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Originally published April 6, 2013 at 12:17 PM | Page modified April 9, 2013 at 3:45 PM

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State feels bite of workers' 'pension spiking'

Last-minute pay raises have boosted some police officers’ and fire fighters’ annual pensions by thousands of dollars a year, and may end up draining a state-run pension plan of $1 million or more.

The Associated Press

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First of three parts

LAKEWOOD — 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, their annual salaries jumped by more than $17,000 each, in part due to a late contract addendum. Bob Bronoske got a similar increase just 13 weeks before he departed, putting each of their compensation rates around $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 because 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 Pierce County ­ 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 data sets.

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 incentivize 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.

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 calculate 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 in several U.S. states. 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.

Crafted contracts

Raises also helped encourage retirements in places like Kelso and Quincy, Grant County. Meanwhile, some longtime chiefs in places like Walla Walla and Mason County got big raises before their retirements, with local officials arguing the leaders weren’t being properly compensated.

In other cases, officials used carefully crafted contracts and let workers decide whether they wanted to retire when temporary raises were in effect.

In Bremerton, a contract clause 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 about $1,000 a month larger than they were just weeks prior.

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 it was a one-time deal.

“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.

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.

Auditor challenges

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 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 was accepting.

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 egregiously abuse the system.

“How does that pass anyone’s common-sense test?” Sonntag said.

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