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Published on Friday, April 12, 2013

News stories on pension spiking and LEOFF medical benefits raise questions about costs

The Associated Press recently released a series of articles that ran in a number of newspapers across the state. The series highlighted issues with Law Enforcement Officers and Fire Fighters (LEOFF) retirement benefits including pension spiking (the practice of increasing compensation shortly before retirement to raise retirement benefits), the cost of medical benefits for LEOFF 1 retirees, and the types of claims local disability boards have approved. Given the interest that has been generated, we thought it would be useful to provide a little background and history for context.

Creation of the LEOFF 1 system

The LEOFF 1 retirement plan was established and mandated by the Legislature in 1969. It included the requirement that local governments provide for post-retirement medical care, and also created the local disability board system. The Legislature realized that the costs for the LEOFF 1 plan were unsustainable and closed the program in 1977, creating the LEOFF 2 plan as a result. Employers, employees, and the state all contribute into the LEOFF 2 system: employers 30%, employees 50%, and the state 20%.

Retirement benefit calculations are different for the two plans. LEOFF 1 retirement benefits are based on salary at retirement, and LEOFF 2 retirement benefits are based upon the compensation received during the highest consecutive five years. Current law requires local government employers to pay for the actuarial value of increased retirement benefits from some types of excess compensation. However, the excess compensation requirements for the different plans are different. Compensation like performance and longevity bonuses are included in LEOFF benefit calculations but are not defined in the statute as excess compensation. Payment of these types of bonuses near the end of a career results in higher retirement benefits, which could lead to claims of pension spiking. Because the employer is not responsible for reimbursing the system for the actuarial value of the benefit increases in these cases, the increased costs are spread to the pension system and can result in potential contribution rate increases for all rate payers. SB 5392, introduced this session, would have expanded the definition of excess compensation for retirement purposes and required employers to pay the full actuarial value into the retirement system. However, one of the concerns expressed was that the bill would capture legitimate raises related to promotions during the final years of employment. The bill did not advance as a result of these kinds of issues and indications that there are relatively few pension spiking cases that might have occurred.

LEOFF 1 medical costs

When the LEOFF 1 system was created, the Legislature also mandated that local government employers be responsible for “all reasonable medical expenses” for life for all LEOFF 1 participants. In addition to typical medical expenses, as LEOFF 1 members continue to age they have begun to move into assisted living situations, further driving up the costs. Most cities do not pre-fund these expenses, but operate on a pay-as-you-go basis.

The Legislature also put into place the requirement for local disability boards. The disability boards were originally tasked with determining whether a LEOFF 1 member was eligible for early retirement due to disability. Disability boards were also tasked with determining “reasonable medical expenses,” which is how expenses outside of traditional medical coverage are approved. Once a claim is approved by a disability board, the employer is responsible for the cost.

Pension benefits are vested

There may be questions about why this system of retirement and medical benefits cannot be changed to reduce the costs. In the 1956 Bakenhus decision, the State Supreme Court ruled that pension benefits are a vested contractual right and cannot be changed or reduced retroactively without providing a similar benefit of equal value. This means that any change that potentially changes or reduces benefits would be challenged in court under Bakenhus.

AWC has advocated for sustainable and predictable contribution rates for the LEOFF system. We continue to look for opportunities to lower the fiscal impact on cities for providing medical care to LEOFF 1 retirees. These are complex issues that are difficult to find solutions for.

If you have any questions feel free to contact Candice Bock, Deanna Krell, or Brittany Sill.

Links to the series of articles

State feels bite of workers’ pension spiking (The Seattle Times, April 6, 2013)

Lavish Washington medical plan imperils budgets (The Seattle Times, April 7, 2013)

Disabilities plague government retirees, even golfers (The Seattle Times, April 8, 2013)

AP investigation prompts state officials to look at late raises (Yakima Herald, April 10, 2013)

Categories: Personnel