Arizona Supreme Court Ends Pension Spiking

The facade of the Arizona State Courts Building. (Photo by Kevin Bondelli/Creative Commons)

PHOENIX – On Friday, the Arizona Supreme Court put an end to pension spiking. The court ruled unanimously in the case of Phoenix employees who use their unused vacation and sick days to artificially increase their pensions.

“The City of Phoenix pays pension benefits to eligible employees upon retirement. The amount of that benefit depends, in part, on a retiring employee’s highest average annual compensation paid over a multi-year period. The City also pays employees for unused accrued vacation leave upon retirement or separation from employment. Here, we decide whether a one-time payout for unused vacation leave forms part of an employee’s compensation for purposes of calculating that employee’s pension benefit. We hold it does not.

Most City of Phoenix employees are members in the City of Phoenix Employees’ Retirement Plan, a defined benefit plan codified in the Phoenix City Charter. A member is entitled to receive a pension upon retirement, which is determined by multiplying a member’s “final average compensation,” total years of credited service, and a Plan-specified benefit rate.

Final average compensation” is an average of a member’s highest annual compensation paid over a period of consecutive years, the length of which depends primarily on the member’s hiring date. Compensation can be monetary (“salary or wages”) or non-monetary. For ease of reference, we refer to compensation used in calculating “final average compensation” as “pensionable” or “pensionable compensation.”

The ruling ends a nearly-decade-long battle between the City of Phoenix and the public employee union that began when the City attempted to rein in pension costs.

For many local governments across the country, unfunded pension obligations are preventing growth and much-needed infrastructure maintenance.

Voters’ intent

The Court found that the voters did not intend to allow the practice and officials wanted employees to take vacations:

We agree with other courts that absent language to the contrary, no logical reason exists to conclude that voters intended to grant a lifetime windfall to members who refrained from taking vacation. See Longley, 931 A.2d at 904 (stating it is “highly unlikely” that in addition to providing “significant lump sum payments” to employees for unused vacation time, “the legislature also intended to bestow a substantial annual windfall on them for the duration of their retirement—in essence, a lifetime annuity—merely because they chose to stockpile their vacation time rather than to use it.”); Amos, 259 S.W.3d at 714–15 (“It is unlikely that the drafters of the Metro Code intended to reward those who did not take vacation and sanction those who did.”); Carter, 633 S.E.2d at 528 (concluding that the legislature did not intend to make a distinction in retirement benefits between a retiree who took a vacation and one who did not).

Although “cash out” payments equalize compensation between members who did not use all their vacation leave and those who did, using those payouts to increase pension benefits would result in unequal treatment among members. See Amos, 259 S.W.3d at 714 (“Excluding accrued vacation payment from the pension calculation appears to treat all employees equally and promote uniformity as to vacations and pensions.”). If voters intended unequal treatment, we would expect to see language in the Plan to that effect. See Longley, 931 A.2d at 904 (“Because there is no logical reason why the legislature would embrace such a policy, we will not lightly presume that it intended to do so.”). Indeed, we can safely assume that the City’s policy in 1953, as today, was to encourage members to use vacation leave. Treating payouts for accrued leave as pensionable encourages exactly the opposite.

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