More Public Pension Woes—Constructive Suggestions Wanted

[kyounge1956]

Seattle's employee pension fund has already been hit hard by the recent stock market downturn. As if that wasn't bad enough, it looks like the fund may also have been affected by a hedge fund collapse, and expected multi-million dollar budget shortfalls in 2010 & 2011 combined with baby-boom demographics makes it very possible that there will be a large number of new City retirees over the next several years. The Mayor sent a memo a few days ago to all City employees which among other things says that employee suggestions for potential cost savings will be sought. Of course, the "L" word has been mentioned, and as I described on another thread, that's likely to have a negative impact on the pension fund. I'd like to come up with some constructive suggestions that can save the City money without further weakening the condition of the pension fund. One possible alternative to layoffs would be to allow partial retirement of current employees—work half your hours and draw half your pension. As the retirement system now functions, retirees can work up to half time for the City without reduction in pension benefits. The difference between the existing system and "partial retirement" is that under the latter, as I imagine it, an employee would draw only half as much pension, and also continue to contribute to the pension fund. An ordinary retiree working half-time would draw full pension and (I think) not contribute to the fund. In addition to saving on salaries, the City would save half of what it's currently paying to match employee contributions to the pension fund (for each employee who opted to take partial retirement), and would not have the expense of cashing out unused sick leave and vacation hours which would stay on the books until the employee goes from partial to full retirement.

Maybe between not hiring the currently unfilled positions, and voluntary partial retirements, the City could reduce payroll enough to avoid a big layoff and the resulting hit to the pension fund, or maybe this idea wouldn't help at all with either the pension underfunding or the budget shortfall. I'm probably too close to the situation to see clearly. What do you think? Or—I ask in all sincerity—do you have a better idea? I'm not trying to start another discussion of whether public employees should get pensions, or as generous pensions, as many of us do. What I'd like to know is, if your ability to ER depended on this job and this pension fund, what would you suggest?

[Rustic23]

In my county, county offices are open 8 hours a day. If they opened 15 min later they would save 3%. Of course this would also mean a 3% wage roll back for the hourly employees, and I would propose the same for non-hourly employees. In this case that would be enough to balance their budget. However, I'll bet they will do something drastic like closing locations, and laying off people, or do nothing and wait till the have to do something worse.

[kyounge1956]

Quote:

Originally Posted by Rustic23 In my county, county offices are open 8 hours a day. If they opened 15 min later they would save 3%. Of course this would also mean a 3% wage roll back for the hourly employees, and I would propose the same for non-hourly employees. In this case that would be enough to balance their budget. However, I'll bet they will do something drastic like closing locations, and laying off people, or do nothing and wait till the have to do something worse.

City employees are already taking ten days of furlough (time off without pay) this year. The Mayor's memo directs department heads to find an additional 3% savings this year, in addition to cuts already made, to compensate for actual revenues about $10 million less than what was projected last year for 2010. If $10 million=3% means $50 million next year=15%, then cuts this year, next year and reductions already made amount to around a 20% cut across the board. The most obvious way to cut payroll 20% would be to increase employee furloughs to a mandatory one day off per week w/o pay (wincing). Is that your suggestion?

This year's furlough was voluntary—agreed to by employees to reduce layoffs—but I doubt that a majority would vote to make it one day a week. I'd survive, but I think for many of my co-workers who are supporting families, 20% of their pay is more than they could afford to do without.

[ziggy29]

Are there any union contracts involved? That could determine what options the city has available to it and whether or not they'd have to get union approval for the changes. Clearly something has to give somewhere if it's not going to go belly up. And sending a city into bankruptcy is the last thing people with a stake in the pension fund want to see.

[MichaelB]

Does the city have assets, such as land or buildings, that can be sold? Sale and leaseback is a common option for a cash strapped operation.

[kyounge1956]

Quote:

Originally Posted by ziggy29 Are there any union contracts involved? That could determine what options the city has available to it and whether or not they'd have to get union approval for the changes. Clearly something has to give somewhere if it's not going to go belly up. And sending a city into bankruptcy is the last thing people with a stake in the pension fund want to see.

Yes, union contracts are involved. The contract with my union actually expired in 2009, but the City and the Union mutually agreed to extend the existing contract (I think until end of 2011) rather than going into negotiations at that time. I don't know whether other unions have also extended their contracts, nor how likely a second extension would be if things still look as ugly the end of next year as they do now.

I absolutely don't want to push the City into bankruptcy, but neither do I think I want to see a large group of employees retire all at once. I worry that might push the Pension fund over the edge. I have some ideas about that too, but need to leave for w@rk now.

[kyounge1956]

Quote:

Originally Posted by MichaelB Does the city have assets, such as land or buildings, that can be sold? Sale and leaseback is a common option for a cash strapped operation.

I hadn't thought of that one. I believe the City does own some buildings, but don't know how much could be gained that way. The tallest building in Seattle (right across the street from the City offices) recently missed a mortgage payment. The vacancy rate in the building is around 40%, and there are a lot of commercial projects on hold due to lack of demand and/or lack of funding.

[W2R]

Quote:

Originally Posted by kyounge1956 What I'd like to know is, if your ability to ER depended on this job and this pension fund, what would you suggest?

Personally I am pretty cautious and if that was my situation, I would continue working at the job, but I would cut way, way, way back on my spending and save/invest as though I had no pension coming at all.

Then if your pension does not come through, you can still ER. If it does come through, you can have a h*ll of a party (be sure to invite all of us!) and then live on a more extravagant budget in retirement.

[MichaelB]

Quote:

Originally Posted by kyounge1956 I hadn't thought of that one. I believe the City does own some buildings, but don't know how much could be gained that way. The tallest building in Seattle (right across the street from the City offices) recently missed a mortgage payment. The vacancy rate in the building is around 40%, and there are a lot of commercial projects on hold due to lack of demand and/or lack of funding.

This is pure finance. You sell the building and sign a lease agreement to lease it back. Corporations used to do it all the time - when they owned the buildings the occupied. This is one reason why telecommuting is so popular.

It brings in cash today and adds pressure to reduce headcount in the future.

[Zero]

As my friend in Seattle recently bragged to me, "Seattle has the most expensive Light-Rail in the world." Supposedly nearly $200 million per mile. And according to him it's pretty much an honor system when it comes to paying the fare, and it seems no one except tourist bother to pay.

Perhaps, trying to sell the Light Rail to a private company would raise some capital.

[clifp]

Quote:

Originally Posted by Zero As my friend in Seattle recently bragged to me, "Seattle has the most expensive Light-Rail in the world." Supposedly nearly $200 million per mile. And according to him it's pretty much an honor system when it comes to paying the fare, and it seems no one except tourist bother to pay. Perhaps, trying to sell the Light Rail to a private company would raise some capital.

Honolulu is building a $275 million (before cost overrun system) light rail, I guess they figure with a pension fund that is in worse shape than Seattle's why not go for broke.

It is hard to make concrete suggestion in these situations, and I have no idea how 1/2 retirement would work but it is seems reasonable.

The current system has some restriction on paying future COLA based on the pension funding level, that is a nice start but probably not conservative enough and also should be linked to the credit rating of the city.

I'd change the pension benefits to the average of the last 5 or 10 years,this prevents spiking and would reduce overall pension benefits.

Finally going forward I'd change the assumed retirement age to 65 not 62. If people want to retire before them fine but the benefits should be reduced in the same actuarial way that social security reduces benefits.

[FUEGO]

If you need to cut payroll 10%, fire your 10% of under performing staff. Combine that with eliminating vacant positions (don't fire anyone, just eliminate the headcount and call it a cost savings in your budget). You can also fire your HR staff since you'll implement a hiring freeze until further notice except for critical hires (FYI no one is critical). And yes, continue increasing the furloughs. Well, as to pay, not as to hours. All city employees will work 40 hours per week and still have a small, cost-savings modification applied to their paycheck amount. Yeah, a few folks may quit and be pissed, but the rest that are up in debt up to their eyeballs will continue with the mediocre job they are currently doing. They will just feel lucky to have a job. Remind them of that fact weekly in morale boosting emails. You need a few % to leave anyway, to meet your attrition cost savings goals, right?

If I charged about $50,000 and turned that into about a 200 pg document and I had an MBA, you could call me a consultant.

[kyounge1956]

Quote:

Originally Posted by MichaelB This is pure finance. You sell the building and sign a lease agreement to lease it back. Corporations used to do it all the time - when they owned the buildings the occupied. This is one reason why telecommuting is so popular. It brings in cash today and adds pressure to reduce headcount in the future.

True, but to sell a building you need a buyer, and I wonder if there are any out there. If there are, certainly sale and leaseback would be a possibility. Even if there are no buyers, opportunities for other related savings might possibly occur, e.g. moving City employees from leased space (if there are any in leased space) into vacant space (if any) in City-owned buildings as the leases expire.

[kyounge1956]

Quote:

Originally Posted by Zero As my friend in Seattle recently bragged to me, "Seattle has the most expensive Light-Rail in the world." Supposedly nearly $200 million per mile. And according to him it's pretty much an honor system when it comes to paying the fare, and it seems no one except tourist bother to pay. Perhaps, trying to sell the Light Rail to a private company would raise some capital.

The light rail system does not belong to the City of Seattle, but to Sound Transit, the regional transit authority. Sound Transit also has bus routes, one of which I frequently ride to or from work. I need a pass or cash to ride the bus—I don't know why the train would be any different, although I've never actually ridden it.

[kyounge1956]

Quote:

Originally Posted by FUEGO If you need to cut payroll 10%, fire your 10% of under performing staff. Combine that with eliminating vacant positions (don't fire anyone, just eliminate the headcount and call it a cost savings in your budget). You can also fire your HR staff since you'll implement a hiring freeze until further notice except for critical hires (FYI no one is critical). And yes, continue increasing the furloughs. Well, as to pay, not as to hours. All city employees will work 40 hours per week and still have a small, cost-savings modification applied to their paycheck amount. Yeah, a few folks may quit and be pissed, but the rest that are up in debt up to their eyeballs will continue with the mediocre job they are currently doing. They will just feel lucky to have a job. Remind them of that fact weekly in morale boosting emails. You need a few % to leave anyway, to meet your attrition cost savings goals, right? If I charged about $50,000 and turned that into about a 200 pg document and I had an MBA, you could call me a consultant.

No smilies in your comment, so I am not sure how serious you are. People can't be forced to do unpaid work. Remember that pesky constitutional amendment about involuntary servitude? I'm pretty sure it would apply to your suggestion of increasing furloughs but demanding that employees work 40 hours. One of your other suggestions (not filling vacant positions), I'm sure has already been put into effect. I would also point out that if you intend to pursue a policy of deliberately increasing employee attrition, it will not be possible to eliminate the HR staff, since you will need them to do the paperwork associated with resignations, handle the exit interviews, make sure the departed employees are duly removed from the pay and benefit rolls, etc. Moreover, IMO the employees likely to go off in a dudgeon under such a program are precisely those who know they have a pension ready to hand on which they can fall back in the event of job loss, and thus the group one must be most concerned with retaining if the retirement fund is not to be adversely affected. ISTM that your strategy should instead be aimed at driving away employees who are vested, but not yet eligible to retire. Employees who leave City employment prior to vesting (at five years of service) must withdraw their contributions, which would create an immediate loss to the fund, but those who are vested have the option of leaving their balances in situ, which (in the current circumstances) they should IMO be encouraged to do. How that particular segment of the workforce can be targeted, I will leave to your ingenuity.

[/sarcasm off] Now that I've got that out of my system, your post (whether serious or not) did make me wonder this: one does have to pay employees for all hours worked, but does one have to pay them entirely in cash money? Would it be possible to pay, say 35 hours in $ and the other 5 in comp time, with the limitation that the comp time could not be used for, say, two years? Would I take tax-free municipal bonds in lieu of part of my salary? I might, especially if I'm an optimistic sort who thinks we're already (or will soon be) past the worst of it. Of course anything of that nature, or the more obvious alternatives of asking employees to take a wage freeze or cut, would have to be negotiated with the unions, but if the City's economic outlook remains this dismal for another couple of years, that "just happy I have a job" factor will kick in bigtime and unions might agree to that rather than a massive layoff.

[kyounge1956]

Quote:

Originally Posted by clifp Honolulu is building a $275 million (before cost overrun system) light rail, I guess they figure with a pension fund that is in worse shape than Seattle's why not go for broke. It is hard to make concrete suggestion in these situations, and I have no idea how 1/2 retirement would work but it is seems reasonable.

I can't figure it out either. I guess I will just have to put it in the suggestion box and let the actuaries determine whether it would help or not.

Quote:

The current system has some restriction on paying future COLA based on the pension funding level, that is a nice start but probably not conservative enough and also should be linked to the credit rating of the city.

IMO, the "Floor COLA" ordinance needs to be completely rethought, if not repealed. I don't think the original pension system had any kind of cost of living adjustment. The first ordinance I could find that established a COLA was in 1994. The full text of that ordinance isn't available online so I don't know what the provisions were. Next, there was a revision in 1997, providing a one-time bonus to bring the benefit up to 40% of its original purchasing power, followed in 1998 by a fixed percentage adjustment based on how long the recipient had been retired but with 60% floor, then changing in 2001 to a 1.5% annual adjustment with a 60% floor, and a trigger to raise the floor to 65%. I'm a bit confused here, because there are two ordinances close together in time. I think the first one may have established a threshold to change from the 1998 system to 1.5% annual/60% floor and that threshold was reached almost immediately. Anyway, to me it looks like the legislation is written so every time the funding threshold is reached, the floor COLA is raised another 5 percentage points, and the ordinance revised to require the same increase next time the threshold is reached, which it did again toward the end of 2007 IIRC, so the floor is now 65% and the legislation requires an increase to 70% floor next time the 95% funding level is reached. Since the threshold is set at 95% funding, if this works the way I think it does, it will keep the pension fund in a perpetual state of not-quite-adequate funding, until the COLA reaches 100%. I agree with you that this should be more conservative. At an absolute minimum, the threshold should be 100% funding for the increased benefit, not the existing benefit which I think is how it works as the ordinance currently stands. IMO it would be even better to require the funding level not just to reach 100% but to stay above full funding for some pre-determined length of time before considering an increase, and the automatic bump-up to a 70% floor next time we get to the threshold should be repealed. Not that that's going to happen any time soon—the funding level is still just below 65%.

I think linking to creditworthiness is a good idea, but IMO it should be the credit of the retirement system itself. It's a separate entity, and at least theoretically, the City could be bankrupt and the retirement system in great shape, or vice versa.

One thing I would consider making automatic, and that is a freeze on the "lump sum" options if funding sinks below some pre-determined level. One of the options available for retirees is to get a reduced pension benefit plus return of either half or all of employee contributions as a lump sum. I don't know how they do it, but you can get back all of your contributions, with interest, and still receive a monthly check for about 80% of the basic, unreduced benefit. The last thing I'd want in a bad economic situation like the current one is for a bunch of employees to retire and withdraw their contributions. I'd be afraid it could be the straw that broke the camel's back.

Quote:

I'd change the pension benefits to the average of the last 5 or 10 years,this prevents spiking and would reduce overall pension benefits.

I don't know if the Seattle retirement system has any problem with "spiking". Unless there is, I don't think I'd change the number of years, and certainly not as high as ten.

Quote:

Finally going forward I'd change the assumed retirement age to 65 not 62. If people want to retire before them fine but the benefits should be reduced in the same actuarial way that social security reduces benefits.

Retirement eligibility is not strictly based on age, it's a combination of age plus years of service. I know you can retire at any age if you have 30 years in, or at age 52 plus 20 years (guess why I know that ), and the older the retiree, the fewer years of employment are required for eligibility, although with only a few years of service you a small pension. I'm not sure changing the only the ages would do very much, because the maximum benefit is set at 60% of the average of two highest years salary, with 30 years of service. What I think would have a larger effect would be to increase the number of years of service needed for the maximum benefit, perhaps to 35, and adjust the benefits of people who retire before that accordingly, but I'm pretty certain that would require legislation to amend the section of the Municipal Code that controls the pension, which might be a difficult hurdle to get over. AFAIK that relationship of 30 years/60% was established when the pension fund was first set up in 1929.

It seems to me too, that the fund needs to have some very strict, very specific limits put on what it can invest in. No more gambling on "black box" hedge funds that won't tell you what they are going to do with the money. Someone said on one of these public pension threads that employee retirement funds could do as well or better with a good selection of index funds than with hedge funds and the like. I couldn't agree more! Keep it simple and keep it sound. I wonder if it would help eliminate those sort of temptations if the Retirement System Administrator's pay were tied to the performance of the fund. But I would make the basis of evaluation not "the more explosive the growth the more you get paid" but rather, "the greater percentage of the time you stay above 100% funding level, and the more stable the fund is, the more you get paid".

Lastly, whatever changes are to be made, I would phase them in gradually, over a period of at least five years. I hate the idea that new actuarial tables are going to be put into effect on such short notice. People who are close to retirement will have to choose whether to retire under the old version or the new, with very little time to think or prepare. I suspect that if the changes are significant, a lot of people who would otherwise have kept working (and contributing to the fund) for a few more years may retire right away to beat the deadline, which is just what we don't need at the moment. On top of that, everyone will almost certainly still be somewhat in the dark about health care—I doubt that any changes to the City's retiree health plan as a result of the recent bill will have been completely figured out by the end of this year.

[ziggy29]

Quote:

Originally Posted by kyounge1956 I don't know if the Seattle retirement system has any problem with "spiking". Unless there is, I don't think I'd change the number of years, and certainly not as high as ten.

Here's an actual example. When my wife was briefly a teacher's aide here, she was in the Texas Teachers Retirement System. As a result I looked at all the plan documentation and benefits guide so I understood it.

First of all, in this district teacher's aide pay scales are just about one-half of the teacher pay scale. That is, for any given number of years of service, an aide would make $X while a teacher would make about $2X.

Also, the TRS bases benefits only on the last five years of service. So while she was in the plan, she could have been hired in at 40, got out at 60 with her 20 years and the benefits are entirely based on the final five years.

So I had it in the back of my mind -- work as an aide for 10-15 years, then work to get teacher certification and become a teacher for the last 5 years. The pension benefit would be the same as if she were a teacher for the entire 20 years even though her contributions to the plan were based on an aide's pay for most of it.

This is why I have a problem with the "last X years" calculation method. Unless the last X years were indicative of one's entire career, the potential for inflating benefits based on long-term service remained. Yes, it would have benefited us tremendously, but I think it's still a bad way to do it.

[Leonidas]

Quote:

Originally Posted by kyounge1956 ...one does have to pay employees for all hours worked, but does one have to pay them entirely in cash money? Would it be possible to pay, say 35 hours in $ and the other 5 in comp time, with the limitation that the comp time could not be used for, say, two years?

I think the answer is that you can't do that. I know FLSA means that for overtime worked you have to allow the employee the option to choose whether s/he wants cash or comp time. It's just an assumption on my part that this would include regular compensation.

But, I wonder if you couldn't allow for a voluntary program that would reduce your immediate labor costs. Allow employees to choose to take some amount of their regular compensation as accumulated comp time that could be taken off later. I don't think you can make them hang on to it for two years, but you can regulate how many people take off at any one time so it doesn't hamper mission accomplishment. Of course my experience in this is all cop-related, so I'm not necessarily sure if the legality of some of the requirements transfers over to librarians and solid waste folks.

You would have some, but not very many, people who would take it at straight time. But if you boosted the return to time-and-a-quarter, or even time-and-a-half, a lot more people would go for it. Of course you are creating a future liability by basically giving people additional paid vacation time.

You could also liberalize the policy on leaves of absence. My employer allegedly had a 6-month LOA that you could take, but I never actually heard of one being approved. There was always somebody I worked with who had an outside job offer, or an opportunity to start their own business, but they were afraid of quitting the city job because they might not like the new job. Some guys were able to string together some leave time to go try out the new job and still be able to come back. But for the most part the restrictions on how much time you could take off at one time was prohibitive. And there are a few people here and there who can afford to not collect a paycheck for a while and really want to go do volunteer work, or go back to school, or whatever.

[W2R]

Quote:

Originally Posted by ziggy29 So I had it in the back of my mind -- work as an aide for 10-15 years, then work to get teacher certification and become a teacher for the last 5 years. The pension benefit would be the same as if she were a teacher for the entire 20 years even though her contributions to the plan were based on an aide's pay for most of it.

I wonder how much a teacher working their 15th-20th years makes, relative to a brand new teacher working her 1st through 5th years (even though she had worked 15 years previously in another job for the same system)? Surely the more experienced teachers would make much better pay during their last five years than your wife would have made under the scenario you describe. If so, their pension probably would have been much higher than hers, too. Still, her pension would have been better than it would have been as an aide.

I got a significant promotion three years before retirement, and conveniently my federal pension is based on my highest continuous three years' salary. But I didn't get as high a pension I would have had I received the promotion years earlier. That seems reasonable to me.

[Spanky]

Quote:

This is why I have a problem with the "last X years" calculation method. Unless the last X years were indicative of one's entire career, the potential for inflating benefits based on long-term service remained. Yes, it would have benefited us tremendously, but I think it's still a bad way to do it.

That's a great way to game the system. The whole pension plan should be based completely on amount put into it. My mega corp pension plan deposits a small account of money every year into an account. When I am eligible for retirement, I can take the accumulated amount with me.