The secret sauce behind bloated state pensions - The Red Tape Chronicles - msnbc.com

The secret sauce behind bloated state pensions - The Red Tape Chronicles - msnbc.com



Debate about bloated government pensions benefits can get testy. In New Jersey, a political science professor’s discussion of the topic led to a surprise classroom visit from a local sheriff, who demanded – and received – an apology in front of the class.

As reported by the Trentonian newspaper, Professor Michael Glass of Mercer County Community College was discussing pension “double dipping” with students in February and brought up “retired” Mercer County Sherriff Kevin Larkin’s dual-income status as an example. Larkin filed the paperwork to officially retire in 2009 and began collecting his $85,000 pension. But he never stopped working, instead using a well-known loophole to keep earning his full-time salary of $129,000 on top of his pension.
A student who knew Larkin texted the sheriff, who drove to the campus, knocked on the classroom door and asked to speak with Glass in the hallway. A few minutes later, with Larkin at his side, Glass returned to the class and apologized.

Government pensions seem to bring out the worst in people, and they are bringing out the worst in state budgets.


Last week, we looked at super-sized pensions as the tip of a debt iceberg that might cause dozens of U.S. states to face default or bankruptcy in the decade ahead.

The abuses are striking. In Illinois, disgraced former Gov. Rod Blagojevich managed to hand out an amazing pension gift in the short time between his indictment and his removal from office. He appointed Rep. Kurt Granberg, who was pulling down an $86,000-a-year salary as a legislator, to head the Department of Natural Resource, a post that paid $133,000 a year. Granberg held the job for just 19 days, but because Illinois law bases pension payments on final salary, the appointment resulted in quite a bounty. In the end, Granberg walked away with a $112,000-annual pension -- $40,000 more than he would have received -- thanks to the brief job bump.

But no state does pension abuse like New Jersey, and no state is facing financial ruin from that abuse sooner than the Garden State. The state’s unfunded pension debt per capita is the largest in the nation, and its pension fund is on target to be the first in the nation to run dry, in 2018.

A few more amazing statistics about the state's gloomy future:

*In 2008-09, New Jersey paid 240,000 retirees about $7 billion in pensions; when free health care and other perks are added in, the cost rose to nearly $11 billion.

*Because pension reform is in the air, state workers are rushing to retire. More than 16,000 have given notice in the first three quarters of this year. New Jersey owes them about $638 million. Included in that group are 233 retirees who will earn more than $100,000 each year in pension payments, including a former community college president who will earn $195,000.

*New Jersey hasn't paid anything into its pension fund in three budget cycles, essentially raiding retirees' money to plug tax revenue holes instead -- and shrinking the time before default. Currently, New Jersey owes its pension funds $45 billion, far more than its annual tax receipts. That's about $5,000 for every man, woman and child in the state. Meanwhile, when promised pension payments for the future are calculated, New Jersey is short $130 billion, or about $44,000 for every state household.

With red ink like that, you might wonder how the state could afford to grant this year's top pension-getter, Dr. A. Zachary Yamba, $195,000 per year for life. Yamba, 72, just retired from a 30-year run as head of Essex County College in Newark, the state's largest city.

At least Yamba seems destined to actually retire. Another member of the six-figure club, Keansburg, N.J., Police Chief Raymond O'Hare, had barely clipped on his retirement watch when he accepted a job as the Jersey shore town's borough manager. He’ll be collecting a pension of $121,000 while simultaneously taking home a salary of $120,000.

In some states, that's called double-dipping. In New Jersey, it's par for the course. One former county official managed to string together eight part-time jobs to earn himself a $150,000 pension.

The tale of former Newark Mayor Sharpe James, who this year completed a 27-month prison sentence for federal corruption charges, strings together many of these themes. According to the Newark Star-Ledger, he stockpiled a $124,000 annual pension from the city of Newark as well as a nearly $1 million 401(k) account during his prior career as a teacher at the aforementioned Essex County College. Before he was convicted, he was also earning a $150,000 annual salary as head of an urban studies institute at the college and a $50,000 annual salary as a state senator. That legislative job earned him credits for an additional $12,000 annual state pension.

There are nearly as many ways to game the system as there are retired workers in New Jersey; far too many to digest in one sitting. So as a guide, msnbc.com enlisted the help of New Jersey benefits expert Peter Tom, who has been consulting with municipalities for 30 years. He identified five typical pension padding practices. We'll explore each one through examples, as a way of explaining the larger pension picture.

“(Pension abusers) prey on the lack of knowledge of the system that the average person has, in understanding how the pension system blows its money,” Tom said. “Government officials pretty much rely on the fact that you don't know how it’s done.”

1. Back-ending or "padding"
It’s easy to abuse the formula for calculating the lifetime annual payout. Workers and political friends simply make sure that an employee’s final-year salary is a doozy – like Blago’s buddy. As you might expect, New Jersey is rife with back-ending.

A government-appointed panel studying state pensions in 2005 found this egregious example: An unidentified employee spent 24 year working in public service earning less than $10,000, then one year as a prosecutor earning $141,000 -- enhancing his pension from $3,600 to $70,000 annually.

Back-ending rules have been tightened slightly since then, but they are still vulnerable to gamesmanship. In fact, it's common, Tom said, for elected officials to reward a losing candidate with a highly compensated public job. That’s one reason local politicos are so eager to keep those $8,000-a-year city council jobs; they both pad future benefits calculations and often lead to lucrative post-politics jobs.

The key is to grab a well-paid city job right before retirement. Tom knows a case of a city councilman who earned $8,000 annually for 12 years, then jumped into a city job earning $91,000. As long as he stays in the new position for three years, his pension will now be based on the higher salary -- and he will earn roughly 10 times the pension he would have received as a retired councilman.

Ron Dobies served as mayor of charming, picturesque Middlesex Borough for 26 years, earning a token salary. Upon retirement, he was appointed borough administrator at a salary of $85,000. After three years, he was removed from office in 2009, and he’s now entitled to a $46,000 pension.

One typical technique for back-ending is common for uniformed officers; they pad their end-of-career salaries with overtime work.

Apart from the outrage factor, Tom said, back-ending causes major problems for the pension system from an actuarial standpoint.

"People aren't paying into the system at the rate they are getting money out in those early years," he said. "Pensioners are never asked to make up the difference."

2. Tacking, as in “tacking on more money.”
"Tacking" is the process of stringing together multiple part-time government jobs to earn a full-time salary. In New Jersey's small towns, it's common for local governments to hire part-time administrative workers, such as city attorneys -- and it's common for them to work for several municipalities.

But eight jobs at once?

That's what former Ocean County official Damian Murray pulled off. In 2009, he presided over court in eight towns, earning more than $300,000. Having also previously served as a member of the library commission and an elected freeholder, he has built a pension credit of more than $150,000 per year.

Of course, in a state where the majority of state legislators tack on additional government work – and one quarter hold dual elected offices, despite a law forbidding that – tacking stories shouldn't be surprising. State Sen. Nicholas Sacco is among the state's highest-paid multiple-job holders, simultaneously serving in the legislature, as mayor of North Bergen and as assistant schools superintendent in the town. His pension will one day reflect credits earned at all three jobs.

A 2005 study by New Jersey's Division of Pensions and Benefits found that 5,000 state workers were collecting multiple paychecks. Eclipsing Murray, the agency found that Judge Jere Powell held 11 positions and earned $171,000 that year.

This is one pension loophole that apparently has been closed, Tom said, by a law signed earlier this year by Gov. Chris Christie. Now, most employees must work 35 hours per week to get credits in the pension system.

“I do want to give credit to the present administration for addressing some of these things,” Tom said. “But even though this loophole has been addressed, the damage has been done for people already in the system.” The new rule only applies to new government workers, meaning it won’t really impact the solvency of the pension system for 20 years or so.

3. Double-dipping
Strictly speaking, double-dipping involves collecting both a government salary and a pension simultaneously. In general, New Jersey prohibits workers from retiring and collecting a pension while also collecting a salary for continuing to do their old job – but there are endless loopholes.

Double-dipping is a common practice for government workers around the country. Defenders of the practice argue that the workers have earned their pension and are entitled to work during retirement if they choose.

The elected county sheriffs in New Jersey provide an obvious example of double-dipping. In 2009, nine of the 63 office holders had retired and then remained in their posts, allowing them to collect six-figure salaries and pensions for the exact same job. Among them was Larkin, the sheriff who demanded an apology from the political science professor. Larkin, who resigned in October, did not return requests for comment.

Twelve-term Union County Sheriff Ralph Froelick retired in 1999. But he's held the sheriff's job ever since, earning $140,000 last year -- along with an $85,000 pension.

Tom said he thinks that’s an unintended loophole.

“I don’t care if people retire and get a new job. They are entitled to do that,” he said. “But the key thing here is you are coming back to same job. If’s the case, then they shouldn’t be able to retire.”

4. An officer and a civilian
Most uniformed jobs do not allow the blatant pension double-dipping that occurs in sheriff's offices. But there's a simple workaround -- retire and be rehired as a civilian serving essentially the same function. That's what Phoenix police chief/public safety manager Jack Harris did three years ago, attracting nationwide attention after a lawsuit was filed by conservative interest group Judicial Watch. The lawsuit claims the public safety manager’s job is manufactured expressly to circumvent pension rules.

That happens in New Jersey, too.

On May 31, 1998, Dennis Keenan retired from his job as fire chief of Trenton, the state's capital. The next day, as he began collecting his six-figure pension, he was appointed to the job of Trenton public safety director. That job was soon abolished by referendum, on July 12, 1999, but Keenan wasn’t done. Instead, he was appointed "fire director." By 2002, Keenan found himself as a lightning rod for such thinly veiled officer-civilian transitions, and the state's pension board began efforts to cut his benefits and force him to return already-paid pension funds. After a five-year battle, an appeals court forced Keenan to retire in 2007. But it also decided Keenan didn’t have to repay the $450,000 he had already collected.

5. "Bridge jobs" and other part-time gigs
Many factors go into calculating the value of a retiree's pension, from past military service to the number of unused sick days and holidays. But the most critical component is years of service. That's where "bridge jobs" come in. A state worker with 12 years of service who loses his job risks a critical break in years of service unless he finds one quickly -- but even a part-time $7,500-per-year job can keep the streak alive. That's why state legislative offices are crawling with nearly $7,500-per-year consultants. And that’s why former political office holders and appointees swarm around New Jersey’s hundreds of part-time commission and advisory panel jobs, despite their often paltry salaries.

Here's one example: Jamie Fox, chief of staff for disgraced former Gov. James McGreevey, earned $11,000 as a member of the state’s Local Finance Board – McGreevey appointed him to the slot just before he resigned in 2004. That allowed Fox to continue his valuable health care benefits and to earn credits for a pension that will be based on his $141,000 salary as McGreevey’s top aide. Fox now works as a lobbyist and earned $513,000 last year, according to the New Jersey Record newspaper.

The state’s new pension law requiring minimum weekly hours also aims to beat back the bridge job problem, Tom said.

But here's a variation on the bridge job concept involving school districts. Superintendents are not allowed to retire, collect a pension and take a new job as a superintendent somewhere else. But there is a glaring exception: Pension rules allow retired schools chiefs to take temporary jobs as "Interim superintendents," for up to 18 months, earning up to $800 per day. After a year and a half, they have to find another temporary home, but lately that's been easy, said Tom – districts seem to like hiring temporary replacements. There’s now a small army of interim superintendents.

Logjam unfair to state workers
This form of double-dipping inspires the usual ire, but Tom said cities and government workers should appreciate that there’s even a deeper cost to these bad pension habits: They create logjams that hurt younger workers.

“It stifles people trying to move up the ladder,” he said. “These practices don’t allow others to move up because it keeps these people around, lets them hang on and hang on.” From school districts to local police and fire departments, to municipal offices, lingering executives have a chain reaction on promotions – police chiefs don’t leave, so assistant police chiefs don’t get promoted, so there are never any open detective or lieutenant slots, and so on.

While pension abuse discussions often inspire vitriol from government workers, who fear attacks on their benefits, Tom said they should be outraged, too. “The rank and file workers are not the issue,” he said. “They are the ones who are paying for all this abuse.”

Sadly, cutting pension abuses won’t fix the problems. Despite the seeming endless stories of oversized pensions, the average pension paid to a New Jersey worker who retired this year is a modest $39,000. When considering all current retired workers, the average pension is $26,000. So cutting all six-figure pensions in the state wouldn’t make a noticeable dent in New Jersey’s whopping pension debt. Still, Tom said, it’s important to attack the misbehavior.

“The issue with abuses is really a matter of unfairness,” he said. “We want the pension system to be fair. But if you want to make it the system solvent, you will have to make other changes.”