Arizona Supreme Court says pension spiking must end

Phoenix employees cannot use their unused vacation and sick days to spike their pensions, the Arizona Supreme Court ruled in two unanimous opinions on Friday.

The Supreme Court's decisions end an eight-year feud between the city and its unions that stemmed from the city's attempt to clamp down on rising pension costs.

Phoenix allows some of its employees to hold on to unused vacation and sick days and cash them out when they retire.

From 1996-2012, the city allowed employees to use these sometimes massive lump-sum payments as part of their salary when calculating their pensions.

The annual amount a retired employee receives through their pension is determined by the highest compensation received while employed, so adding the lump sums artificially increased, or "spiked," their pensions.

The city stopped allowing employees to include these lump sums in 2012, which many employees and their unions argued was unfair.

After eight years and multiple lawsuits, the Arizona Supreme Court disagreed.

Pension spiking was a common practice for Phoenix employees, which is why many revolted when the city changed its policy.

The financial impact of pension spiking largely varied depending on an employee's salary.

But for employees who made six figures, these payouts, and the corresponding pension benefits, were substantial.

For example, when former City Manager David Cavazos retired in 2013, he cashed in sick and vacation leave and other perks to boost his annual retirement check by about $88,000, to $234,536.

According to the court opinions, the average payout from 2009 to 2010 for just sick leave was $9,923 and for vacation, some employees cashed out up to 450 unused vacation leave hours.

Vacation and sick leave stockpiled prior to 2012, when Phoenix changed its policy on pension spiking, can still be used in calculating an employees pension.

Following the Great Recession, Phoenix faced ballooning pension liabilities, which forced the city to look at reforms to the city's retirement system.

Ending the practice of pension spiking was one of those reforms and is expected to save the city a significant amount of money moving forward.