Report says public employee pensions padded by benefits

PORTLAND, Ore. — The formula used to calculate pension for thousands of retired Oregon public employees can be milked to deliver benefits that far outstrip the Legislature's intent and taxpayers' expectations, according to The Oregonian's analysis of pension and pay records from public employers across the state.

The problem is rooted in what gets counted as final salary in determining an employee's pension, the newspaper reported ( ). That final salary can include everything from overtime, vacation lump pay, uniform allowances, perks and other incentives.

"These kinds of shenanigans have gone on in public pension systems around the country," said Alicia Munnell, director of the Center for Retirement Research at Boston College told the newspaper.

Most public employees don't have the chance to rack up overtime or fatten their pensions with perks. Those who do say they sacrificed bigger paychecks for job security and better retirements and are owed what they were promised.

The pension formula used by the Oregon Public Employees Retirement System, or PERS, isn't out of line with other states, the newspaper reported. But some states have started limiting salary inflation in the years before retirement.

The Oregon Legislature has placed no percentage limits on the growth of final salary — defined as the average of an employee's three highest years pay or the last 36 months, whichever is more. But it has changed its rules to eliminate unused vacation and sick leave and limit overtime in calculating final average salary, though only for employees hired after a certain time.

The PERS formulas multiply a member's final pay by the length of service and an accrual factor. PERS' full formula provides members 1.67 percent of their final pay for every year they work. After 30 years, that's 50 percent of a member's final salary. Officers, firefighters and other public safety workers get 2 percent a year, with full retirement at age 50 to 53 with 25 years' service.

A lot gets counted toward final pay, from uniform allowances to the value of employee's insurance premiums, the Oregonian reported. The state even pays pension benefits on its pension contributions.

Portland firefighter Jeffery Von Allmen retired in 2010 at age 50. A Portland firefighter wouldn't normally be covered by PERS, but he stuck with PERS when his original employer was absorbed by Portland Fire & Rescue.

In his last four years of work, Von Allmen racked up an average of nearly 3,100 hours a year by working call shifts and overtime at premium pay rates.

"I just followed the rules," he told the Oregonian. "Knowing every dollar I made would help my retirement, I was volunteering as much as I could."

All of it went into the pension hopper, along with a $39,000 payout for unused vacation. In the end, a firefighter who would have made around $80,000 a year working straight time managed to garner final average pay of $123,000 a year. His pension: $87,500 a year.

Final salary inflation shows up in increased employer contributions as PERS adjusts rates to reflect its costs. The system anticipates some spiking and recovers those costs from the moment an employee is hired.

"It's hard to capture one-time increases, but a lot of these things come back again and again," said Matt Larrabee of Milliman Inc., PERS' actuary.

Managers typically don't get overtime pay, but perks and incentives can add to their higher base pay and boost their average final salary.

Lesley Hallick, a former Oregon Health & Science University provost, has one of the richest pensions in the system. She made between $420,000 and $497,000 in her final three years, before retiring in 2009 to become president of Pacific University in Forest Grove. Her annual pension after 32 years: $287,000.

Incentive pay alone netted her $317,000 over those three years and boosted her annual pension by $56,000.

Mike Thorne, a Pendleton rancher who was a Democratic state senator from 1973 to 1991, spent 10 years as Port of Portland's executive director. When it came to calculate his retirement benefits in 2001, the PERS rules gave him the best of all worlds, the newspaper reported.

All 28 years of Thorne's public service were credited as full-time work, even though the Legislature was then biannual. Thorne's salary jumped 42 percent in his last full three years at the Port. A $242,000 average over 36 months was the one used to calculate his benefit.

Though his full-time service and highest salary came at the Port, his pension formula was the one used for legislators, with the higher, 2 percent annual accrual rate then in effect: 20 percent more generous than the 1.67 percent used for other Port employees, according to The Oregonian.

It all paid off in a pension benefit of $134,000 when he retired in 2001. With cost-of-living increases, it's now $157,000 a year.

Thorne said he wasn't responsible for designing PERS rules. He said he pushed back when unions sponsored bills designed to feather their pension nests.

He acknowledged that he's a beneficiary of the existing rules.

"It speaks to the question going forward: Should the system change?" he said. "The answer is yes."

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