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“Pension Padding” investigation expands to artificial inflation of compensation to boost pension payout

ALBANY - Attorney General Andrew Cuomo announced that his investigation into the manipulation of salary and overtime payments that leads to inflated pensions at the expense of taxpayers, known as “pension padding” or “pension spiking,” has expanded to include more than two dozen additional localities across New York state.

Cuomo, whose investigation into pension padding commenced in March, is sending letters to 25 additional entities that have some of the highest proportions of pension costs in the state.  The letters seek payroll and related data for pension recipients from localities in Western New York, Rochester and surrounding areas, Central New York, the Southern Tier and the Capital Region. A full list of the 64 localities that have received letters thus far can be found below. 
“As the state and nation are gripped by the current economic crisis, we must make sure that taxpayers are not saddled with any artificially inflated bills,” said Attorney General Cuomo. “My office will continue our efforts to ensure that our pension system, which controls $130 billion and serves more than 1 million people across the state, is efficient and waste-free.”

According to recent census data, New York State had an overall pension cost of $486 per resident in 2007, which was the highest in the nation. The New York State Common Retirement Fund (“CRF”), which funds the Employees’ Retirement System (“ERS”) and the Police & Fire Retirement System (“PFRS”), has assets of approximately $130 billion and covers more than 1 million members and retirees from more than 3,000 government employers.  The CRF is primarily funded by taxpayers who pay an estimated $2.5 billion to the fund each year. 

Pension payments to retirees in ERS and PFRS have increased from $3.5 billion in 1999 to more than $7.3 billion in 2009.  New Yorkers end up bearing the burden caused by excesses in pensions through increases in their property taxes.  New Yorkers already face some of the highest property taxes in the nation. Although pension costs typically make up only about 2 percent of expenditures in cities, towns, counties, and villages, in certain localities pension costs represent over 7 percent of expenditures.

In light of these rising pension costs, state and local employers will be required to make significantly higher contributions to fund the state pension system starting in 2011.  For public employers participating in ERS, their mandated contributions will increase from 7.4 percent of payroll to 11.9 percent of payroll; for those participating in PFRS the costs will go from 15.1 percent to 18.2 percent.

There is currently a striking variance in levels of retirement benefits paid across the State.  The average annual public pension payment in New York State is approximately $25,000, but pensions paid to some individual retirees top $300,000 per year and some retirees end up receiving more in pension than they received in salary. 

Some examples of inflated salaries that can lead to inflated pensions

  • A water department worker took in more than $30,000 in overtime and extra pay in addition to his $40,000 salary for a total salary of almost $74,000.
  • A county animal control officer took in more than $19,000 in overtime in addition to his $38,000 salary for a total salary of more than $57,000.
  • A police officer earning a base salary of $74,000 took in $125,277 in overtime in his final year, bringing his total income to almost $200,000.  Based on this inflated final year’s salary, he then received a $101,333 annual pension.
  • A sanitary district official saw his annual salary increase from approximately $150,000 to over $200,000 through raises, bonuses, and special payments.

Boosting a final salary has compounding effects on a pension because it increases the ultimate, repeated payouts over the pension’s term.  For example, if a public employee with 20 years of service and an expected 20-year payout period gets an average salary inflation of $50,000 in overtime in the final years of employment, that adjusted pension could cost taxpayers as much as an additional $500,000.

Furthermore, if merely 1 percent of the pension costs in 2009 were improperly inflated by pension padding, elimination of those practices could potentially save taxpayers close to $500 million over twenty years.