Attorney General Cuomo Announces Preliminary Pension Padding Report Showing The Problem Is Widespread And Is Costing Taxpayers Millions

NEW YORK, NY (July 7, 2010) - Attorney General Andrew M. Cuomo today released a preliminary report in his ongoing investigation into pension padding that shows some workers across the state are significantly inflating their pensions by dramatically increasing their overtime hours in the final few years of employment. Additionally, the Attorney General’s investigation is being expanded with 23 more letters sent to public employers asking for payroll information.

Cuomo also launched a Web site, www.nypensionpadding.com, that contains the preliminary report, examples of data collected, and suggested best practices to help curb overtime abuses, along with other information related to the investigation.

As part of the investigation, Attorney General Cuomo’s office requested payroll data from 64 state agencies, local agencies, municipalities, and authorities that participate in the Common Retirement Fund. The preliminary report analyzed data from 50 of those 64 employers representing 3,688 retirees from 2009. The data indicates that employees are boosting their overtime to inflate their pension benefits, which are based on an employee’s total income, not their base salary. Specifically, the investigation found two patterns that demonstrated increased accumulation of overtime in many workers’ final years of service. The first pattern is employees who start getting overtime only when they near retirement. The second pattern is employees who greatly increase overtime only when they near retirement. The report found that 28 of the 50 employers from 13 different counties across the state showed one or both patterns, and 12 of the 28 employers showed both patterns.

“Our ongoing investigation into pension padding has so far identified problems that transcend occupation, region, or job title,” said Attorney General Cuomo. “More critically, we have developed solutions and tactics that, if implemented, can reduce the abuses of the pension system. While we expand the scope of our probe, I urge all public employers to closely examine how they can improve the way they do business for the sake of the state and taxpayers.”

The first pattern involves employees who start working substantial amounts of overtime only when they are near retirement. This pattern is found in 14 of the 50 public employers analyzed. Based on this pattern, some employees start to work overtime when it would likely be included in calculating their pension benefits. Here are some examples:

• A highway maintenance employee went from no overtime to working 539 hours of overtime in the final years before retirement.
• A police officer went from no overtime to working more than 800 hours of overtime in his final years before retirement.
• A Deputy Commissioner of Civil Defense/Disaster Preparedness went from no overtime to working 1,629 hours of overtime in the final years before retirement. The data shows that this employee took in more than $50,000 in overtime pay the years before his retirement and had twice as many overtime hours as his co-workers.

The second pattern involves employees who worked some amount of overtime during their career, but showed a substantial increase in the amount of annual overtime hours during the period approaching retirement. This pattern was found in 26 of the 50 public employers in the preliminary analysis. In some instances, average annual overtime hours in the period approaching retirement increased by more than 10 times the amount in earlier periods. Here are some examples:

• A 2009 retiree who was a shovel operator averaged 144 hours of overtime annually from 2002-2005. From 2007-2008 that employee averaged 820 hours of overtime annually.
• A 2009 retiree who was a journeyman operator averaged 150 hours of overtime annually from 2002-2005. From 2007-2008 that employee averaged 551 hours of overtime annually. The average annual overtime hours for other employees was around 300 hours.
• A 2009 retiree who was an operator group supervisor averaged 434 hours of overtime annually from 2002 to 2005. From 2007-2008 that employee averaged 1,191 hours of overtime annually. This employee had a $69,000 annual salary and then received $67,000 in overtime pay in the year prior to retirement.

At a minimum, this data confirms that employees are indeed inflating their pension benefits by boosting overtime as they near retirement and may be engaging in pension padding. If only 2 percent of new pension recipients followed some of the practices found in the Attorney General’s investigation, taxpayers could face an additional $120 million in pension benefit payments over the next 20 years. At 5 percent, this could mean an additional $300 million over the next 20 years.

The preliminary report also identifies the following practices that may help prevent overtime abuses and pension padding:

• Institute overtime caps: Adopt overtime caps and implement a specific reporting system to monitor overtime per employee. When an employee’s overtime exceeds a certain threshold of their salary, it should trigger an inquiry. This type of monitoring would allow an employer to reevaluate the work and staff needs in their department and possibly to adopt measures to reduce overtime, such as hiring new personnel, using flexible schedules, or reallocating seasonal employees.
• Move away from seniority-based assignment systems: As expected, assigning overtime based exclusively on a seniority system seems to correspond to employees working more overtime hours as they near retirement. In many cases, this type of system is granted in a Collective Bargaining Agreement. Consequently, while the agreement is in affect, the employer is legally bound to assign overtime based on seniority. However, not all employees are bound by Collective Bargaining Agreements and the agreements only apply to union members. Nonetheless, some public employers that are not bound by such an agreement are still using a seniority based system. The report shows that must be revisited.
• Centralize overtime practices: Establishing a centralized system for overtime with uniform policies and procedures should help employers effectively limit overtime excesses. If overtime is handled by a number of independent departments, districts, and sub-agencies, it can result in inconsistent overtime practices and reduction in the monitoring and prevention of overtime abuses.
• Reduce overtime generally: Management should plan for adequate staffing rather than relying on overtime to meet needs. While in some cases overtime is unavoidable, employers should regularly review overtime use and take steps to reduce overtime needs, including adopting flexible schedules and providing for more coverage over different shifts.

The pension padding investigation is ongoing and the Attorney General’s Office is sending out an additional 23 letters to public employers. The new data combined with the old data will identify areas vulnerable to abuse and mechanisms to address these abuses. But the preliminary report is clear: it appears pension padding exists and is widespread across the state and ultimately legislative reform must be considered to effectively address this problem.

Carol Kellermann, President of the Citizens Budget Commission, said, “This report provides convincing evidence of increased overtime purposefully incurred to enhance already ballooning pension benefit payouts. While management reforms, such as overtime caps, are common sense ideas that should be adopted immediately, the only way to totally eliminate pension padding through excessive overtime is to exclude overtime from pension formulas entirely.”

Stephen J. Acquario, Executive Director of the New York State Association of Counties, said, “Due to the severe economic recession, all levels of government are operating under strenuous financial circumstances. Governments must continue to provide important public services while striving to achieve maximum operational efficiencies. Attorney General Cuomo’s investigation into pension costs has revealed important information that should help lower the cost of government operations. County leaders applaud this smart investigation and corresponding recommendations and remain committed to working with Attorney General Cuomo to implement employment based practices to reduce pension costs for New York taxpayers.”

RISING PENSION COSTS AND ITS EFFECT ON PROPERTY TAXES

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 more than $129 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. In a ranking of the counties with the highest property taxes in the United States, Nassau County ranks fourth, Westchester County ranks fifth, Rockland County ranks seventh, and Suffolk County ranks eleventh. 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.

OTHER INVESTIGATIONS INTO THE NEW YORK STATE PENSION SYSTEM

Curbing all types of pension abuse and manipulation is a top priority for Attorney General Cuomo. One ongoing investigation conducted over the past three years with respect to allegations of "pay-to-play" practices at the CRF has led to a number of criminal charges to date. 15 investment firms have agreed to sign the Attorney General’s Public Pension Fund Reform Code of Conduct to resolve their roles in the Attorney General’s investigation. Through the investigation, a combined total of more than $130 million has been returned to the CRF and New York State.

In a separate investigation, Attorney General Cuomo uncovered abuses by independent contractors throughout the state who defrauded the pension system by holding themselves out as public employees entitled to pension benefits, resulting in the return of more than $1.9 million to taxpayers through actions involving the conduct of more than 70 attorneys and other professionals. As a permanent fix, the Attorney General spearheaded legislative reform to curb pension fraud and other pension abuses.

The Attorney General’s office urges individuals with knowledge of any questionable pension padding practices to contact the Attorney General’s Public Integrity Bureau at 212-416-8090 or public.integrity@ag.ny.gov.

The Attorney General’s pension padding investigation is being conducted by Assistant Attorneys General Lauren Ellis, Renée Jarusinsky, and Jessica Silver, and Director of Economics Kitty Kay Chan, under the supervision of Deputy Chief of the Public Integrity Bureau Monica Stamm and Special Deputy Attorney General for Public Integrity Ellen Nachtigall Biben.