Lessons from Detroit. Public employee pensions and benefits must be aligned with the private sector … and with taxpayers.

Fair share and affordability are the mantra of people running Washington these days. They are worthy goals to be sure, but they are also a two edged sword. What may be affordable to one person may be unaffordable to provide for another. Low cost or “free” health insurance for public employees is unaffordable to taxpayers. Property taxes elicit a fair share from homeowners, but are unfair to many moderate income families when they support unfairly generous total compensation for a relatively few.

Nowhere is this more apparent than in Detroit where employee benefit abuses have contributed significantly to the city’s fiscal problems, but sadly is only one of many governments facing similar problems. Eventually the consequences become apparent and must be dealt with. Those consequences fall not on the politicians and labor leaders responsible for the problems, but on the workers who blindly accepted the false promises.

Retirees will lose free health care and instead receive coverage through a voluntary employees’ beneficiary association (VEBA), which will be less generously subsidized by the city. Annual 2.25% cost-of-living adjustments will be eliminated for non-public safety retirees and limited to 1% for police and firefighters. Non-public safety annuities will be cut by 4.5%.

Future benefit accruals will be reduced by roughly 16% for public safety and 20% for other workers who work 35 years. Public safety officers who can now retire in their 40s will have to work until they’re at least 52. Employees also won’t be allowed to “spike” their pensions with overtime, bonuses and sick leave accruals and will have to begin contributing a modest 4% to 5% of pay to their pensions. Benefits could be adjusted further if pension funding levels dip. From Detroit’s Bankruptcy Revival, WSJ April 25, 2014

From Mondaq.com

United States: Public Pension Funds Rethinking Investment Return Rates
Last Updated: April 26 2014
Article by Fox Business
Fox Rothschild LLP

Michael Sweet was quoted in the Fox Business article, “Public Pension Funds Rethinking Investment Return Rates.” Full text can be found in the April 17, 2014, issue, but a synopsis is noted below.

After months of negotiations, Detroit agreed to set the projected investment return rate for the pension funds of the city’s retired firemen and police officers at 6.75 percent, well below the projection rate of 8 percent used by most public pension plans.

In a recent study of 134 state public pension systems, a consulting firm found that 96 percent of them were underfunded.

“If expectations were more realistic we wouldn’t be having these problems,” said Michael Sweet. “The expectations aren’t in line with reality.”

Sweet noted that when projections don’t meet expectations, it pits different constituents against each other and can lead to cutbacks in needed municipal services, ultimately forcing retirees to give back some of the benefits promised to them.

“The whole discussion is unfortunate,” he said.

Pension fund administrators, elected officials and union leaders contributed to the difficulties by taking “what should be a very conservative – hyper-conservative — investment and putting aggressive expectations on its returns,” Sweet said.

But the trend toward lower projections is good, Sweet said. “It’s certainly moving in the right direction.”

Setting the expected annual return at a high level lowers the required funding, but when expectations are not met, a pension trust becomes more and more underfunded.

Following is the text of a letter I wrote to my Town newspaper related to this subject, a town within a state with the highest taxes in the Nation.

To the Editor:

In your article, Budget, April 17 there is mention that school board employees will pay 17.5% of health insurance premiums in 2015 up from 6.4%. Are we to be impressed? In the real world where expenses actually matter and revenue can’t be obtained by raising taxes, workers pay 25% to 30% of premiums and more and have for many years, regardless of salary. For example, someone seeking employment with one of NJ’s major employers today will pay between $421 and $531 per month for family coverage depending on the option selected. How does that stack up to BOE contributions?

But this is only part of the story, the health benefits offered by the BOE and the Township are very generous by most standards. That’s where the real costs lie and where real savings should be found … just as employers in the private sector are seeking savings through redesigning their plans (and by the way, most private sector workers do not have generous defined benefit pensions also enjoyed by public employees).

Last year the Times quoted our Township Manager about his concern over additional taxes the Township will pay as a result of the Obamacare 40% excise tax on high cost health benefit plans beginning in 2018. While he worries about paying the tax, private employers are restructuring their employee health plans to be sure they do not exceed the value above which the new tax is applicable.

This isn’t about giving Township workers less, it’s about not providing employee benefits (or a total compensation package) that have a value far in excess of that enjoyed by the vast majority of taxpayers footing the bill. It’s about a new mindset where solving a problem is not dealt with by raising taxes.

We seem to forget that the cost of new sports fields, years of neglected school repairs, excise taxes, redirecting PILOT payments, pension costs, county assessments and more all come together on one tax bill, and that bill doesn’t care if you just lost your job, if you are retired on a fixed income or what your household earns.

The people running the Township need to act more like managers running a business where you must earn every penny of revenue to survive (and apparently so do many of the voters who approve this or that pet project but forget about the big picture).

For the record, I am a retired VP-Compensation and Benefits for a Fortune 500 company and also served on three governor’s commissions evaluating public employee pensions and benefits.