What Can Hawaii Learn From Other States About Pension Spiking?

Employees' Retirement System

At least 14 states have revamped their pension systems in the past five years to prevent employees from "spiking" their pay to pad retirement benefits.

The Hawaii Employees' Retirement System is looking to do the same despite opposition from public employees' unions.

The system's trustees expect to draft legislation aimed at deterring the practice known as pension spiking — essentially working extra overtime in the years before retirement to boost the overall pay level on which retirement pay is based. Wes Machida, the system's administrator says spiking is a big concern, especially in light of the ERS's estimated $9 billion unfunded liability.

Some ERS members serving on a legislative committee are scheduled to meeting Tuesday to come up with a plan to present to the full board before the Legislature convenes in January.

Now, pension benefits for Hawaii government retirees are calculated by averaging their highest three or five years of compensation, depending on their hire date — what's known as "final average compensation."

Compensation, as currently defined by statute, includes base pay, overtime, differentials and supplementary payments, bonuses and lump sum salary supplements.

Board members are considering excluding or capping additional compensation beyond base salary when calculating benefits. The changes are targeted at employees "trying to game the system or trying to boost their pension in their final years of service," Machida said.

At its last meeting, the legislative committee had wanted more details from its actuary on exactly how the ERS's funded status will be affected by excluding those various payments from an employee's compensation.

Other states have struggled with the same issue, a national expert says.

"The popular thing is to limit salary increases in the last few years of employment," said Keith Brainard, research director at the National Association of State Retirement Administrators. "Another thing is to prohibit or limit overtime and sick leave in calculating average final compensation."

He said excessive overtime tends to be more of a city-level issue because it's more common among public safety personnel such as fire fighters and police.

Some states — including Arkansas, Colorado, Iowa and Nevada — have set caps on how much an employee's pay can increase from year to year. Any pay that exceeds the cap won't be counted when calculating retirement benefits.

In Georgia, the employer — meaning the state, city or county department — is required to cover the extra benefits costs for any pay increase that exceeds 5 percent during the 12 months before an employee's retirement.

Other states — including West Virginia and Kentucky — don't allow lump sum payouts to be counted when calculating benefits.

Here's a look at what 14 other states have done in the past five years to curb spiking, based on research by Brainard.

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