The Seattle Times received tips from readers saying that some city employees, aiming to increase their pensions, were working a lot of overtime right before they retired. To confirm if this was true, we requested payroll data from employees who retired from five big Seattle city departments:
- Seattle Fire Department
- Seattle Police Department
- Seattle City Light
- Seattle Public Utilities
- Seattle Department of Transportation
These departments were chosen because they are among the 10 city departments with the largest budgets, represent different kinds of public jobs and are big users of overtime. The first three account for over 80% of all overtime expenses that the city has paid in more than a decade. Utilities and transportation are at a distant fourth and fifth place.
Firefighters and police officers are covered by a state pension plan called LEOFF2, which counts overtime pay toward their pension calculations. But employees in City Light, Public Utilities, Transportation and civilian staff in the police and fire departments belong to a city-run pension plan that doesn’t include overtime in their pension calculations.
The question was whether this difference in pension rules affected how much overtime people worked and how it impacted retirement costs for the state.
The investigation found that some firefighters and police officers considerably increased overtime hours in their final years, while employees from the other departments, and civilian employees from the fire and police departments, mostly worked stable or even declining overtime hours throughout their careers.
The Times requested data for employees who retired from 2015 through 2022. For each of the roughly 2,000 retirees in that group, we obtained the following information for each of the last 20 years of their careers:
- Overtime hours: How many overtime hours they worked each year.
- Overtime pay: How much money they made from those overtime hours each year.
- Gross pay: Their total income each year, including base pay and overtime.
- Years of service: How many years they worked for the city.
The LEOFF2 state retirement plan for firefighters and police officers uses the average income from the highest-paid five consecutive years of an employee to calculate their pension. This is called Average Final Compensation. For each retiree, we determined their AFC.
For example, let’s say employee A’s five consecutive years of highest income were from 2016 to 2020, and that they worked 200 hours of overtime each of those years.
Employee A’s pension would be calculated as follows:
Let’s assume for a moment that employee A’s retirement plan doesn’t count overtime toward pensions. Using only employee A’s base income, their AFC would be:
AFC = ($100,000 + $100,000 + $100,000 + $120,000 + $120,000) / 5 = $108,000
Now let’s assume employee A had 30 years of service. Their pension would then be:
Pension = AFC x years of service x 2% = $108,000 x 30 x 2% = $64,800 per year
But now, let’s assume that employee A’s plan does count the 200 annual hours of overtime pay toward pension. Then their pension should be higher than $64,800. Let’s calculate how much higher.
OT pay = $14,423 + $14,423 + $14,423 + $17,308 + $17,308 = $77,885
Average OT pay = $77,885 / 5 = $15,577
Pension amount that comes from OT = average OT pay x years of service x 2% = $15,577 x 30 x 2% = $9,346 per year
Total pension = pension from base pay + pension from OT pay = $64,800 + $9,346 = $74,146 per year
Because employee A worked overtime during their highest-income years, their pension increased more than 14%, from $64,800 to $74,146.
Does this mean that employee A “spiked” their pension? Not necessarily.
Pension spiking occurs if an employee boosts their income with the goal of inflating their pension. If employee A worked roughly 200 overtime hours not just during their highest-paid years, but through most of their career, there would be no pension spiking.
But let’s assume that during their averaging period, employee A increased their annual overtime hours from the 200 a year they typically worked so far, to 1,000.
Their base pay did not change, so the part of their pension that comes from it is still $64,800. But now the part of their pension that comes from OT hours is as follows:
OT pay= $72,115 + $72,115 + $72,115 + $86,538 + $86,538 = $389,423
Average OT pay = $389,423 / 5 = $77,885
Pension amount that comes from OT = average OT pay x years of service x 2% = $77,885 x 30 x 2% = $46,731 per year
Total pension = pension from base pay + pension from OT pay = $64,800 + $46,731 = $111,531 per year
Because employee A worked 800 additional overtime hours each year (above their usual 200 OT hours) during the last five years of their career, they earned an extra $311,538, on top of their base salary and their usual OT pay. That extra salary translated into an extra $37,385 in their pension (from $74,146 to $111,531) every year for the rest of their life, plus yearly cost-of-living increases.
Assuming employee A lives 21 years after retirement, and using a projected inflation of 2.75%, the extra costs to the pension system would add up to about $1,043,708 for this employee.
Just from this analysis, it is not possible to determine if employee A worked more overtime with the intention of increasing their pension. It could be that their job required them to take on more overtime during those years. Regardless of the reason, the structure of LEOFF2 is such that those extra hours increased the pension system’s costs by about $1 million over two decades.
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