Phoenix Ends Pension Spiking

Most state constitutions contain a little-used provision known as the “gift clause,” which prohibit certain public expenditures to private entities. Unfortunately, only the Goldwater Institute, located in Arizona, is effectively using the gift clause.

In 2010, the Arizona Supreme Court had clarified the parameters of the state’s gift clause. To determine whether public funds aiding private interests violate the gift clause, courts in the state use a two-part analysis: 1) expenditures of public funds must promote a public purpose; and 2) the public entity must receive proportionate, quantifiable, and direct benefit for the aid given.

For example, one such government expenditure that has been ruled to violate the “gift clause” is union release time, which allows public employees to conduct union business without suffering loss of pay.

Recently in Arizona, the Goldwater Institute successfully challenged union release time as a violation of the state’s gift cause. The Maricopa County Superior Court ruled that Phoenix police on union release time was illegal under the state’s gift clause, which declares that no state or local government agency “shall make any donation or grant, by subsidy or otherwise, to any individual, association or corporation.”

At the gift clause’s core, it prohibits public expenditures that do not serve a public purpose. As the Maricopa County court ruling made clear, union release time fails to “serve a public purpose” and “diverts officers from performing police work.”

Now the Goldwater Institute has used the gift clause to spur pension reform. In Phoenix, pension spiking has caused pension costs to explode, “jumping from just $7.2 million in 2003 to nearly $130 million in 2014.”

In 2013, the Goldwater Institute challenged the wasteful practice by filing a lawsuit against pension spiking provisions in police and firefighter contracts, where “benefits such as sick leave, vacation time, vehicle allowances, bonuses and other benefits are cashed in to inflate a salary for retirement calculation.”

As Goldwater’s Nick Dranias and Byron Schlomach noted in a paper, the gift clause “should bar pension funds from giving public employees grossly disproportionate compensation for their work. Specifically, to counteract the practice of “spiking,” pension benefits for any employee should be capped at an amount that is not grossly disproportionate to that employee’s pension contributions.”

Fortunately, the threat of Goldwater’s lawsuit led to pension reform. As reported by the Arizona Republic:

Phoenix’s new contracts with its employee unions will end the controversial practice of pension spiking for police officers and firefighters and cap it for other city workers, saving taxpayers an estimated $233 million over 25 years, according to a city report.

Pension spiking is generally seen as the artificial inflation of a city employee’s income toward the end of a career to boost retirement benefits. The practice has been widespread at City Hall and became a hotbed of controversy last year, particularly after former City Manager David Cavazos cashed in sick and vacation leave and other perks to boost his annual retirement check by about $88,000, to $234,536.

The recent changes go far enough, however, that the Phoenix-based Goldwater Institute, a conservative watchdog group, is considering dropping its lawsuit challenging the practice for police and fire personnel in the state Public Safety Personnel Retirement System.

As I’ve said before, the gift clause is still on the books in 47 states, now its time other states put it to use.