Tom Morrill wanted to boost his retirement.
So a few years ago, during his last year as Auburn’s school superintendent, Morrill chose to have the school system pay him some of the money it was paying for his health insurance. He turned around and bought back that insurance.
Morrill didn’t gain or lose anything in the deal, but the cash payout made his salary appear larger — a strategic move for his future state pension.
“It would boost my annual salary for retirement purposes,” Morrill said. “Your three highest annual years are calculated into that (state pension) formula.”
The problem? The little-known practice is banned in Maine and has been for nearly 30 years.
At issue is cash in lieu — giving a worker money in place of health insurance, vacation time or another perk. Receiving the money instead of the benefit is perfectly legitimate. Using it to later pad retirement is not.
Since 1987, Maine has prohibited members of the Maine Public Employees Retirement System — public school administrators and teachers, state workers and municipal employees — from considering cash in lieu as salary when it comes to figuring out retirement amounts.
Maine law requires that cash in lieu of a benefit be considered a benefit. Only workers’ actual salaries — not their benefits or their income derived from forgoing benefits — are supposed to determine how much they get in pensions.
Morrill said he had no idea the practice was banned. Because his pension had to be capped for other reasons, he didn’t get any advantage from the cash-in-lieu situation and didn’t face any consequences.
But others have.
Recently, Maine retirement system officials ruled that five mid-coast-area school leaders had been padding their salaries for years. Four of the five are appealing, saying their situation is different from others and claiming the retirement system initially gave them the OK for the arrangement.
The cash-in-lieu provision is complex, little-known and not always well-understood, despite its nearly 30-year existence. Because of that, it can be easy to both take advantage of and stumble into.
At risk: money.
Depending on how cash in lieu is applied, a single retiree can gain or lose thousands of dollars a year.
“The bottom line is, I’m counting on that money from Maine State Retirement,” said Nancy Kneedler, one of the four mid-coast-area school leaders appealing her cash-in-lieu decision.
The state — and its taxpayers — can gain or lose, too.
“We take this very seriously when we see it,” said John Milazzo, general counsel and chief deputy executive director for the retirement system. “But sometimes, we don’t see it. Sometimes, it’s hidden from us.”
‘A significant number’
State workers receive a pension if they’ve worked long enough and contributed enough to the retirement system. How big of a pension depends on a worker’s salary. A superintendent who earned $100,000 a year will get a much larger retirement than a teacher who earned $45,000 a year.
The retirement system uses a worker’s highest three salary years to calculate a specific pension amount. Although those three highest years can happen anytime during a person’s career, they often come just before retirement, when a worker has the longevity, experience and raise history that leads to more money.
Since 1987, the state has prohibited cash in lieu of benefits from being added to the definition of “salary” for that pension calculation. That means a worker can still take cash instead of health insurance, for example, but that cash can’t be considered salary and used to get a higher retirement check.
It’s unclear how often state workers take cash in lieu of benefits, but it’s commonly offered in both public and private workplaces. Employers have used it to entice workers to drop company health insurance and as a reward for unused vacation or sick days.
Depending on the employer’s policy and what the cash is in lieu of, workers can get between a few hundred dollars and several thousand dollars extra each year.
“When you’re looking at health insurance, you are looking at a significant number,” Milazzo said. “You’re not looking at somebody who might get a fringe benefit of, I don’t know, $300 for some reimbursement for dental or something. You’re looking at big numbers.”
Big numbers that, when added to salary, boost state pension costs.
“And it’s over the lifetime of a person, with (cost-of-living adjustments), assuming they get COLA in the future,” Milazzo said. “That’s a significant increase.”
The retirement system has safeguards in place to stop workers from padding their pay to boost retirement benefits, including a 5 percent annual cap on salary increases during their three highest years.
But a cash-in-lieu situation can sometimes be difficult to spot, especially if the arrangement began long before the three highest salary years and carried through. The retirement system looks for cash-in-lieu stipulations in employment contracts, then checks to see whether that money was reported as benefit or salary. Sometimes, it gets calls from people who want to draw attention to a cash-in-lieu situation they’re concerned about.
“We see a jump in pay, and in this day and age, you don’t get much of a jump in pay,” Milazzo said. “None of us are getting jumps. So when we see that, it sets up a flag for us. ‘What’s the circumstances?'”
Milazzo estimated that cash in lieu comes up three or four times a year at the retirement system. Although the rule is in effect for all 102,000 retirement system members, system officials most often encounter it with public school employees.
“If it’s come up with state employees, I don’t remember it,” Milazzo said. “Unfortunately, I think the cash-in-lieu situation, when it was enacted … I believe they were sort of looking at the higher-level positions in the teacher world.”
Although the retirement system encounters only three or four cash-in-lieu situations per year, some people say the problem is more pervasive.
“I believe it is the tip of the iceberg. This has been happening for two decades,” said William Shuttleworth, a veteran school administrator who’s served as superintendent in several Maine school districts, including Buckfield, Bath and Camden, and now leads Jonesport-area schools.
Shuttleworth said he’s encountered a number of situations in which school leaders — athletic directors, principals, other superintendents — got cash in lieu of health insurance, used that cash to buy back their health insurance from the school system, then reported that cash as a salary increase to raise their pension. Some, Shuttleworth said, expected him to go along with it.
He believes it’s morally wrong.
“You have people making $500 a month on Social Security getting by and you have administrators who have these very well-paid, quality retirement plans that abuse the system to steal more money from the state in perpetuity,” he said.
Consequences
Nick Ithomitis and Nancy Kneedler said they never intended to steal anything from the state.
They are two of the four mid-coast-area school leaders appealing a retirement system ruling that they used cash in lieu of health insurance to make their salaries artificially higher and bolster their retirement plans. Ithomitis is principal of Camden Hills Regional High School. Kneedler was assistant principal of Camden-Rockport Elementary School until her retirement in 2012.
Both said the former school district superintendent approached administrators several years ago about an arrangement that would give them money to buy school district health insurance or anything else they wanted.
“It wasn’t something that was off the cuff, nor was it something that we asked for,” Kneedler said. “(The superintendent) did due diligence by asking Maine State Retirement if this would be possible. She contacted the attorneys for the school district and all of that. It wasn’t just some under-the-table, underhanded thing.”
Ithomitis said he and other school administrators had no health insurance at the time and the extra money simply gave them the ability to buy it if they wanted it. He believes theirs was not a true cash-in-lieu situation because there was nothing for the cash to be in lieu of.
“It wasn’t in lieu,” he said. “It was additional salary.”
But administrative contracts for 2009 to 2014 note that administrators are entitled to receive “benefits equal to 21 percent of compensation to be used for health insurance or other benefits offered by the school district.” It adds that administrators “may waive health insurance coverage or other benefits and receive cash in lieu of insurance.”
The retirement system did originally tell the school district it could go through with the arrangement, but Milazzo said the school district didn’t provide complete information to officials at the time. When the retirement system understood the full situation, he said, it concluded five Camden-area school administrators were running afoul of the cash-in-lieu provision.
Four of the five are appealing the decision. The school district, which spent thousands to defend the case initially, still backs the workers but is not joining the appeal.
“I think (school board members) just felt they had gone as far with it as they could go,” said current Superintendent Elaine Nutter.
The school district faces no consequence, but the five employees do. If the decision is upheld on appeal, cash in lieu will be excluded from their earn-able compensation, lowering the pension they’ll receive. Those who have already retired will have to pay back any overpayment.
Kneedler guessed she could lose several hundred dollars a month from her pension, not including money she would have to pay back.
“I’ve come to rely upon that,” she said. “To lose that would be really a detriment to my livelihood.”
The school district, for its part, has changed the way it does business. It will now give administrators the same health insurance as teachers, with no option for cash.
“Either they need the insurance or they don’t,” Nutter said.
Confusion
It’s hard to tell how much questionable cash-in-lieu practices cost the state and its taxpayers. It would depend on how prevalent the practice is, and no one really knows the answer to that.
Milazzo believes the greatest impact comes over time.
“The retiree would be receiving a ‘greater’ benefit than would have been actuarially calculated and financially provided for, and the retiree would receive that increased benefit, compounded by annual cost-of-living increases, over that retiree’s lifetime,” Milazzo wrote in an email.
In other words, an unearned $100 a month isn’t a lot. But take $100 a month, add annual cost-of-living raises, and multiply it by 25 years or so, and the cost will run into tens of thousands of dollars. It’s money the state didn’t plan for, and that’s just for one person.
In addition to keeping an eye out for padding after the fact, Milazzo said the retirement system works to educate members and school systems on the correct way to handle cash-in-lieu situations from the beginning.
“We do so much training, it would be hard for people not to understand it,” he said. “We also do recognize that at some employers, there’s changeover in staffing, like business people, payroll people. They may not understand it. But the people who negotiate salaries should. This is not something that’s a new statute. The statute’s been there forever. It’s hard for me to believe they don’t understand it.”
But some people don’t. Even those who should.
According to contracts that cover the late 1990s and early 2000s, former Lewiston Superintendent Leon Levesque was given the option of taking cash in lieu of his health insurance. For some period of time, he exercised that option, taking the cash and buying his health insurance back from the school system. It was reported as salary, according to the school system.
Levesque, who retired in 2010, served Lewiston as superintendent for 12 years and was a veteran school administrator. He could not be reached for comment.
Lewiston Assistant Superintendent Tom Jarvis, a former human resources director, wasn’t involved in those contracts but said he believed the practice was and is permitted by the retirement system.
“I don’t think there’s anything not allowing him to do that,” Jarvis said. “I know a lot of collective-bargaining agreements offer, ‘If you don’t take the insurance, we’ll give you some money.’ I’ve seen that in other districts. I don’t think that’s uncommon. Like I say, it’s a very permissible practice.”
He said no one in the Lewiston school system is now getting cash in lieu.
Auburn’s former school superintendent, Morrill, had no idea cash in lieu couldn’t be counted toward retirement. He said he and the school board negotiated a cash-in-lieu option for him in 2009 for the 2011 school year. Auburn couldn’t afford to give him a raise, and the arrangement allowed the board to compensate him with a higher retirement.
“We were in a very, very difficult financial time,” he said. “I mean, it doesn’t get any worse. You look at compensation and how you can adequately compensate, while at the same time, respecting the fact that the revenues were maxed out.”
At the time, he said, the school board was considering offering a similar cash-in-lieu arrangement to large groups of employees. He said it was discussed with at least one union but never implemented — not because it was against state law, but because workers didn’t embrace the concept.
“It’s hard sometimes breaking with what you’ve traditionally viewed as a compensation package,” he said.
Morrill retired in 2011. He learned his cash-in-lieu option might have been handled wrong when approached recently for this story. He immediately called the retirement system and asked officials there to review his situation.
He said an official did and told him it was earn-able compensation.
But Milazzo said the official didn’t fully explain. Morrill’s cash in lieu ultimately wasn’t a factor because he’d already hit the salary increase cap before that extra cash was added. The money was never counted toward his pension.
“(The official’s) statement was his shorthand way of saying that, when all payments were considered and accounted for, Mr. Morrill’s earn-able compensation amount was accurately calculated and was not overstated due to cash in lieu,” Milazzo said in an email.
Auburn’s longtime business manager, Jude Cyr, however, believes Morrill’s situation wasn’t a cash-in-lieu deal because Morrill received money for only 55 percent of his health insurance, not the whole thing.
“It wasn’t as though they gave him the full value of that,” he said.
Cyr said he also believes a school board can create a salary any way it wants and have it count toward retirement, as long as it doesn’t go over the retirement system’s annual 5 percent cap.
“It’s legitimate,” he said. “I can think of some communities where they’ve gotten pretty creative and have to in order to either attract new hires or retain superintendents, because it’s a tough job and not everybody wants it.”
Milazzo said both of Cyr’s assumptions are wrong. It doesn’t matter whether a worker gets cash in lieu of a full benefit or only a portion of the benefit. And a school board can’t get as creative as it wants when it comes to salary for retirement.
Milazzo said he planned to follow up with Auburn.
“His understanding does not comport with our understanding of the law, and therefore the situation needs clarifying,” Milazzo wrote in an email.
Although Cyr didn’t believe Morrill’s situation met the cash-in-lieu criteria, he agreed with the state’s philosophy to exclude cash in lieu from retirement.
“Admittedly, I know some former superintendents who did, in fact, do that before the rule was changed,” he said. “Yeah, I don’t think that’s fair.”
How does it work? An example:
1) Public High School Principal Jane Smith will retire in a few years. The higher her salary, the larger her monthly pension check will be come retirement. She wants a higher salary.
2) School system likes Principal Smith and wants to make her happy. It offers to give her cash instead of paying for her health insurance as a way to make her salary look larger. She agrees.
3) School system gives her $10,000 as cash in lieu of insurance. Principal Smith uses that money to buy back her health insurance through the school system. Her salary artificially looks $10,000 larger and she still has insurance.
4) By Maine law, that $10,000 should be considered part of her benefits package since it’s cash in lieu of a benefit. Benefits are not part of a state retiree’s pension calculation. Salary, not benefits, determines how much someone will get for retirement.
5) School system reports that $10,000 is part of Principal Smith’s salary — like a raise — when it’s actually cash in lieu of a benefit.
6) Principal Smith retires. Her salary is $10,000 higher than it should be. She gets a higher pension, funded by taxpayers.
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