A California dustup over large pension payments is shining a spotlight on the practice of spiking — increasing a salary just before retirement and boosting the lifelong payout.
Pete Nowicki had been making $186,000 shortly before he retired in January as chief for a fire department shared by the municipalities of Orinda and Moraga in Northern California. Three days before Mr. Nowicki announced he was hanging up his hat, department trustees agreed to increase his salary largely by enabling him to sell unused vacation days and holidays. That helped boost his annual pension to $241,000.
The boost was legal, and Mr. Nowicki said he is receiving a permissible pension. “People point to me as a poster child for pension spiking, but I did not negotiate these rules,” he said.
The fire district’s board agrees. “Chief Nowicki abided by existing rules and guidelines for optimizing his retirement pay,” said Frank Sperling, the board’s vice president. “I don’t fault him. The system itself is broken. We need to change the system.”
Mr. Nowicki’s situation isn’t unique. Contracts that permit a jump in salary just before retirement — boosting the pension payout — have been around for years. But as tough times are putting more scrutiny on public pensions, Mr. Nowicki’s case has sparked particular anger from colleagues and local residents. Some recently demanded an explanation from the department trustees and others have lobbied the Orinda council to divert funds away from the fire department.
“These guys may have priced themselves out of job,” said Steve Cohn, a financial analyst in Orinda.
The practice is getting more attention amid growing concerns about the sustainability of guaranteed pension payouts for public employees after brutal market losses last year in public pension funds.
In California, which has taken to issuing IOUs to hoard cash, a private interest group has launched a campaign to publicize the names of government retirees with pensions of $100,000 or more to promote its view that steep pensions threaten to bankrupt states and municipalities. Mr. Nowicki’s payout was brought to light in the spring in a Contra Costa Times column.
While it happens nationwide, pension spiking has been especially prevalent in California, which some attribute to favorable terms negotiated by powerful unions.
The Pacific Research Institute, a San Francisco-based conservative think tank, estimates that pension spiking costs California taxpayers $100 million a year for the additional pension payments.
“It’s only a minority of workers who engage in pension spiking,” said Lawrence McQuillan, a director at the institute. “But it adds up to real money.”
Critics of pension spiking maintain the practice is unfair because employees or employers contribute toward pensions based on salaries. When a salary is significantly boosted around the time of retirement, it creates a shortfall between what a pension system has collected for an employee and what it must pay out.
Union representatives say that over time the system has suffered some abuses. “The rules have been in place historically for a number of reasons, some of them good reasons. But times have changed rather dramatically now,” said Rich Ferlauto, head of corporate governance and pension investment at the American Federation of State, County and Municipal Employees. “We support changes in the rules to prevent spiking and other similar abuses.”
Mr. Nowicki recently turned 51 years old. If he lives another 25 years, his pension payments will cost the fire district an estimated additional $1 million or more over what he would have received had he retired at a salary of $186,000, not including cost of living adjustments, a fire board representative said.
In addition to drawing his pension, Mr. Nowicki currently is working for the fire department as a consultant at an annual salary of $176,400 while the department searches for his replacement.
Some peers aren’t pleased. “We want him out,” said Mark DeWeese, a firefighter who along with three other union members recently demanded an explanation for the spike from the fire district’s board. Mr. DeWeese said firefighters are agreeing in current contract talks to forgo raises because of the poor economy.
The board said it had no choice but to honor the chief’s requests. Mr. Sperling, the board’s vice president, said directors spent months trying to decipher a 300-page document that details the pension law passed in 1937.
Mr. Nowicki said he began talking with the board in spring of 2008 about changes to his employment contract that would affect his pension. On Dec. 10, the board approved amendments to his contract requested by Mr. Nowicki, which enabled him to sell back unused vacation and holidays. On Dec. 13, he announced his retirement.
Mr. Nowicki said he asked to have this vacation provision included in his contract because he rarely had time to take vacations. Since he had recently volunteered to forgo a raise, he felt he was entitled to other compensation, he said.
If vacation days are sold during the last year of employment, they count as income for the purposes of calculating a pension, Mr. Sperling said. Because the chief didn’t retire until January, he was able to sell back vacation days for both 2008 and 2009.
Write to Craig Karmin at [email protected]