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Giving Targeted Tax Breaks Puts Burden on Others

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By Lowell L. Kalapa

Last week we spelled out the various retirement and health benefits available for public employees, elected officials and judges.
Generous as they are, it seems that there are some who would still attempt to abuse the system in the sense that they have used the law for excessive benefits. Up until 1997, observers criticized the way lawmakers curried favor with the state administration in the hopes of being appointed to some high paying job in the state or county administration.
This was a way to improve their retirement benefits because the retirement law, prior to July 1, 1997, allowed the 3.5% factor available to elected officials to apply to all years of public service and to the highest average final compensation for which they were paid. For example, a lawmaker who had ten years of service and earned $32,000 as a legislator could suddenly be appointed to a cabinet level position which pays $84,000 and could, after three years in that position, retire with as much as $38,000 in retirement benefits – $6,000 more than he had earned as a lawmaker. That’s because that ex-lawmaker would have worked 13 years for state government and with a multiplier of 3.5% be able to claim an allowance of 45.5% of the average final compensation of $84,000, the highest three years of compensation.
As a result, it became very lucrative for lawmakers to curry the favor of the governor while still in the legislature by approving or stopping bills that the administration wanted because it might earn the reward of an appointment to a high paying job. This was the criticism levied at the previous administration. And indeed, a number of lawmakers were elevated to high-paying cabinet positions or commissions and other types of governing authorities. As a result, they were able to retire with generous retirement allowances.
Lawmakers were finally “shamed” into reforming this loophole in the employee retirement system law in 1997. However, for those lawmakers who were in office on July 1, 1997, they are still able to take the highest three years of compensation and use that for those years prior to that date multiplied by the 3.5% factor. Thus, if a lawmaker who was in office on that date and had worked in public service in some other job prior to entering the legislature that paid more than the legislative compensation, those years of the higher pay would form the base against which the 3.5% factor would be used in calculating that portion of the retirement benefit. The reform of the retirement law limiting the 3.5% would then apply only prospective to that compensation paid while in elected office. So to some degree the law has been reformed, but sitting lawmakers made sure they took care of themselves with respect to their prior employment.
Another abuse of the retirement system continues to be available. This is where the employee “fattens” his or her average final compensation by earning more than the posted salary for the position. How does that happen you might ask?
Investigators discovered a longtime practice that allowed some public employees to work substantial over time in the three years prior to their projected retirement. Overtime was awarded to those with seniority and who were preparing to retire, allowing these employees to earn sometimes as much as six figures during that three-year period. Being paid time and a half or double time adds up very quickly. And while they are working for that money, it also results in a higher average final compensation that looks nothing like the employee’s posted salary.
The result is that the retirement benefits of these employees many times exceeds the salary at which the employee would have been paid had he or she not worked the over time hours. As a result, the taxpayer is on the hook for a generous retirement benefit that looks nothing like what the employee should have received based on the stated salary for that position.
This loophole has yet to be closed. The rules of the game should not be twisted to reward those who work the system to their favor at the expense of all taxpayers. Argue as they may that they are entitled to this arrangement, the argument fails to recognize that their benefits come at the expense of all other taxpayers.
Next week we will look at the growing disparity in the tax treatment between the traditional pension benefit and the retirement vehicles that are becoming more common.

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