Ever since he was a state representative, Joey Manahan said he has been concerned about the cost to Hawaii taxpayers of overtime in general and its potential effect on retirement pensions in particular.

But a recent critical audit of a Honolulu trash collection service was the last straw for Manahan, who was elected to the City Council in 2012 and is now chairman of its Budget Committee.

Manahan has proposed a resolution that urges the council to “take steps to eliminate overtime abuse and pension spiking.” He calls for the city to “address any management complicity with such abuse.”

Honolulu City Council Member Joey Manahan. 8 feb 2017
City Councilman Joey Manahan wants the state to stop considering overtime pay when setting pension levels — for all employees. Cory Lum/Civil Beat

And he also proposes that the council ask the Legislature to pass a law that would completely halt the practice of considering overtime pay when determining pension amounts for all employees.

Such a law was passed in 2012 — Manahan’s last year in the statehouse — but it only applied to workers hired after July 1, 2012.

Making it apply to everyone might present legal challenges.

State Finds Substantial Pension Spiking

There are about 67,000 public employees in Hawaii and they earn an average of $60,000 annually. Based on that, after a 30-year career they could retire with an average $30,000 annual pension.

But some of those employees have found ways to increase their pensions by piling up overtime in a practice called pension spiking.

The Hawaii Employee Retirement System calculates pensions based on the average of an employee’s three years of highest salary. Pension spiking happens when employees work an inordinate amount of  overtime for three years to later inflate their pension.

When 2,125 public employees retired in fiscal year 2015, the ERS found that 447 of them had spiked their pensions — about 21 percent. The following fiscal year, 16 percent of the state’s 2,188 retirees were found to have spiked their pensions.

The ERS reviews the salaries of new retirees every year to watch for signs of pension spiking, and then bills the spikers’ employers for the additional costs. Not surprisingly, the City and County of Honolulu and the state have the largest number of spikers.

Hawaii’s retirement system billed Honolulu $8.7 million in FY 2016 and $9.7 million in FY 2015 because of spiked pensions, according to ERS data.

Statewide these bills have averaged $20 to $25 million per year, in addition to the over $700 million government employers already pay each year for retirement benefits.

Legislators passed a bill in 2012 removing overtime earnings from pension calculations for employees hired after July 1 of that year. But out of about 68,000 city, county and state employees in Hawaii, 75 percent were hired before the 2012 cutoff date, said Wes Machida, the state’s budget director.

When employees spike their pensions, taxpayers must pay that inflated amount for the rest of the employees’ lives after retirement.

Colbert Matsumoto, an ERS trustee, was surprised to learn Thursday of the number of retirees who had spiked their pensions.

“What was more surprising was the magnitude of the financial cost associated with that relatively small group of people,” he said.

The cost adds to the state’s already massive unfunded liability. The state’s pension fund shortfall jumped to $12.4 billion in 2016 from $8.8 billion in 2015, according to a report by the state’s independent actuarial consultant, Gabriel Roeder Smith & Company.

‘Invisible To Most People’

Most public employees don’t abuse overtime.

“A lot of the guys who work overtime don’t have a choice,” said state Sen. Karl Rhoads. “They’re told to work overtime and of course it’s completely in control of the employers — if they don’t want to give overtime they don’t have to give overtime.”

While there have long been allegations that employees collaborate to increase overtime hours for some, Rhoads said there’s no proof of that practice.

Still, the recent city audit of the Department of Environmental Services’ bulky item collection service found some employees had abused overtime and taken excessive sick leave.

During the course of almost two years, 21 employees each took on average 23 days of unpaid leave, the audit said. Their colleagues filled the vacancies by working overtime. The audit found that between July 2015 and July 2016, 153 employees earned $1.7 million in overtime, an average of $11,000 per employee.

“You’ve gotta wonder why they’re not showing up to work and why these guys are picking up all those hours,” Manahan said.

“I don’t know how we’re managing this at the city,” he said.

The audit found that in a 13-month period, 10 employees with the highest overtime hours received a total of $467,201 in overtime pay.

The trash audit also blamed staff shortages and union agreements for excessive overtime.

Matsumoto and Machida wrote a recent opinion piece for the Honolulu Star-Advertister expressing their concerns about the lasting costs of pension spiking.

Matsumoto offered an extraordinary example of an emergency medical technician whose pension would have been about $30,000 annually based on an annual salary of less than $60,000. In 2012, the EMT racked up a pension of $120,000 a year, thanks to overtime.

“It’s kind of invisible to most people,” said ERS Executive Director Thomas Williams. “The retirement plan just pays out benefits, nobody knows exactly where it comes from and if I get twice as much as I’m due, who’s worse off for that? Most people don’t see the harm, but the harm actually permeates through all of the taxpayers.” 

In 2011 when then-Gov. Neil Abercrombie testified in support of bills to reduce public employee retiree benefits, he found himself in front of a crowd of jeering public workers.

“These types of issues should be vetted but a lot of the members don’t want to touch it,” state Rep. Calvin Say said of legislators. “You’ll get the unions on your back.”

Manahan’s resolution is headed for its first hearing before the council’s Executive Matters Committee on Sept. 26 at 1 p.m.

“It’ll be a lively hearing,” Matsumoto said.

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