State and local governments have piled up trillions of dollars in retirement debt for pension and health-care promises that they’ve never bothered to fund adequately. Yet, even as they strain to pay these obligations, some keep handing out other expensive perks, rarely bestowed in the private sector. The most striking example: governments are accumulating billions of dollars in future debt by letting employees store up unused sick days and vacation days, which they can then “cash out” when they retire. Unsurprisingly, states with some of the largest burdens in this area also carry the heaviest pension debt—California, New Jersey, and Massachusetts among them. Failure to reform these practices puts already-beaten down taxpayers under an even more crushing load.
California owes $3.5 billion in payouts for unused vacation time to workers, according to the Los Angeles Times. In 2017 alone, the state paid out $300 million for unused vacation days to retiring workers. Facing severe financial constraints after the 2008 financial crisis, state politicians nonetheless did little to control these costs. Payouts for untaken time off have rocketed upward by nearly 80 percent in less than a decade. The state paid six-figure “goodbye kisses” to about 460 employees in 2017, up from 280 five years ago. One retiring transportation engineer took away $405,000, in addition to his generous salary and health-care benefits. A surgeon in a state prison hospital netted $456,000. One reason these payouts are so generous: California pays for unused days at the employee’s retiring salary level, rather than at his wage rate when he accrued those days. For employees who amass unused time over decades, a tidy sum can be owed.
California politicians have long grumbled that they can’t get a handle on pension costs because of state court rulings that make it impossible to cut pension benefits for current employees—even for work that they’ve yet to do. But no similar restrictions exist on ending the unused overtime perks. The refusal to do so reflects a lack of will among politicians, starting with the governor’s office.
In New Jersey, which has one of the biggest retirement-funding problems, local governments owe nearly $1.9 billion in unused sick time. Only 8 percent of private-sector employers offer this perk because firms consider paid time off for sick days to be a benefit of continued employment, not a retirement benefit. Jersey municipalities are struggling to pay big settlements. The police chief of Englewood Cliffs, a town of about 5,200 residents, received a payout of $587,000 that included 150 unused sick days and 408 unused vacation days. The extra benefit endures despite a 2009 investigation that concluded: “It simply is unacceptable and intolerable for taxpayers to continue to be burdened by these sorts of gold-plated, sky’s-the-limit payout packages for active and retiring public workers—especially when the cost of such arrangements can seriously erode local budgets, drive up property taxes, and actually coincide with the layoffs of essential personnel, including police officers and firefighters.” Former Republican governor Chris Christie and the Democratic-controlled legislature sparred for years over this issue. They agreed to cap state worker accruals at $15,000 per worker, but Christie wanted to eliminate the benefit entirely for municipal employees. The legislature agreed only to cap the size of the payouts that local workers could earn. No deal was reached.
Massachusetts is putting $2.4 billion into its pension system this year, an amount projected to swell to $11 billion in 15 years as the state tries to pay down its debt. Even so, the state pays retirees for unused sick time. Last year, more than 10,000 retirees took advantage of the arrangement. A retiring professor at the University of Massachusetts garnered $185,000 in pay for unused days, while seven other state college employees netted more than $100,000 each and a retiring top officer in the state police took home $112,000. In 2017, the inspector general reported that the state faced a liability of $117 million because of the unused time. Governor Charlie Baker’s efforts to cap the time have met with resistance from the Democrat-dominated state legislature.
Union power is clearly the driving force in places with these steep liabilities. California, Massachusetts, and New Jersey have some of the nation’s highest rates of public-sector unionization. Another deeply indebted state is Ohio, where legislators also face union struggles. The state owes workers some $444 million in unused time off, according to one report. One recent Ohio example: a former state pathologist retired with 3,000 hours of sick leave and 600 vacation hours, worth $193,000. The perk persisted in Ohio through eight years of a Republican governor and legislature. The reason: fear of union power. After the GOP passed a law in 2011 to restrict public-sector collective bargaining, unions were able to overturn it via a statewide referendum, making Republicans hesitant to take on the unions again.
Meantime, the debts keep piling up, adding to the public sector’s already-significant retirement-debt crisis.
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