On Presidents’ Day, last week, around one in four Americans went without holiday pay. If they didn’t work, they earned no money. If they did work, no federal law required them to receive anything beyond their regular wages.
In contrast, the City of Cranston, Rhode Island, paid 314 men an average of $459 for the day, and all of them are retirees. That amounts to double-and-a-half time for the former policemen and firefighters in the locally run system. In total, the Presidents’ Day pension payments to these retirees equaled $144,151, and that same sum applies to 13 to 18 holidays per year, including 9/11, for some.
Mayor Allan Fung and City Controller Michael Igoe disagree with that interpretation of the numbers. On paper, and in the spreadsheet that the city provided to the RI Center for Freedom & Prosperity for its RIOpenGov.org Web site, the average retiree payment for each holiday is $234, bringing the day’s total cost to $73,365.
Determining which point of view is more accurate requires an understanding of the way in which pensioners’ total income is calculated. Under the old retirement plan, which covers most of the current retirees although it began phasing out in 1995, the base pensions of fire and police employees are calculated using their number of years of service and their final salary rates on the day of retirement. Those base pensions increase every year, as a cost of living adjustment (COLA), by the greater of 3% or the raises negotiated by active employees.
Pension payments are made month by month. However, for each holiday granted in the retiree’s final contract, he receives an additional check. To determine the holiday bonus, the city divide’s the retiree’s annual pension by 261 days (52 five-day “workweeks” in the year) to find the daily pay rate. Most retirees receive another 125% of that amount for the holiday; many receive 132.5%.
Then, at the end of the fiscal year, retirees receive a “longevity” payment, which is based on their length of service, capped at 17 years. For most, this check equals 11% of all of the payments that they received since the year began, including the holiday bonuses.
For example, the data shows that the average annual base pension for these retirees is $47,699, yielding a daily rate of $182.76. Most receive an additional 125% per holiday, which works out in this case to $228.45, for a total of $411.21 attributable to that day. Although it will be folded into the rest of the retiree’s income for the year, this total will ultimately be amplified by the longevity bonus, usually 11%. Cranston therefore pays this typical retiree $456.44 in pension benefits that are directly associated with each holiday, even though he is not and would not be working, anyway.
Calculated this way, the holiday pay ranges from $112.21 to $898.51.
A controversy in Connecticut, last year, prompted unsuccessful legislation to end the similar practice of pension “padding.” With padding, however, bonuses and overtime are factored into the calculation for base pensions. An employee earning $40,000 and expecting a 50% pension could put in enough overtime at the end of his career to bring his gross pay to $50,000, thus increasing his base pension from $20,000 to $25,000. In Cranston’s system, holidays and longevity payments are simply added, automatically boosting pensions by about 20%.
Even without that extra lift, Cranston’s local retirement benefit for policemen and firefighters is considerably higher than that received by similar employees in the state system. The average base pension for Cranston police and fire (including surviving beneficiaries, who don’t receive the holiday and longevity bonuses) is $44,317. That compares with $28,057 for police and fire retirees and beneficiaries covered by the Employees’ Retirement System of Rhode Island (ERSRI).
Not surprisingly, Cranston’s local system is in worse shape than ERSRI, even before adjusting for last autumn’s pension reform at the state level. According to the latest actuarial report, as of July 2011, Cranston’s fire and police plan was just 17.8% funded. Partly on that basis, Moody’s Investors Services just downgraded the city’s bond rating from A1 to A2.
Mayor Fung stresses that no new employees are eligible for the old pension plan, and that some policemen and fire fighters are already retiring into the new, state-managed system. Still, Cranston will be an early test case for pension reform’s study and planning requirements for local plans that are in “critical status,” or less than 60% funded, and changes will have to be made.
“There’s no way out of this without having some impact on the retirees,” says Fung.