I was watching a short interview with Steven Greenhut on Reason.TV and heard Steven mention "Chief's Disease". After a few quick google entries, I tripped over this 2005 exerpt from Reason.org. Click HERE to read and download the entire PDF.
THE GATHERING PENSION STORM: HOW GOVERNMENT PENSION PLANS ARE BREAKING THE BANK AND STRATEGIES FOR REFORM
By George Passantino and Adam B. Summers
1. Pension Spiking
Over the years—and particularly during the past decade—government defined-benefit plans have offered very generous benefits to employees. One justification for this is that higher benefits encourage employees to remain longer, which, in turn, helps to save on the cost of hiring and retraining new employees. Benefits have often been so attractive that the opposite has happened, however, as employees have taken advantage of higher benefits and retired sooner. Thus, employers may end up with higher pension costs and the costs of hiring and training new employees. Employees that “game” the system to improve their final compensation (and thus their pension benefits), only to retire soon afterwards, are said to engage in “pension spiking.” Some benefits are especially prone to pension-spiking abuse.
One such example of pension spiking is the redemption of large quantities of unused vacation time shortly before retirement. Employees contemplating retirement may have accrued significant sums of vacation time over the years. Some government employers have extremely liberal policies regarding the amount of vacation time that can be “sold back,” or exchanged for a lump-sum payment equivalent to the value of the unused vacation time. Employees may use this sell-back policy to spike their final compensation during their final year of employment to increase their pension benefits. Employees with enough time built up may even sell back the maximum amount of time shortly before the end of the year and sell back more time after the start of the new year. If the employee then retires within 12 months of the first sale, he may be able to include both redemptions in the calculation of his final salary, pushing his compensation even higher.
In addition, vacation time is typically “sold back” to the employee at the salary the employee is currently receiving, not what he or she was making at the time the vacation time was earned. If the current salary is significantly higher than when the benefit was initially earned, then the government will have significantly greater costs. In New Jersey, sick time and vacation time sell-back benefits are expected to cost taxpayers nearly $1.5 billion in coming years.19
Another example, unique to California, is found in the practice of calculating pension benefits based on an employee’s single highest year of salary.20 All other states take an average of the employee’s salary over the last three or five years of employment (or the highest three- or five-year period of an employee’s earnings). The California rule means that employees may realize higher benefits from raises or promotions sooner than employees in other states. On the margin, this means employees considering retirement are more likely to retire sooner in California, rather than waiting a couple or a few years before the higher level of benefits fully kicks in. Liberal unused sick and vacation time sell-back policies and California’s one-year formula may represent excessive benefits, but employees who take advantage of these benefits are acting completely within the system.
Other pension-spiking schemes are simply fraudulent, or encouraged by loopholes in workers’ compensation and disability pension laws. Take the example of “chief’s disease,” for instance. Chief’s disease is the practice of claiming a questionable work-related injury during one’s final year of employment in order to receive greater retirement benefits, and is particularly common among police and firefighter employees (hence, the name). According to the Sacramento Bee, over 80 percent of California Highway Patrol chiefs who retired in the past four years filed disability claims just before they retired, “though many of the alleged medical problems had been building for years and were common for those in any field who are nearing retirement age.”21
A successful injury claim allows the employee to take a one-year leave of absence while collecting his or her full salary tax-free. The lack of tax withholding allows the employee to realize a higher salary than he or she would if he or she were working. Thus, the employee benefits from claiming an additional year of service without actually working that full year and also gets to claim a higher salary (one or both of which will increase his pension benefits upon retirement). The filing of the workers’ compensation claim, moreover, opens the door to a disability pension, which grants full medical benefits and greater benefits to the retiree’s spouse upon the retiree’s death. On top of that, half of the amount of the disability pension is tax-free.22
Apart from the obvious fraud problem, liberal workers’ compensation and disability pension rules as to what constitutes a “work-related” injury contribute to abuses of the system. Rules have allowed conditions such as cancer and heart disease, for example, to be considered job-related injuries.23
19 Dore Carroll and Robert Gebeloff, “Retiring workers and their golden send-offs: Public employees who bank sick, vacation time will cost taxpayers $1.5 billion,” Star-Ledger, May 18, 2003.
20 John Hill and Dorothy Korber, “How law fattens state pensions,” Sacramento Bee, December 19, 2004. At the local level, the city of Houston was guilty of a similar calculation. In Houston, changes to the pension plan for police officers in 2001 allowed retiring officers to receive pension benefits based upon their highest two-weeks’ pay.
In September 2004, Mayor Bill White and the Houston Police Officers Pension System announced that, under a new contract, most officers’ benefits would be calculated based on a three-year average of their highest pay. See Office of Mayor Bill White press release, “Mayor Bill White, Houston Police Officer Pension System Trustees Reach Agreement on a New Pension Plan,” September 20, 2004. Available online at http://www.houstontx.gov/mayor/press/20040920.html.
21 ‘Chief’s disease’ inflates highway patrol pensions,” Associated Press, September 10, 2004.
22 Troy Anderson, “Padding for pensions? Workers’ comp patterns for retiring county firefighters raise a red flag,” Los Angeles Daily News, December 11, 2004. See also Jack Leonard and Catherine Saillant, “County Pensions Examined for Abuse: Supervisor orders study after reports that many retiring safety officers claim job disabilities,” Los Angeles Times, December 14, 2004.
23 Jack Leonard and Catherine Saillant, “County Pensions Examined for Abuse.” Los Angeles Times, December 14, 2004.