MOUNT CARMEL - Former borough police lieutenant Blaine Handerhan's salary appears to have been "spiked" in the final three years of his employment, driving up his pension payout.

From 2002 until his retirement in 2005, his earnings increased $36,494 a year. Even though the extra money was subtracted as a deduction on each paycheck and he never received it, his pension ballooned based on the higher gross pay.

That and a 1997 decision by borough council to triple pension benefits for non-uniformed employees have combined to help put the borough more than $1 million behind in payments to its two pension funds, said borough council President Tony Matulewicz. He has poured through records to uncover these and other details after the borough was informed earlier this year of the large deficit.

"Mount Carmel Borough's pension crisis is not an accident. Rather, it is a man-made disaster," Matulewicz said Friday.

Council revealed in April that the current actuary from Pennsylvania Municipal Retirement Fund reported the pension fund for police is underfunded by $759,885 and the fund for non-uniformed borough and municipal authority employees is underfunded by $247,548, a total of $1,007,433. That's how the far the borough is behind in anticipated payments to retires in the coming years.

This year, the borough has $208,705 budgeted for police pension for nine individuals and $74,680 budgeted for non-uniformed employee pension for 12 individuals.

The borough can catch up with the deficit in increments over a number of years, council members said, but the total might also increase with further investigation.

As for Handerhan, who was hired Jan. 30, 1975, and retired Oct. 31, 2005, he began serving an eight-year federal prison sentence in August 2011 for possession of child pornography. But his monthly pension payout of $3,831.89 - nearly $46,000 a year - continues.

Missing records

As a cost-saving measure, the borough in March 2012 switched pension service providers from Susquehanna Bank to Pennsylvania Municipal Retirement Trust as third party administrator and from Aon Actuarial Risk Assessment to Tom Anderson as actuary.

The new actuary requested documentation for the old plans, but paperwork and files were missing, and some of what was provided did not match the former actuary's contribution reports and W-2 forms, Matulewicz said.

The computer payroll program that includes pension information, while on the borough server, is also not accessible, and Matulewicz wants a forensic expert to check it out to recover the data.

Since council revealed the actuary's report in April, Matulewicz has been pouring through financial records, spending 25 hours just on Handerhan's information. It's not clear yet if other employee salaries were possibly spiked, he said.

In Mount Carmel, a uniformed employee can retire once he or she has worked for 20 years and has reached age 50. Employees' pensions, which are 50 percent of their monthly pay, are determined by the average salary in the final 36 months of employment.

An employer has the length of the employee's career to save money for retirement, which is based on projections of what that person will likely be making in their career history. The money saved should be enough to make pension payments from the time of their retirement until death.

However, if the gross pay is inflated near the end of an employee's career, the employer will have to provide higher pension checks than anticipated, and will likely use up the available funds too quickly.

Inflating earnings in such a manner is called "spiking," said Jim Allen, secretary of the Pennsylvania Municipal Retirement System (PMRS), Harrisburg, which is responsible for 960 local government pension plans in the state.

Provided with details of Mount Carmel's predicament, Allen said spiking is difficult to accomplish with actuaries and auditors overseeing the process, but not impossible.

"You'd have to be doing something corrupt for a long period of time to get that inflated. It should have come to the governing body's attention prior to that happening," he said.

There are too many variables to consider in calculating the exact amount Handerhan's pension contributes to the $759,885 shortfall for the uniformed employee pension, Matulewicz said, and the borough didn't suffer an immediate "theft" or other loss of funds even with the apparent spiking.

But artificially inflating an employee's salary is "not only fiscally irresponsible, but also fraudulent," Matulewicz said. "It presents false information to the actuary, the public, and unjustly enriches the employee in the form of a higher-than-deserved pension for life."

Given, taken away

In 2001, copies of Handerhan's checks show he was making $44,356.05 a year. But his salary - at least on paper - rose considerably in the final years of his employment. In 2002, records show a gross pay of $48,913.36; in 2003 it was $59,212.63, then $78,960.70 in 2004. From January until his Oct. 21 retirement in 2005, he earned $76,507.12, a monthly average that would have totaled $90,000 in 12 months.

By comparison, former Chief Brian Shurock, employed for 19.5 years, was making $54,912 when he retired last year. Current Chief Todd Owens, who has been with the borough 21 years, is now making $53,768.

It appears Handerhan's inflated pay was shown on his check to increase his pension accrual, then deducted and given back to the borough.

A category on the payroll statement called "other deductions" was blank for every employee in 2002 with the exception of one pay in January, when full-time employees were charged a $10 local service tax. However, beginning in October 2002, exactly three years before Handerhan's retirement and, therefore, the beginning period for the pension determination, that category started showing deductions for Handerhan only of $382.08 on nearly every bi-weekly payroll sheet through September 2003. From October 2003 until December 2004, the number increased to $504.58 or $504.59.

The deduction on each paycheck was labeled as health insurance contributions for Blue Cross/Blue Shield.

While Handerhan and other employees were receiving health care benefits, they were not contributing toward them at the time. Employees did not start contributing to their health care until 2011; they now contribute $500 a year.

Every dollar figure in the "other deductions" category on Handerhan's checks matches a check from the borough that is marked with Handerhan's name or the word "transfer" and the letters "B/C." Every check matches a bank deposit slip also marked with Handerhan's name or the word "transfer" and the letters "B/C."

In 2005, employees started contributing 5 percent to their pension fund, and those deductions starting appearing in the "other deductions" category as well. But not only had Handerhan's already been there for more than two years, his deductions were still significantly higher, rising to figures between $715 and $735 with his own 5 percent added in. That was at least $600 more per pay period than the other employees.

It appears his 5 percent contribution was not included when the "B/C" deduction was paid back to the borough. Between January 2005 and October 2005, there are checks in the amounts of either $589.62 or $589.63 to the general fund from the borough with "B/C" notation and deposit slips to match. Handerhan's name does not appear on these checks, but the word "transfer" does again.

Never approved?

Matulewicz said he has been unable to find council authorization for the practice in past meeting minutes, resolutions or ordinances - and he doesn't expect to find it.

Every one of Handerhan's checks and every one of the deposit slips were signed by former borough Manager/Secretary Joseph K. Bass, who was also the chief administrative officer of the pension board; former borough Treasurer Marian Muldowney and former council President Carl Froutz. Handerhan also served on the pension board as the president of the police pension between 1993 and 2005.

Bass and Muldowney were fired in 2009 for receiving raises that council said were never approved and using Matulewicz's signature stamp to approve checks.

"Who gave the authority to inflate Handerhan's lifetime benefits at the expense of the taxpayers?" Matulewicz said. "As a taxpayer, I would like an explanation as to why the names of Joseph Bass, Carl Froutz and Marian Muldowney endorsed dozens of checks used to accomplish the inflation. This type of action is fiscally irresponsible, fraudulent and reprehensible."

Froutz said the pension fund and all related documents were reviewed by the previous actuary and by the borough police pension board.

"Between those two, who the heck am I?" he said Saturday.

While on council for 12 years, six of those being president, Froutz said he didn't disagree with the professionals because they were supposed to know what they were talking about.

"We went by what was said and we trusted them," he said.

It is only a fact that the pension is underfunded according to the new actuary and not the previous one, Froutz said.

"I can't go back and tell you which one is right," he said.

Told of the details of Handerhan's pension, Froutz said it was the first time he was hearing those figures, and he said he would like to take a look at the documents himself.

"I didn't micromanage the place by any stretch of the phrase, be that good or bad," he said.

Bass did not return several requests for comments for this report. Muldowney's telephone number is not listed.

Comp time, too

Matulewicz also takes issue with Handerhan being on worker's compensation, for which was he was paid two-thirds of his normal earnings between Sept. 11, 2004, and Oct. 17, 2005. He was off work after being injured in a fall in the line of duty.

During this time, records show Handerhan was also approved to use sick days and time off for 16 holidays, including the first day of hunting season. He was paid for those days.

These hours and salary were all factored into his gross pay, which may be permissible under the Pennsylvania Heart and Lung Act, said Allen from PMRS. The purpose of the law is to provide a full salary to employees in certain dangerous occupations who have been injured on the job but are expected to recover and return to work in the foreseeable future.

Handerhan had apparently built up 1,223.50 hours of compensation time despite it being against the Fair Labor Standards Act to have more than 480 hours.

The Department of Labor conducted an investigation in 2004 and awarded Handerhan $11,518.74. Despite being against the Pennsylvania Auditor General's opinion at that time, that amount of money was figured into his gross pay and counted toward his pension.

Furthermore, unused vacation, personal and compensatory time equaling $22,071.74 at the time of his retirement were factored into his pension as well.

Past challenge failed

Allen said documentation is key in such complicated pension cases.

"If there was a promise made in his final average salary and it was in a contract somewhere, you would not be able to take it away," he said. Even if it's "illegal or illogical," it has to be followed.

If there are no documents to support the amount or there was a clerical mistake, however, it is possible to adjust a pension, Allen said.

The borough has already been in court regarding Handerhan's pension, but Northumberland County Judge Charles Saylor found in favor of the former officer in December 2010 after several hearings that fall.

Handerhan sued the borough after his pension benefits were reduced. The borough contended Handerhan was overpaid approximately $8,600 from November 2005 to April 2008, which he was ordered to pay back, but never did.

Saylor ordered the borough to reimburse him $4,889.63 and immediately reinstate $3,339.54 as the monthly pension payment to Handerhan. With cost of living increases, the amount has increased to $3,831.89 a month this year.

Saylor noted no evidence was presented by the borough at the non-jury trial to support the assertion that the compensatory time included in Handerhan's pension calculation was accrued outside the 36 months prior to his retirement. The judge also noted that a borough policy adopted on July 15, 2004, not to provide overtime monetary compensation on compensatory time to salaried exempt employees was ignored for Handerhan's retirement.

Saylor said Handerhan was not responsible for the calculation of his pension benefits and any miscalculation was only on the part of the borough. He said the borough's attempt to unilaterally decrease the amount of Handerhan's pension violated state law.

The judge said no explanation was offered as to why the monthly amount increased to $3,339.54 from the original calculated amount of $3,256.15.

In a transcript from an Oct. 28, 2010, hearing, Handerhan alluded to the "other deduction" practice that seems to have inflated his pension. He said some employees were paid for their health care coverage "but they never saw the money. It increased their salary to bolster the pension," he testified.

Handerhan alluded to a document that would allow this, but it was not presented at the hearing as an exhibit, and Matulewicz said he has yet to locate it.

Handerhan testified it was brought to his attention by Bass that council eventually was going to change this practice.

"...They were going to have to scale back allowing hospitalization to go on salary and make some adjustments," he said. "...They were going to continue that practice with me and then, after I retired, they were going to work on whatever they needed to do."

Tripling of benefits

As for the quarter-million dollars the borough is behind in non-uniformed employees' pensions, that stems from a 1997 council vote to triple pension benefits. That vote was done by resolution rather than by ordinance, thus eliminating the public's right to have that decision advertised, Matulewicz said.

The resolution passed 7-0 with President Walter Janusky, Vice President Lawrence Czeponis and council members Richard Guinan, Chris Kanezo, Ronald Tanney, Robert Strike and Dorothy Hook voting in favor. None of these individuals are on borough council today.

"The almost $250,000 of unfunded liability in this account is almost completely attributable to this decision," Matulewicz said.

Council recently voted to freeze the non-uniformed pension due to excessive costs, but otherwise hasn't decided how to proceed.

Moving forward

Matulewicz said the only solution to fund the police pension is to come up with the money.

The state auditor general will be consulted in determining the proper benefit to be paid from the pension fund and what must be paid from the general fund, he said.

Whether there will be any further investigation, Matulewicz said he could not comment.

But he did comment on the criticism he's received for putting blame on the actions of prior borough council members and officials.

"My response to those who are accusing me of blaming past borough officials, let me be clear: I am," he said.

"As far bolstering pensions, no record of council approval has been found. Therefore, to attribute blame would be unfair," he added. "I do know, however, that at a minimum, Joseph Bass, Carl Froutz and Marion Muldowney's names endorsed every one of the Blue Cross deductions."

Froutz noted Bass and Muldowney had a stamp of his signature that they would often use when a check or document needed to be signed.

He also said Matulewicz would rather contact the news media instead of calling him. That makes him and other past borough officials "look like a--holes," he said.

While Matulewicz is meticulous at digging into money issues, Froutz said that is not his own strong suit.

"I tried to make the best decisions based on the information we had at the time to benefit the borough," he said.