Wednesday, June 25, 2008

Pensions: defined benefit vs defined contribution

At the Council meeting two weeks ago, there was a "small" item inside a motion to amend Personnel Rules and Regs. The small item read as follows:Yeah... changes to postretirement benefit plans are always NBD. Right?

Seriously though, I am glad this got on the agenda. Not because of the suggestion made by Matt Altieri about someone wanting to "pull the rug out" from underneath our existing ee's (presumably by closing the defined benefit plan and telling ee's that their only option is a defined contribution plan...), but because this discussion about "any employee hired prior to July 1, 2008" provided an opening for me to address pension plans for future ee's.

See, by offering ee's the option to move from a DB to a DC, I expect about zero employees to take the offer. Why? Who's kidding who? With the exception of a select few people (such as experienced investors or people with highly unusual personal circumstances), no one is going to trade the peace of mind offered by a DB... for a DC plan which offers the opportunity for greater return... but at a higher risk. (I doubt I would, unless I expected to jump ship before the first tranche vested at five years.) And the town shouldn't do as Matt Altieri touched upon... take away DBs for existing ee's. But at the same time, I think the voters would benefit by avoiding the possibility of unfunded long-term liabilities.

Anyway... I've been pushing this for years. And tonight I saw an opening to push the dialogue a little further. So after I asked about a policy change that would simply end DBs as an option for "new hires," and was told by staff that those weren't the droids I'm looking for the Council could discuss that next January... I specifically asked Matt Altieri to discuss the item this summer. And since he wasn't answering me (and clearly avoiding eye contact), I repeated my concern... to which Matt Hall referred my concern to the Personnel Committee... so I guess now it's finally on the agenda. Hopefully to be simultaneously addressed by the Budget Committee. (Btw, I thank Matt Hall for his support in considering my idea.)

Also this evening, it was mentioned that the police dispatchers union has moved from a DB to a DC... so I'm hoping now we can continue in that direction and move all non-union new hires to a DC... and really start to get our hands around these long-term liabilities (which at the town level are largely funded... depending how you measure them).

These long-term liabilities are a huge concern for me... and I'll try almost anything to address them in a fair and equitable manner.

Tim White


Anonymous said...

has the town taken stepsto reduce its liability on the DB? I.E. has the town made annual contributions to the plans to ensure the plans are healthy, or has the town "rolled the dice" hoping they would fund themselves.
penny wise pound foolish
If they have contributed, do you know how much vs the employee yearly contributions?

tim white said...

The DB plans are in good shape. And over the years, the town has funded them properly.

My concern about other unfunded long term liabilities relates more to potential new liabilities... anything from "heart and hypertension" to environmental that may arise at anytime... consider Strathmore Dam.

breachway said...

Tim, I work in the DC business....if there is someone out there, with fiscal responsibility for the town,who is saying the DB plan should stay for new hires, then we are in trouble...I don't see why it can't end for all employees and go into a DB plan....the existing employees would still keep accrued benefits from the DB plan All day long I see companies going this route. i can also tell you that very few municipalities or govt agencies offer 6% to employees...most offer zero match. The state of CT has a 401a that has employer funding but their 403b and 457 have none.

tim white said...

Breach said:

I don't see why it can't end for all employees and go into a DB plan

into a DB plan or DC plan? Was that a typo? That seems confusing to me.

tim white said...

My goal is basically to stop increasing the long-term liabilities for the taxpayers. To that end, I'll listen to all options such as those addressed in your comment:

The state of CT has a 401a that has employer funding but their 403b and 457 have none.

See... postretirement bene's are not part of my professional experience... though I know they're complicated. Anyway, I appreciate your comment... if at the basic level that it let's me (and others) know that there are a lot of options and moving pieces. And until we start discussing these things... we're never going to change anything.

Coincidentally, this reminds of my questions on the gas use policy and take home vehicle policy... staff gets very upset when I start voicing my concerns... and some elected officials take direction from staff... so the only way to make certain points is to do it in public meetings.

Regardless, last night we got the ball rolling on consideration of ending the option of DB plans for future non-union hires.

Anonymous said...

Ending DB plans would mean a slow death to the municipal labor pool. Most people look at public sector benefits (health and retirement) as an off set to the poor pay. You cant fairly compare private and public. If "The DB plans are in good shape. And over the years, the town has funded them properly." the town should have nothing to worry about.

Anonymous said...

I don't think so.

tim white said...

Most people look at public sector benefits (health and retirement) as an off set to the poor pay.

You seem to suggest that the benefit of DB plans is the dollar value. But when the prior Council (around fall '06, I think) voted for a new DPW contract... I opposed it because it didn't include a switch to a DC plan... a DC plan that would have had a bigger benefit to the union members.

See, my concern on this is less about cost... as it is about my view that most politicians are irresponsible in a way that they look to the next election.

For example, look at social security at the federal level. Or look at the various state pension plans (including municipal teachers)... all are underfunded.

My goal here is to end the intellectual dishonesty and force politicians to address spending in their current term... thereby forcing them to act responsibly.

Seriously... I have no doubt that to get unions to convert to a DC plan, the pot would need to be sweetened. And I'd be willing to do that.

My issue is my view that most politicians are both irresponsible and intellectually dishonest when it comes to long-term liabilities.

As for the town's pensions being properly funded (as of today... but if the market crashes, all bets are off), kudos should be spread around for that (some other towns are drastically underfunded)... but my concern is making a promise today that could be broken by someone else 30 yrs from now.

I think it would be better to offer a DC and let the ee's own that plan.

Anonymous said...

Tim, the DPW had a tenative agreement on switching new employees into a DC, but that was abruptly removed from the table by Town Management.

tim white said...

I'm one of nine.

Anonymous said...

Tim, you arent stating the facts on the Towns approach to the DB/DC issue. The town was advised, not long ago, that switching to a DC plan would not be cost efficient, and would actually cost the town money. Further the town has made very few contributions to the DB plans over the years stating "we accept the liability, how we manage the funds is our risk, not yours (the employee). The funds are actually very well managed. Why would it be such a bad thing for the town to continue this benefit. The markets have crashed and the plans are still strong. Wouldnt this be a prudent selling point for working for the town, as others are going away from DB. Why doesnt the town just contribute the 6% straight to the pension plans now to maximize stability, instead of offering it to some employees. Let the town take the steps now to avoid issues

tim white said...

Tim, you arent stating the facts

I'm not making a fact-based argument. I'm making a philosophical argument.

For example, I have no statistical data to prove that Congress is "lying" to the American people when they ignore the solvency issues of Soc Sec & Medicare.

And I have no factual data to prove that the state legislature is being intellectually dishonest when they underfund state pensions.

I'm simply making a philosophical argument that while the funding is currently fine in Cheshire... there's no way to ensure that the pensions are in good shape in a few decades.