The problem was, Gonzales didn’t plan on retiring for another seven months – until after he got another pay increase. Quincy Mayor Jim Hemberry said he met with Gonzales to discuss options for an earlier retirement. “We said, ‘What would it take for us to reach an agreement where you left fairly soon and we brought in someone new?’ ” Hemberry said in an interview. As the result of those discussions, officials developed a document titled “RETIREMENT INCENTIVE AGREEMENT.” The plan, which included a 4 percent pay increase, was notarized by Hemberry and Gonzales on July 21 of that year. Gonzales retired 10 days later as a result of the deal. A similar circumstance occurred across the state in the southwest Washington city of Kelso, where police officer Ernie Moore expressed his intention to retire in May 2008, leading city officials to prepare for his departure by hiring a replacement. But after the new worker was confirmed, Moore said he wanted to delay his retirement five months until after a 3 percent cost-of-living increase was set to go into effect. Police Chief Wayne Nelson wrote to the city manager that Moore had talked about wanting that increase to boost his pension, so Nelson was exploring ways to avoid the expense of having both on staff at the same time. Nelson said he talked with Moore about giving him a “merit” pay raise equal to the future cost-of-living increase to accomplish the same retirement bump. “He said that if you agreed to do that, it would be much appreciated,” Nelson wrote to City Manager Paul Brachvogel, according to one email. After approving the increase, Brachvogel later justified the raise by saying Moore was a model officer deserving of a merit raise. Union officials complained in that case that the city improperly awarded the raise without proper negotiation with the union. An examiner at the Public Employment Relations Commission agreed that the raise was not done appropriately but decided that Moore should keep the raise and the bonus retirement money because it would have been administratively onerous to make the changes. Pension officials, however, took notice of the case and ultimately asked Moore to pay back $5,000 in excess money – something he said he is now doing.

‘Common-sense test’

Auditors previously have come across late raises and challenged whether they were allowed. In one case, officials examining the records at Central Pierce Fire and Rescue found that the district’s board of commissioners had approved a $3,123 monthly salary increase in the final months of Chief Jack Andren’s time in office. That 2010 increase, which auditors said was improperly negotiated behind closed doors, included a cost-of-living adjustment and compensation for unused sick leave. Sick leave payments were supposed to be provided as a cash-out at the end of retirement and not included in pension calculations. The extra pension payments caused by the salary spike were ultimately corrected and reimbursed to the state. Auditors didn’t have as much success in a 2006 case in which the North Highline Fire Chief Russ Pritchard saw his salary jump 57.5 percent to nearly $200,000 per year – three months before retirement. His monthly pension benefit is now larger than the amount Pritchard was being paid in salary in the months before his late raise. After state retirement officials questioned whether the money was designed as a retirement incentive package, the district denied that intention and then adopted a resolution making the new salary permanent, even for the incoming chief. That placated the concerns of retirement officials, who saw the raise as simply a readjustment of how the chief’s position was compensated in general. Meeting minutes obtained by AP, however, say the board of fire commissioners had offered him a “severance package” that he had decided to accept. Ultimately, in 2010, the district eliminated the fire chief position and the salary altogether. Sonntag, who was state auditor at the time the assessments took place, said he believes officials involved in both cases were participating in a concerted effort to abuse the system. “How does that pass anyone’s common-sense test?” Sonntag said.