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Overtime & Final Average Pay (FAP)

Jul 24, 2018, 10:32 AM by MOSERS

Given the extreme amount of overtime currently being worked by corrections officers (over 1 million hours so far in 2018, and 1.6 million last year), how will this effect the long term funding available for pensions? Their pension is based off their 3 highest consecutive grossing years of service. Many officers have been grossing 2-3 times their base pay due to the inordinate amount of overtime. This has been ongoing now for two-three years. This will make a huge impact on their pension monthly benefit, increasing it exponentially. Has there been any comprehensive study done on how this will effect our pension funding in the future?

Calculating Your Benefit

You are correct, retirement benefits for general state employees are calculated using a three-part formula:

Final Average Pay (FAP)  x credited service  x  a multiplier =  Monthly Base Benefit

As you referenced, FAP is determined using your highest 36 full consecutive months of pay when looking at your entire work history covered under MOSERS. Practically speaking, for most, that is their last three years, but not always. The exception to this would occur under the BackDROP (if eligible). If you become eligible for and elect the BackDROP upon retirement, your highest 36 consecutive months would be determined from your MOSERS-covered work history prior to your BackDROP date. In other words, any pay or service during your BackDROP period doesn’t count toward your monthly benefit payments.

Overtime pay can increase your retirement benefits if there is a pattern of overtime pay. We don’t count one-time payments or any payments from your employer after you terminate state employment such as for unused vacation/annual leave.

Pension Funding

With regard to your question about how all this overtime will affect pension funding, you can rest assured that it is all being factored in to our funding process, we have made our external actuary aware of it, and we will continue to monitor it.

In setting funding policy, our Board of Trustees works with our external actuary to review and set assumptions about a variety of economic and demographic factors including payroll growth, inflation, life expectancy, and several other factors.

We conduct an annual “valuation” which is collecting all the above data (and more) and sending it to our external actuary. Our actuary does an “experience study” every 5 years to compare our assumptions to our actual experience with our members and with other economic factors. Then, we make adjustments accordingly. All that (and more) goes into the calculation of employer contribution rates going forward.

The Department of Corrections (DOC) is a large employer but is one of several that we cover. While there may have been increases in payroll at DOC, they are offset elsewhere. For the year ended 6/30/17, the overall pay increase for state employees we cover was slightly less than assumed (p. 20 of 2017-06-30 Actuarial Valuation MSEP). We will have the data for FY18 soon. Each of the 39 state departments, agencies, colleges, or universities that we cover makes employer contributions as a percentage of their total actual payroll, which includes overtime pay. So,paying overtime also increases the amount of employer contributions that DOC has already been making to MOSERS. As mentioned above, we will continue to monitor overtime at DOC and factor it into our funding calculations.

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