Public Pensions: Why all the clamor for reform?

[swingline]

Public pensions and their alleged over-generosity have been part of the debate over the broken budgets in Detroit and in Michigan. Lots of folks are saying that major reform is needed in public pensions. Well, with regard to our state employees, the Detroit News fueled the debate some more with an article today about the State Police Director, Col. Eddie L. Washington. http://www.detnews.com/article/20101...llects-pension

The apparently well-qualified Col. Washington was appointed to the director position in May of this year. The position pays $145K per year. Col. Washington has 26 years of experience with the State Police. Interestingly though, Col. Washington "retired" from the State Police just before taking the top job. With his years of service, Col. Washington apparently was eligible to begin receiving a pension immediately. Upon his "retirement", Col. Washington had reached the grizzled old age of, wait . . . . . 48. His monthly pension is, wait some more . . . . $7,100 per month. Don't know what Col. Washington's salary was before being appointed director, but it's a safe bet that he earned well under $100k per year for most of his 26 years.

A little rudimentary math puts some perspective on Col. Washington's pension. At age 48, he has a life expectency of about 30 years. A 30 year income stream of $7,100 per month would require a principal of approximately $1.5 million assuming a ROI of 4%. Assuming the same ROI, a private sector employee would have to save approximately $2,500 per month, $30,000 per year, beginning at age 22 in order to accumulate $1.5 million by age 48. I don't have the statistics, but I have a sneaking suspicion that not very many 22 year old private sector workers are socking away $30,000 anually toward their retirement.

Not trying to denigrate public service, but a $7,100/mo retirement at age 48 is something attainable for probably less than 1% of the private workforce. Is it good public policy to reward public service, of whatever excellence, at such a level? Is it fiscally sustainable?

[gazhekwe]

People want to challenge benefits for public employees without regard for the fact that those employees worked a good part of their lives to earn those benefits as part of their compensation. They earned their pensions with their years of service. Reducing or eliminating pensions would be to steal a good portion of those peoples' lives that they spent working for the public good.

As for state pensions, there is a calculation based upon a percentage of the average of the last five years of compensation. I don't believe the amount cited for a state police commander is possible using that formula. Could they be adding in state contribution to medical, dental and vision insurance? Saved leave and sick time reimbursement?

another thing, most state employees, if they are hired to work for the state, must give up their pension during their employment. During the last golden parachute for the state police passed last summer, I believe that rule was waived, but it was continued for the state employee retirement plan passed last month.

[LodgeDodger]

Last Updated: May 26. 2009 12:02PM
Deferred police retirement pay to cost strapped state millions

Mike Martindale / The Detroit News

Lansing -- As 100 soon-to-be-laid-off Michigan state troopers wonder how they're going to make the rent, dozens of the State Police department's most veteran officers -- including its director, Col. Peter C. Munoz -- are racking up millions of dollars in retirement nest eggs.

The savings plan, which was launched in 2004 to keep veterans on the force, will lead to lump sum payments of up to $560,000 at retirement in addition to their annual pension checks. The payments -- which could total more than $40 million -- are now being questioned by state and police union officials.

"When we're talking trooper layoffs and having other state workers take unpaid days off, we should review any program which provide incentives for people to stay on working while in retirement," said state Rep. Tom McMillin, R-Rochester Hills. "This is a time we should be offering employees incentives to leave state employment -- not stay."

The Deferred Retired Option Plan was created in October 2004 when a trooper hiring freeze made some lawmakers think retaining retirees would be more cost-efficient than training and putting rookies on the road.

But rather than keep front-line, experienced troopers on the job, the program has also been mined by higher ranked and higher paid supervisors, who work desk jobs and rarely get on the road, according to the state trooper's union, which represents more than 1,000 officers.

"We would like to see them [[lawmakers) make it more attractive for some of those in DROP to retire now," said Chris Luty, vice president of the Michigan Troopers Association. "We estimate for every one who retires, at least one, maybe more, of the planned layoffs could be averted."

When those in DROP retire, they will receive, depending on their pay, lump sum payments totaling $227,500 to $560,000. In addition, they will receive annual pension checks of $37,200 and above, about 60 percent of their annual pay.

With a minimum of $227,500 per officer, lump sum retirement packages to be paid out by 2014 will total more than $40 million.

Those accepted in the program must be retirement-eligible, which means they've got 25 years on the job, and agree to immediately have retirement benefits set aside for six years in an investment account at 3 percent annual interest while they receive full-time pay and benefits.
Large disparity found

Luty estimated the number of participants is equally divided between troopers and higher ranking officers. But a Detroit News review of 171 officers signed up for DROP as of Feb. 1, 2008, found a much larger disparity, with only a handful of troopers enrolled.

The News found 30 of those taking advantage of DROP were troopers, another 32 were sergeants and 40 more were detective sergeants. The remaining 69 -- more than double the number of troopers signed up -- were higher-ranking command officers, including Munoz, the department's director, a governor's appointee.

Munoz, who makes $130,000 a year, has salted away a retirement package to exceed $560,000 as of his Oct. 31, 2010, retirement date. That's in addition to the $78,000 a year he will be paid for life, even as he considers moving into another job.

A State Police official confirmed Munoz recently applied for and has interviewed for the post of U.S. marshal, Western Division, in Michigan.

At least one commander who signed up for DROP defended the program as good for the department and the state budget.

Capt. Mike Thomas, who is in charge of the State Police forensic labs, said the program benefits the entire state of Michigan.

"It [[DROP) was offered to me and I enrolled and planned my retirement accordingly," said the 52-year-old Thomas, who will retire next year after 32 years with the State Police. "This program has helped retain invaluable experience throughout the department and also has provided an opportunity for a smooth transition for whomever comes after us."

In San Diego, a DROP program offered to police and other municipal employees has prompted a lawsuit against the police union in an effort to reduce the city's budget deficit.

Michigan lawmakers are now taking a tough look at DROP. State Rep. Richard Leblanc, D-Westland, has proposed a bill to permit DROP enrollees to retire after four years without penalty to accrued pension benefits, in an effort to save money and encourage more enrollees to retire.

DROP payouts depend on the amount of time officers stay in the job. Currently, an officer who stays less than a year in DROP collects only 30 percent. That percentage rises to 50 percent for less than two years, 60 percent for less than three years, 70 percent for less than four years, 80 percent for less than five years and 90 percent for less than six years.

"There are some people who might like to retire right now but are staying on because there is a 20 percent penalty," said LeBlanc. "I would like to propose a 31-day window where they could exit with no penalty.
'Look at everything'

"These are different times. Everyone is looking at ways to address our budget problems without layoffs. I don't think there is any one answer. I think we have to look at everything."

McMillin said it makes no sense to keep paying higher paid supervisors not to retire when some make the equivalent of two to three troopers.

"I think we need to be taking a hard look at it," said McMillin, a certified public accountant. "At least that's what I will be discussing in caucus."

But LeBlanc noted the State Police is not alone in offering a deferred retirement program. He said police agencies in Sterling Heights, Southfield and the Macomb County Sheriff's Department have similar programs.

"It doesn't surprise me there might be more command officers enrolled," LeBlanc said. "After 25 years, most troopers have received promotions or [[are) eyeing opportunities elsewhere."


From The Detroit News: http://detnews.com/article/20090526/...#ixzz14vlUnHTz
From The Detroit News: http://detnews.com/article/20090526/...#ixzz14vlNzpMB

http://www.detnews.com/article/20090...tate-millions/

[DetroitPlanner]

Public pensions are under scrutiny because we are in a giant race to the bottom. At one time public employees were paid far less than they would make in the private sector. The thing that made public service attractive was the benefits.

Few if any of today's new hires get a pension, nor do they get health care after retirement. Those of us still working public sector have had our wages froze for several years, and are now required to kick in more for benefits such as a 403b, 457k, or medical insurance. This follows the same model as most private sector companies. About 12 years ago my co-pay on drugs was $2. Now my co-pay is so high it is cheaper to not buy drugs using insurance benefits. Seeing the doctor with my HMO was free, now it is a $30 co-pay. This is on top of having to pay a portion of the health insurance itself. Combine this withthe wage freeze for several years and you see that this is sort of benefit is quickly going away.

Government is 'correcting this' but the expense is that many competent people are leaving public service for the private sector, where wages ar higher and benefit costs are approximately the same.

Most of the older employees near retirement have found it makes fiscal sense to leave rather than pay more when an increase is asked for, and many governments have lost the most seasoned and experienced people. Those who leave are not replaced.

My father worked for Detroit for 30 years, retired, then got a similar position in a suburb. He has two pensions, the majority of his health needs covered, and social security. He has a hard time believing that I will not be in the same position when I retire.

Col. Washington is an exception. The exception is getting rarer.

[gazhekwe]

Dang! I chose the wrong department to work law enforcement for 30 years. We got nothing like that. In fact, when I retired, policy prohibited my department from retaining me in any capacity at all. I could apply for other positions in other departments, but if I got one, my pension would be suspended for the duration of my employment. That's what happened to my Dad, he had to give up his pension to take the directorship of the Michigan Indian Commission. He got it back when he retired from that job, though.

[DLife]

Why aren't more pensions handled by big investment firms like Fidelity or Vanguard? I would think their fees would be less than all the current overhead and salary that's incurred.

[JBMcB]

As for state pensions, there is a calculation based upon a percentage of the average of the last five years of compensation. I don't believe the amount cited for a state police commander is possible using that formula. Could they be adding in state contribution to medical, dental and vision insurance? Saved leave and sick time reimbursement?.

There's a trick where some departments let officers bank up unlimited vacation days during their employment. Then, during their last few years of employment, they cash them in, bumping their average salary up. There was an article about this in the News or Free Press a few months ago - a small downriver city is heading for bankruptcy because their pension outlay is going to run two to three times it's entire budget in a few years because of public service employees doing this.

[Johnnny5]

Why aren't more pensions handled by big investment firms like Fidelity or Vanguard? I would think their fees would be less than all the current overhead and salary that's incurred.

Or Lehman Brothers and AIG....

[DetroitPlanner]

Why aren't more pensions handled by big investment firms like Fidelity or Vanguard? I would think their fees would be less than all the current overhead and salary that's incurred.

They are bigger thieves than any public official guarding the hen house. MERS is what most municipalities use here. At one time it was part of a huge system that covered teachers, and state employees as well. CALPERS is the California version. The nice thing about MERS is that there is a changing of the guard and since there are probably a couple hundred municipalities involved there is more checks and balances.

[Swimmaven]

Why aren't more pensions handled by big investment firms like Fidelity or Vanguard? I would think their fees would be less than all the current overhead and salary that's incurred.

Remember when the big financial houses made the money disappear a couple of years ago. Then us taxpayers had to bail them out @ three-quarters of a TRILLION $$$$$$. ? .

[DLife]

Do the pension holders get to vote for representation on the Pension Board? Is it overseen by the state?

[Ray1936]

Do the pension holders get to vote for representation on the Pension Board? Is it overseen by the state?

In Detroit, half the members of the Pension Boards are appointed by the mayor; the other half by the active participants. The retirees themselves have no voice, although the retired associations are seeking relief in Lansing for that factor at this time.

[birwood]

Good Evening All
I hope everyone is aware that not all public pensions are structured the same, although some are similiar in nature, lumping all of us retirees into one pot is unfair.

I cannot speak for the State of Michigan or City of Detroit employees pensions but I can gladly tell you about mine from the City of Dearborn FD.

During my career, my employee contribution rate was between 5 and 10% of my monthly wage. Yep!...this was my monthly out of pocket cost, while the city's contribution rate was between 1/2 and 2% depending on their ability to fund and this was a contractual agreement between the city and fire union.

The contributions were then entered into our Pension Fund managed by an independant actuarial accountant who reported monthly and advised on investiments to the Pension Fund which consisted of 2 Firemen, 2 Cops, the Mayor, a City Councilperson appointed by the city council peers, and a member of the business community appointed by the mayor. This is what pays my pension, not the current active city payroll as many people are led to believe. Dearborn did not have the DROP plan when I retired and I don't believe they have it now

The annual interest accumulated by the pension fund , is collected by the City Treasurer and used for administrative costs in administering the pension. The rest is divided, 50-50 back into the pension fund for reinvestment and into the Citys General Treasury. So over the years, I have basically paid for my own pension....like a 401K with employer matching.

As for the payout rate to the retiree, the Final Average Comp is determined either by the employees last year 3 years of wages, or their last year based on a contractual percentage. The Math use to calculate each pension system is different and usually contractual. Mine was based on my last 3 years I worked and maxed out at 70% of my gross wage for 30 years of service.

Now out of that final figure, different payout options come into play. #1 is that I collect the full shot on my FAC and if I pass on first, my wife gets nothing., #2 a small reduced payout so that if I pass, my wife would get only 50% of what we were getting and visa versa., #3 a larger reduced payout so that she would collect 75% of what we getting now., #4 is a larger reduction so that she'll still get what we are getting now......and not to mention Medical and Dental contributions which reduce my monthly pension even more.

Getting back to the FAC payout numbers, you gotta take a hard look at the citys themselves on this one. How many cities have reduced the number of employees and still demand a satisfactory safe level of service for the resident. During my career, we were not permitted to take a vacation day if it was going to create overtime and if the Chief refused to approve the overtime for that shift, because someone was off sick or on duty injury, then a truck was place out of service for at 24 hour period, unbeknownst to the residents. If you were called back for overtime, they asked that you defer a cash payment into an Accumulated Overtime Bank which you could use in conjunction with a vacation day, but remember you couldn't use the vacation day if it was going to cause overtime, so the powers to be in city hall suggested and contractually agreed that any Accumulated Overtime, Unused Vacation or Unused Sick Days would be figured automatically into the employees FAC at retirement.....hence the boost in the final payout numbers. Don't blame the retiree

Don't forget also, that we worked Holidays, Birthdays, Graduations, School Events and missed those days with our familys, when the rest of the general public was off, so it was a trade off to be collected at retirement.

Please don't lump us all into one pot...My Thanks for listening and Happy Thanksgiving to all readers

[EastSider]

To draw further distinctions, anyone hired by the state after 1997 does not have a "pension" as such, but a 401k. People who were on the payroll of the state in 1997 had the option to opt into the new defined contribution plan from the defined benefit plan, too.

[stasu1213]

The pension should be left alone to collect interest and given to city employees who are retiring. That is their money. No one else. The mayor, the governor, and others including Mr Pugh, are in place to make sure the city workers don't reap the benefits of their labor for over their years of employement. What do you expect from a corporate type mayor and council. They do what the corporation tells them to do. Damn the retired or retiring city employees.

[daddeeo]

Wherever there is a pile of money, there are people who want it whether it's theirs or not. Raiding public pensions is where the money is these days. Never mind the promises made and sacrifice done to accumulate it. Some folks have no shame.

[EastSider]

Using pension money isn't a new gig. It's been around practically since pensions started.

And if the money is left to just "collect interest," there wouldn't be enough money to pay everybody.

[Ray1936]

Good post, Birwood. Detroit's two pension systems are basically the same, with some minor differences.

[RYANGUARD]

To draw further distinctions, anyone hired by the state after 1997 does not have a "pension" as such, but a 401k. People who were on the payroll of the state in 1997 had the option to opt into the new defined contribution plan from the defined benefit plan, too.

Also anyone hired after April of this year pays a higher amount for their healthcare.Over my 33 years of service to the State of Michigan there has been a lot of give and take when it came time for our contract to be renewed.I work in a place that has to be staffed 24/7/365 and as such at times have not had the luxury of being with my family for all sorts of occasions and that is one of the reasons when I retire I will collect my pension and be thankfull for the benefits,as I have EARNED them.

[EastSider]

Also anyone hired after April of this year pays a higher amount for their healthcare.Over my 33 years of service to the State of Michigan there has been a lot of give and take when it came time for our contract to be renewed.I work in a place that has to be staffed 24/7/365 and as such at times have not had the luxury of being with my family for all sorts of occasions and that is one of the reasons when I retire I will collect my pension and be thankfull for the benefits,as I have EARNED them.

Depends on your contract...in some departments, everyone now on board pays 3% toward their retiree healthcare, regardless of their hire date.

[RYANGUARD]

The State started taking out 3% for my "healthcare trust contribution"with the payday on 11-11-10,which just so happens to equal the 3% raise that I got starting in October of this year.I was referring to the healthcare for blue/cross or even hmos that started for anyone who was hired after April of this year

[EastSider]

The employee's premiums are still dictated by the contract. I don't think the new hires pay differently in my department. My contract's at the office, though, so it'll have to wait until tomorrow.

[swingline]

Good post, Birwood. Detroit's two pension systems are basically the same, with some minor differences.

Not really, Ray. Detroit's "defined benefit plans" have historically required no contributions from employees. Employees can contribute to the "defined contribution plans" that both systems also sponsor, but those plans are voluntary.

The required employee contribution in the Dearborn police and fire defined benefit plan that Birwood describes is less common than the Detroit zero contribution system. The vast Michigan public employee system [[MPERS) also requires no contribution for pension benefits. Recent changes have implemented a 3% contribution for retiree health care benefits though. Michigan public school employees hired since the early 1990's make a contribution to their pension as well.

It's also worth noting that public employees are getting a lot more bang for their benefit buck. Very few private plans provide for any kind of benefit at all before age 55. Many don't provide for full benefits until age 60. In Michigan, virtually all public plans allow for full benefits at age 55 with 30 years of service. Some local plans only require 25 years of service with no minimum age. Additionally, most public plans allow for average final compensation amounts to be padded with unused vacation and sick days. This practice can boost an annual benefit by thousands of dollars. This is not common at all in private plans. Also, public employees do not pay Michigan income tax on their benefits.

A couple of generations ago, there was an argument for higher than average retirement benefits for public employees because their salaries were slightly lower than the private sector and they weren't eligible for Social Security. Now, this dynamic has reversed. In most states, Michigan included, public employees have been eligible for Social Security since the 1970's. And in Michigan their average pay has been higher than the private sector for around a decade.

[gazhekwe]

Don't forget, state employees paid for their retirement benefits with with wage considerations. The packages were always based upon a combination of wages and benefits. In the past two decades, packages have been declining in value. Those who started working prior to the 90s were able to maintain their plans as paid for in the past. In those days, loyalty, longevity and cumulative experience were considered valuable assets to the state. Like so many other things we the people have given up in the race to the bottom, these assets have been devalued and much experience and knowledge has been wasted at great cost to the state's residents who must pay for training or do without the knowledge and level of services that have been historically available.

[1KielsonDrive]

WHY ALL THE CLAMOR FOR REFORM? Because now that the politicians and their business allies have stolen, lent out, misappropriated and made our pensions and retirement funds disappear, they don't want to pay us back.