Chariho School Parents’ Forum

July 23, 2009

Sometimes timing is everything

Filed under: contract negotiations,Hopkinton,pension,Police,Unions — Editor @ 10:22 pm

Having just gotten back from a trip I got caught up here, then started reading the papers and blogs. First on the list is Anchorrising and Justin’s post on pensions is as timely as ever and brings in another persepective on our pension issue.

We  have been talking about the difference between defined contribution and defined benefit plans as a matter of liability — How much is owned. This article helps to understand the difficulty in paying for it.

As Gene and Lois have said, our private sector 401 k’s are now 201 k’s as a result of the failing market. But public sector pensions also rely on investment income. 

The  AR post is pasted in full below because it’s so darn good (and did I mention timely).

 

Pensions and Politics

Katherine Gregg’s Providence Journal article on Rhode Island’s pension fund losses has an interesting frame. Toward the beginning (emphasis added):

Despite this recent run of losses, state officials say there is no immediate danger for state and local employees and teachers whose retirement checks are drawn from the pension fund, which is made up of a mix of investment earnings, taxpayer contributions and employee contributions. These retired public employees are guaranteed pension payments for life, regardless of the stock market’s performance.

And the final word is given to Stephen Laffey, who (Gregg notes) is “weigh[ing] a return to politics”:

“I have said many times that the only way to save the pension system is to end it and give everyone their money and go to a 401(k) plan … like the people in the private sector,” Laffey said in an e-mail.

The question — over which the unions will shed blood, if necessary (although probably figuratively) — is who bears the risk. When the market shrinks beyond reserves, or simply does not live up to the excessive requirement of more than 8% growth, either retirees manage on less income or the state attempts to tighten the tax vice on a population that already feels overtaxed (with ample justification). Moral considerations aside, the latter option is simply not functional; folks working in the private sector are not going to idly watch their money flow to retirees, many of whom are taking home more than they are, and employers are not going to accept the escalating costs associated with operations in Rhode Island.

Probably the most important point to emerge from the article is that inadequate half-measures aren’t going to cut it:

But the market losses have already eliminated any possibility of taxpayer savings this year from state lawmakers’ decision to curb annual cost-of-living increases and institute a minimum retirement age for all state pensioners. As state budget officer Rosemary Gallogly explained Wednesday: “The rate of payroll determined for FY2010 will not change as a result of pension fund performance.”

Mr. Laffey, in other words, is absolutely correct: The two possibilities are (1) drastic changes or (2) the collapse of the pension system, bringing the state with it.

 

You can comment directly on the  AR blog HERE.

Then there is the ProJo piece on Providence giving us a glimpse of the future (h/t Gene).

This is a concern for Providence since the city is already drawing nearly 62 percent of its obligation to pensioners from its yearly contribution to the system, meaning it is putting money into the system almost as fast as it is being paid out.

And our  baby boomers are just starting to retire – things are going to get worse quickly.

All the writing is on the wall. The only reason the state isn’t in more pain right now is because we put $226m of stimulus money to plug the budget – we still increased spending 12%. Next year we can expect things to be worse. Drastic change is needed and Hopkinton is as good as place as any to start.

July 19, 2009

Total pension liability for Hopkinton right now is estimated at $55,329,372.

 The HPD infamous 3% compound COLA pension –

There has been a lot of talk, most notably from frmr town councilman John Matson, that the pension was not implemented according to the letter of the law. I asked the town’s solicitor about it and she said it looked as though Matson was right, but she wasn’t sure, and that if it was true there probably wasn’t anything we could do about it now.

I have spoken with one other council person and told them what I’m going to say here – for the protection of the town I think we should have a written opinion from our counsel ending this question once and for all. If there was anything improper can we do anything about it, and if not, why.

How much is our pension system going to cost us?

The contract states that longevity and holiday pay are included in the calculation for pensions. I don’t have average holiday pay, nor do I know if that includes comp and sick time, so I won’t include it just to play it safe.

I also used a conservative average yearly wage increase of 5% (the actual current average is 7%).

I used the actual pay numbers from our latest retiree and worked backwards to determine how much the employee contributed over the years. The employee works 20 years (contract minimum) and lives for another 28 years (from 55 to 78).

The defined contribution method (private sector) says the employee contributes 8% of salary and the employer matches it (which is rare in this economic times).

The accumulated pension in the private sector method gains 3% interest and is paid out over the same 28 years. 

The defined benefit method (HPD) has the same 8%  employee contribution, but the town contribution is based on what benefits are defined to be paid – in our case it is the gross salary with a 3% increase, compound yearly.\

I want to compare what it is going to cost the town if we used a defined contribution pension program like private sector businesses and the defined benefit pensions found in the public sector – using the HPD as an example.

So, let’s get started.
The most recent employee to retire (Patrolman Georgetti) had a total income of $80,550 last year. Using the 3% compound COLA and assuming he lives the average of 28 years after retirement, he will be receiving $178,924 per year by then. We will have paid him a total of $3,458,085 over those 28 years. For that the employee paid $82,678 into the system while the town has to cover the rest (approximately $3m).

Now let’s compare that to the private sector.  If the same employee, making the same income, paid into a defined contribution plan, the employee  would contribute the same $82,678 but the employee would contribute another $82,678 – NOT the estimated $3m to meet the defined benefit obligation.

Assuming we had all 16 employees retire tomorrow (after working the required 20 years) – and didn’t add a single additional employee ever again (like Exeter) our total liability would be $55,329,372. That’s what we owe right now – assuming nothing is done retroactively to remove this crazy pension gift.

This is very serious stuff for a small town. I hope when the HTC votes on this contract they have taken these numbers into consideration. Anything other than a defined contribution plan is going to bankrupt the town. I’m happy to recalculate is someone points out an error in the method.

  Total 8%  
Year Pay Emp cont  
1         30,395.83      2,431.67  
2         31,995.61      2,559.65  
3         33,679.59      2,694.37  
4         35,452.20      2,836.18  
5         37,318.11      2,985.45  
6         39,282.22      3,142.58  
7         41,349.70      3,307.98  
8         43,526.01      3,482.08  
9         45,816.85      3,665.35  
10         48,228.26      3,858.26  
11         50,766.59      4,061.33  
12         53,438.52      4,275.08  
13         56,251.07      4,500.09  
14         59,211.65      4,736.93  
15         62,328.05      4,986.24  
16         65,608.48      5,248.68  
17         69,061.56      5,524.92  
18         72,696.38      5,815.71  
19         76,522.50      6,121.80 Total paid in
20         80,550.00      6,444.00           82,678.33
Pension begins1        80,550.00    
2         82,966.50    
3         85,455.50    
4         88,019.16    
5         90,659.73    
6         93,379.53    
7         96,180.91    
8         99,066.34    
9       102,038.33    
10       105,099.48    
11       108,252.46    
12       111,500.04    
13       114,845.04    
14       118,290.39    
15       121,839.10    
16       125,494.28    
17       129,259.10    
18       133,136.88    
19       137,130.98    
20       141,244.91    
21       145,482.26    
22       149,846.73    
23       154,342.13    
24       158,972.39    
25       163,741.57    
26       168,653.81    
27       173,713.43    
28       178,924.83    
      Total 3,458,085.81    
all 16   55,329,372.95