Thursday, May 07, 2009

Those Pernicious Pensions . . .

In May, 2008, the Albany Times Union created a sensation when it revealed that almost 900 people, including state officials convicted of crimes and retired police officers, were receiving $100,000 or more annually in retirement benefits. The following August, the Buffalo News noted that a local school superintendent retired with an annual pension of over $205,000, more than his former pay; that a local math teacher retired with a pension of more than $90,000 per year, about equal to his pay; and that statewide almost 700 teachers and administrators had retired with six-figure pensions. These are the exception rather than the rule; however, to many who are not on the public payroll, and to those who rely exclusively on Social Security, even average government pensions look generous. Newsday recently reported that newly retired teachers state-wide last year received almost a $46,000 pension (almost $72,000 for those with 35 years on the job), police and firefighters about $58,000, and state and local workers almost $25,000.

The reason why everyone is focusing on pensions now is the nation's economic crisis and the state's fiscal crisis. In early March the Associated Press reported Comptroller DiNapoli's estimate that the state's pension fund had lost about 20% of its value last year and that losses were continuing. People who are not on the public payroll expect that they will probably be taxed more to finance government pensions, while watching their own retirement nest-eggs disappear. In fact, they need to know that Article V §7 of the New York State Constitution forbids any diminution or impairment of these pension benefits, while Article VII §8(2) allows benefits to be increased. Article XVI §5 exempts the benefits from state taxes. Pension benefits for existing employees are iron clad. Even before the current crisis, taxpayer costs for public pensions in New York State were rising dramatically: from around one billion dollars in 2000 to 6.7 billion dollars in 2005. If the financial meltdown continues, there is a real chance that basic governmental services will have to be curtailed, while taxes are dramatically increased just to cover pension obligations.

Pension benefits have long been an enticement to public employment. Government employees did not expect to get rich when they joined the public payroll 20 or 30 years ago. They often accepted less pay than their peers in the private sector in return for greater job security, a predictable career path, more time to be with family, health benefits, the satisfaction of doing public good, and a secure retirement. 

Times have changed, however. In our area, most of the better paying jobs in the private sector (excluding health care, which is supported by insurance premiums similar to taxes) have simply vanished, owing to an inability of employers to compete in a national, and later, a global marketplace. The level of taxation necessary to maintain legions of public employees contributed to New York's private employers' inability to compete with those elsewhere. Public employees, however, have been insulated from this competition, protected by laws, rules, and powerful labor unions (some more “effective” than others). A comparison of public school teacher salaries with those in private schools, or with the salaries of government lawyers and engineers having a less powerful union, is a sobering demonstration of how the strongest public employee unions use their political influence to distort the labor market. Now, the better-paying jobs are more often the public jobs, but there is no longer a healthy private sector to sustain them.

A big problem with public employee pensions is the manner in which benefits are determined. Usually benefits are calculated as a multiple of the years worked times the average of the highest three years of compensation. While this approach lends itself to prediction of the cost of the pension for those civil servants who follow the typical progression up the career ladder, there are simply too may ways for some to artificially inflate their “high three” years far above what their careers would justify. 

For example, the Buffalo area superintendent mentioned above seldom took vacation and sick time. The pension rules applicable to him allowed him to cash in literally hundreds of days of leave during his last year on the job, inflating his final salary to almost $534,000. The Buffalo News calculated that this added almost $53,000 to his annual pension benefit, allowing him to retire on a pension that was bigger than his salary. Had he simply collected the value of the leave by remaining on the payroll longer in leave status, no increase in pension would have occurred. 

Those who can control their overtime are also in a position to inflate their “high three.” Stories of police officers doing things of little value such as washing police cars to burn overtime have been urban legends for years. Teachers have been suspected of inventing after school clubs and activities to obtain advisor stipends that increase base pay. While school boards consider the immediate annual cost in their budget when the club is in operation, they often fail to consider whether or not the timing of the stipend will result in a permanent increase to the teacher's pension.

Employees, even part time employees, who have political connections can sometimes use them to get themselves appointed to positions paying far above their normal pay. It only takes 2 or 3 years in a political position to significantly increase a retirement benefit for the rest of one's life.

Recently the Town of New Hartford approved a payout of almost $72,000 for several years of alleged back overtime to a bookkeeper who, according to Town Board minutes, was originally hired as an “exempt” employee (a category not usually eligible for overtime). This person's 2008 pay zoomed from $50-something thousand to about $128,000, due to the overtime payment. Did the Town Board consider the probable long-term cost of this “one shot” deal to the taxpayers for pension benefits? Could the payout have been structured to take place over time to avoid pension consequences? There is no evidence that these considerations were even on the Board's radar screen.

Employees, who engage in these “inflation” techniques, feel that they are entitled to the resulting pension benefits because the rules of benefit calculations allow it. Managers that may be in a position to minimize abuses, either do not see conservation of tax dollars as their responsibility, or they are in a position to benefit from the abuse themselves. But are these practices fair to the taxpayers – or fair to other employees who do not engage in them? 

The typical employee who retires has years of contributions into the system, either by him or herself, or by the employer on his or her behalf, at levels commensurate with earnings that gradually increase to the “high three.” Over the years, a substantial amount of contributions would have built up to pay for this person's pension. With an inflated “high three,” however, the money is NOT already in the system. That means that money either must be reallocated to the inflated pension from the contributions made for our typical employee, or the taxpayers must make up the difference. In the case of the superintendent, the $53,000 additional benefits per year for two or three decades of retired life would be a significant burden on the taxpayer. That money could otherwise be used to hire another teacher. The benefit formula, in a sense, allows some to take contributions intended for others. It is easy to see how just a few of these bad apples can threaten the viability of the pension fund or ruin budgeting for years to come.

During the fiscal crises of the '70s and '80s, the state placed new hires into “tiers” with scaled-back benefits. Although the unions argued that it was unfair for two people doing the same job to have different benefits, this was necessitated by the constitutional prohibition on cutting benefits for existing employees. As the economy improved and the value of pension fund investments increased, there was pressure to both increase benefits for those in new tiers as well as to scale back contributions. Around 2000 Gov. Pataki and the State Legislature not only eliminated a requirement for employees to contribute 3% of their salaries into the system after 10 years, they allowed pensions to vest after employees had only 5 years on the job, instead of the 10 years previous. That opened the door for many relatively short-term political appointees to obtain long-term benefits from the pension system – another form of political patronage. Once increased benefits are given, the constitution prevents them from being cut. 

What can be done to control pension costs? One thing proposed by Governor Paterson is the creation of another retirement tier, Tier V, that will increase retirement age to 62 from 55, require employees to contribute 3% of their pay throughout their employment, return pension vesting to 10 years, and eliminate overtime when calculating pensions. Unions will scream “unfair,” but what is going on now is unfair. These changes, however, will only apply to new employees.

For existing employees, our public leaders need to keep pension benefits on their mind when taking any action that involves personnel. For example, was overtime and the impact on pension benefits ever considered when Utica decided to go into the ambulance business – or considered in the latest police contract? Overtime needs to be carefully regulated. Payouts for accumulated leave or other benefits need to be structured over a period of time to avoid a pension impact. 

Pension costs are posing great peril for the taxpayers. The public needs to be aware of the problem and demand that it be brought under control.

[This article was originally published in the April, 2009 "Utica Phoenix." Be sure to pick up this month's "Phoenix" to read "What is the Fix for Upstate" ... available now in a newsrack near you.]


Anonymous said...

Strike. You have some very sound ideas and reasoning behind them. There are a few things to clarify. Tiers one through four’s benefits decrease at each level and tier five would be the next logical step. Amongst the benefits that decrease are those earlier retirement ages you mention, the cost of health insurance coverage both while working and after retirement and the ability to abuse this “high three” in the manner you describe.

Most tier one employees have retired and the tier two are close and/or starting to retire already. That leaves the tier three and four employees whose benefit packages are in no way as attractive as their predecessor’s. While the “high three” is still what their pension is based on, any overtime an employee works for is not added in its entirety. One can only increase their base pay by a maximum of 10% regardless of the amount of overtime one earns. Retirement ages have already been increased. One can still retire at 55 with enough years of service but not at the pay one would get at age 62. There is a penalty for early retirement. While the abuses you describe are real, they are generally old timers who are underworked and overpaid to begin with. These practices will eventually wean themselves out naturally. Meanwhile we have the problem of what to do now.

As a tier four state employee I can tell you that my take home pay has decreased annually for years now. As taxes and health insurance costs increase (as well as co-pays and the cost of living), any menial increase in salary doesn’t even cover them. As civil servants many of us do jobs most wouldn’t want. Employees are more and more difficult to retain and in the system I work it is also increasingly difficult to fill positions in the first place. These big guns you refer to are the exception and I see more and more of the everyday workers leaving to work in the private sector because it is far more attractive and lucrative, with the possible exception of the retirement. For new employees it’s hard to sell the benefits they will receive 30 some odd years down the road as reason enough to do more for less in the meantime. What makes the future more important than the present, especially in today’s instant gratification society?

The Tier V that is already being discussed is a good idea. Although it would only affect new hires, you’ve got to start somewhere. Returning to 10 years before becoming vested and having to contribute to your pension throughout ones career are good ideas. Many of your other suggestions are already in place. I just think we have to be careful not to go so far that people won’t even want to take these jobs to begin with. The bad rap State employees get is not as true as it once was. Changes need to start at the top. There are too many overpaid and underworked chiefs and the underpaid and overworked little guys are always the first ones being asked to make sacrifices.

Anonymous said...

The only way our area's cycle of tax and spent= population loss can change is to control public employee costs. When fringe benefits and automatic annual increases are factored in, the pathe we've been on is unsustainable. Freezing benefits and salaries and eliminating taxpayer paid jobs through consolidations and efficiencies are the only answers.We need elected representatives with the guts to say that.

Anonymous said...

You have some nerve. Labor unions have distorted the labor market? Why don't you talk about Corporate America {such as our own local ConMed} that has sent millions of American jobs overseas in order to avoid paying pensions & other benefits to the taxpayers you claim to be so concernrd about. The pensions were negotiated in good faith. Public employees help in their communities by paying taxes to help support the taxpayers who no longer have a job after being shafted by outfits like ConMed.

Anonymous said...

Abuses that you mentioned are few & far between. But people like you love to cite them as a way to attack all public employees & are used as a ruse in your agenda to deny all employees, public & private, any benefits. Thank God that I don't have a 401k plan which is big businesses way of screwing the American worker.

Strikeslip said...

Public Employees have to get real. The benefits packages that the taxpayers pay for are far and away more generous than most (non-government employee) taxpayers themselves are getting. . . And most taxpayers have no where near the job security that government employees have. And the abuses are not few and far between in certain segments of the public work force where overtime is easily available.

Workers certainly should have benefits. This is one public employee who appreciates his benefits and wishes that everyone else could have the same . . . but When the government sector has grown so large, and the cost of maintaining the benfits has grown so much, there is not much of a private economy left over to support the public sector. (And public sector-only economies don't work -- look no further than old Soviet Russia for proof of that.) The balance has been lost. Until the balance has been restored, public employees cannot expect everyone else to continue carrying their water.

Anonymous said...

There is a difference in labor unions supported by taxpayers and private sector unions. The costs of the public unions are driving people out of the area.If the cost of a product made by a unionized company is too high, consumers can simply not buy the product i.e. an automobile. Public union slaries when fringes are factored in are prohibitive to growth in New York State, across the board.

UticaSux said...

Strike thanks for your continuous contributions to the local collective psyche. You are great at illustrating clearly the things we already sense are happening. For better or worse one thing you can say about CNY and Utica is that we're well ahead of the national curve as far as garnering and spreading info online.

Another great read Sir.