Tag Archives: Contracts

Will ACA Bail Out Unfunded Municipal Retiree Health Benefits?

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Detroit and Chicago have announced plans to offload their unfunded retiree health plans onto the Affordable Care Act exchanges. The Detroit announcement predated the July 18th filing for bankruptcy protection. These cities believe they will save tens if not hundreds of millions in expenditures annually if they are successful in their intentions.

 

 

For the 61 largest cities in the nation, Pew Research has found that retiree health obligations under current contract or policies are only 6 percent funded.  In Detroit that number is close to zero.

 

While the Affordable Care Act requires employers with 50 or more employees to offer health insurance to employees or pay a fine (presumably municipalities are covered, but it does not matter, they almost all provide insurance anyway), the Act does not cover retirees. So cities-and perhaps states-might look at what Detroit is planning and decide to follow suit. Many private companies and some governments stopped paying for retiree health care years ago.

 

There are two levels of the issue.  Retirees and employees who have worked under contracts promising the health benefits in their retirement presumably cannot willy-nilly be deprived of those benefits by a unilateral cancelation by the employer. Folks already retired would have little incentive to make large concessions since they cannot lose their jobs if they refuse.  Eliminating future retiree health benefits for current employees would require contract renegotiation.  Therefore, for these groups, it would appear bankruptcy of the city might be the only way to have the promised benefits nullified.  Health benefits for retirees and current employees who have no protection of a contract might be offloaded with or without filing bankruptcy.

 

For new employees who will be on labor contracts, the city could negotiate to eliminate retiree health benefits. And for non-contract employees it could simply adopt a no retiree health benefit policy. There are local Pennsylvania examples.  In the City of Pittsburgh, police and fire personnel hired after 2005 do not get retiree health care the way employees working in those departments and employed prior to 2005 do.  The Port Authority’s largest union (its 2008 contract called for the union and the Authority to “jointly issue a statement with regard to their support for national health care”) has language in its 2012 contract stating that employees hired on or after July 1, 2012 would be eligible for three years of retiree medical coverage, as opposed to previous stipulations that allowed coverage until Medicare eligibility if the employee had 25 years of service or had reached age 55 and had ten years of service.

 

Government employee pension benefits are sacrosanct in many states to the point of being constitutionally protected.  That is certainly the case in Pennsylvania and Michigan.  Whether Federal bankruptcy judges will use Federal law to set aside state constitutions in the pension issue remains to be seen. At the same time, health benefits for retirees could be more easily dealt with in bankruptcy.  But, for cities looking to dump retiree health benefits for employees and retirees working under contracts containing such provisions, get ready for lawsuits and labor unrest. Bankruptcy or threats of massive layoffs will almost certainly be needed to get meaningful results.

While the offloading of retiree health care onto the exchanges might be appealing to many hard pressed cities and towns, it might be more complicated than they think. On the other hand, if they have a strong enough case to file bankruptcy, retiree health costs might be the trigger to file.

 

In the larger picture, if cities are able to offload their retiree health promises to the Affordable Care Act, then US taxpayers will get a big share of the tab.  Watching 58 year olds enjoy retirement from Detroit or Chicago city jobs and get Federally-subsidized health care until they reach 65 might not sit well with 60 year olds in the private sector who have no retiree health care until eligible for Medicare and have to keep working and keep paying taxes to subsidize the Detroit retiree’s health benefits. Further, if this strategy turns into a flood of unexpected exchange participants, what happens to the projected expenditures?  Undoubtedly, they will be off. And what if a bunch of private sector companies follow suit?

 

If a few large municipalities such as Detroit and Chicago are successful in reducing their expenses substantially by pushing retirees into the exchanges, there will undoubtedly be a flood of other municipalities around the country rushing to do the same. Moreover, there could be a number of school districts that could benefit from dumping retiree health benefits.  In short, taxpayers might find themselves on the hook for funding much more health care than Affordable Care Act drafters imagined. 

 

This is another unforeseen consequence of a health care law with seemingly unlimited ramifications and complications.

Governor’s Pension Reform: Does It Have a Chance?

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Well, it is here; the Governor’s plan to stop the impending budget calamity created by unfunded pension liabilities.  To be sure, the far reaching proposals face a very uncertain future in the Legislature.

 

 

A little background.  In the fall of 2012 the Pennsylvania Office of the Budget released “The Keystone Pension Report” detailing the steps that have produced a $41 billion unfunded liability for the state’s pension plans covering state workers (SERS) and school employees (PSERS). The report also offered suggestions as to how the state might begin a process of addressing the enormous unfunded liability.

 

Although no specific reforms were recommended by the report-a pension reform proposal was to come, and did, as part of the FY 2013-14 budget address-there was a five point framework for change:

  1. Taxpayers would be put first.
  2. Retirees who had earned their pension would see no changes.
  3. Current employees would not have their accrued benefits touched but “components of current employee’s prospective benefit” could be altered.
  4. The costs should not be shifted to the future.
  5. Experience from other states should be studied.

 

The Governor’s reform proposals, as spelled out in the 2013-2014 Executive Budget, match up fairly closely with the framework set out by the Keystone Report. Explicitly, there was no mention of a tax increase to fund pensions, so point one was clearly satisfied.  The benefits earned by retirees would remain unchanged and the benefit plan for current SERS and PSERS members would remain the same until 2015.  However, at that point, a lower multiplier for pension benefits, 2 percent times years of service, would be used instead of 2.5 percent unless the employee elected to contribute an amount sufficient to keep the multiplier at 2.5. An average of the last five years of compensation would determine the basis of pension payments. Further, pensionable compensation would be capped at 110 percent of the average salary of the prior four years when determining final average earnings. Then too, the Governor’s proposal would place a cap on the pensionable income at the maximum Social Security income on which contributions are made and benefits calculated. Thus, the reform plan has largely adopted points two and three of the framework with much detail on the changes to future pension benefits for current employees.

 

To point four, the Keystone Report stated “…any short-term prospective budget relief should be paid for by long-term reforms…” The same year when the alterations to future benefits for SERS and PSERS members are to go into effect all new hires will be enrolled in a defined contribution plan with SERS members contributing 6.25 percent of pay and PSERS members putting in 7.5 percent.  Basically, the state would be closing enrollment in the defined benefit plans offered by the systems (as of 2011 there were a combined 589,000 active, retired, and vested but inactive members) and placing new hires in a 401(a) system.  As members of the defined benefit plan retire and new employees come in the hope is that the costs of the pension system come down, albeit gradually. 

 

Lastly, the Keystone Report looked at reforms made in other states in 2010, 2011, and 2012 and classified them along the lines of “strategy” (whether the state was asking for higher employee contributions, raising retirement age or service time, and switching from a defined benefit plan to a defined contribution or hybrid plan) and who the reform(s) affected: new employees or both new and current employees.  Much of that analysis came from the National Conference of State Legislatures which has for many years detailed statewide pension reform plans.  In 2012,   Louisiana, Kansas, and Wyoming among others set into motion plans that would close existing defined benefit plans to new employees or create new tiers with higher age and service requirements for new hires.

 

Interestingly, not all change is happening at the state level.  In 2012, the California cities of San Diego and San Jose both had local ballot measures to amend their city charters’ language on retirement benefits.  In San Diego, voters approved a ballot question that (1) would put all new hires, with the exception of police officers, into a defined contribution plan, (2) permit the City to seek limits on what constitutes employee compensation (through bargaining and negotiation) for pension calculations, and (3) eliminate the ability of current and former employees to vote to change their benefits.  The San Diego Councilman who spearheaded the reform movement argues strongly that only base salary should figure in pension benefit calculations while factors such as overtime, longevity pay, etc., should play no role in pension benefits.

 

In San Jose, voters approved a question that would require employees to pay more into their pensions or voluntarily move to a plan with reduced benefits, limit benefits for new hires, and require voter approval for increases to future pension benefits.  The reforms, even though receiving a comfortable majority, face court challenges.

 

Keep in mind that this is just the proposal stage and that the Governor has stayed true to the ideas laid out in the Keystone Report.  It is up to the General Assembly to debate, modify and possibly enact the proposals. Then Pennsylvanians will see what, if any, the reforms can look like.  Would the General Assembly decide to put the issue of pension reform in front of Pennsylvania voters such as happened in cities in California?  The last time a ballot question related to pensions went before the voters was in 1981 when voters were asked if the state Constitution should be amended to allow spouses to partake of increases to benefits so long as the finances of each system extending the benefits were actuarially sound. It was defeated. 

 

And how will members react when hearing from public sector unions, who, not surprisingly, have decried the proposals in the strongest terms? A state employee union stated in a press release that by proposing a defined contribution system for new hires the Governor is “…trading the promise of retirement security for retirement insecurity” and wants to give the Act 120 legislation more time to work.  The teachers’ union stated that the “…proposal includes costly, unconstitutional changes that won’t solve the pension crisis, but will reduce your pension benefits and weaken the retirement security that you earned and you paid for.” That statement is quite ironic in that the entire motivation for the reform effort is the huge increase in taxpayer funding that will be required to meet the pension obligations.

 

At this point it is important to ask whether the Constitution’s language means that something passed in a prior legislative session can create a suicide pact for future ones.  According to the Keystone Report the causes of the massive pension problem can be traced to promises made by laws passed in 2001, 2002 and 2003. What does the Constitution say about this predicament? Article 1, Section 17 prohibits the General Assembly from passing laws impairing contracts. Further language in Article 3, Section 26 says that “…nothing in this Constitution shall be construed to prohibit the General Assembly from authorizing the increase of retirement allowances or pensions of members of a retirement or pension system now in effect or hereafter legally constituted by the Commonwealth…”

 

So what does that mean?  To the first section, the state’s Municipal Pension Handbook notes that “the Pennsylvania Supreme Court has applied [this principle] to the rights of public employees in their pensions…as such, once a public employee has worked even a single day, he or she has not only earned that day’s pay but a guaranteed right to such future pay that formed part of the employer’s promise of compensation”.  On the second, the implication is that when times are good the Legislature could increase pensions but there is no language that allows for a decrease or a cut in a situation like the one faced by SERS and PSERS now. Obviously, the richer benefits should never have been granted because when the bill comes due as it has, the difficulties in undoing the damage will prove virtually insurmountable.

 

The question is: if it comes to a court battle, how will the judiciary interpret a plan in which the benefits earned up to a certain point are not reduced, but the pension benefits accruing based on future earnings beyond that point are reduced?  Would the courts rule that the Constitutional sanctity of contracts has been trampled?  If so, where do taxpayers go for relief from the ill-considered actions of earlier Legislatures?  Protection of employees is important, but in the private sector, when the pension benefit costs are threatening a company’s survival, relief can be sought through bankruptcy. State and local governments as well as school districts in Pennsylvania are effectively denied that option.

 

Moreover, if a Constitutional amendment becomes necessary to overcome the problem, it will almost certainly never get the required votes in the General Assembly to go on a ballot and voters have no right to petition the Commonwealth for a referendum.  And even if the Constitution were to be amended, could the new language ex post facto overturn provisions in currently existing contracts or “employer promises”?

 

If the pension reform fails, the “Pac-Man” or “tapeworm”, as the Governor’s report characterizes the increasing share of the budget going to cover unfunded pension fund liabilities, will eat away at other portions of the state budget.  If the reforms are enacted the proposal envisions that the employer contribution rates will be lowered from an expected 4.5 percent to 2.25 percent in 2013-14, rising by a half a percent per year thereafter. This is instead of rising 4.5 percent per year to top out at close to 30 percent by fiscal year 2016-17. 

 

It should be incumbent on those persons and groups who view pensions as sacrosanct and inviolate to suggest areas of the budget that can be cut substantially in order to satisfy the pension plans’ need for ever more finding. 

 

One thing is certain, with the crucial funding requirements for highways and bridges demanding more tax dollars, and with the state’s taxpayers already taxed heavily by state and local governments and school districts, asking for additional billions of dollars in revenue to cover pensions is simply not politically or economically prudent. If all meaningful reforms in the state’s two big pension plans are blocked and no significant reductions in costs are forthcoming, there will be no choice for the state and school districts but to begin slashing other personnel costs. 

 

Fewer employees, lower contributions to the generous health care benefits, fewer sick day allowances, heavier workloads, pay freezes, etc., will have to be on the table. Employees with the least seniority will take the brunt of the hits given the rules governing layoffs in most contracts. 

 

There is no free lunch.  Taxpayers cannot afford the massive additional pension burden that is coming and some relaxation of objections to all attempts to stem the tide of increasing pension fund allocations must be in the offing.  Insistence on the status quo will lead to a raft of problems the opponents of reform will not like.  The divisions between government employees and taxpayers will almost certainly widen and grow increasingly bitter.

Dilemma for a Small District

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Cut positions in order to save the district. That’s the position taken by the administration of the Northgate School District, a district serving the North Hills communities of Avalon and Bellevue. Population has fallen in the communities, as has public school enrollment, but there are more teachers now (115) than there were in the 1995-96 school year (110). Thus, the proposal to layoff 23 teachers and 10 aides at a meeting this week. As we have written before, Pennsylvania only allows layoffs of public school employees when there is a drop in enrollment or a program is shuttered, not for economic conditions.

Consider: in 95-96 enrollment was 1,644 students and the pupil to teacher ratio was 14.9. In 12-13 enrollment was 1,211 and the resulting ratio was 10.5. Laying off 23 teachers-and assuming enrollment does not change dramatically for next year, say it stands at 1,180-the pupil-teacher ratio would be 12.8, lower than the national average of 15.1 and that of Pennsylvania (13.8) as of 2010. Curiously, a November 2011 article detailing a new four-year contract for teachers recalled three teachers who had been laid off and stated that it had "eliminated the need for additional layoffs".

The superintendent-who was hired last May-went on record saying he would not support merging with another district due to losing the character of neighborhood schools that serve the district. Property tax rates went up 24% in the District from 2001 through 2012 and, at 28.6 mills now, the District has one of the highest millage rates in Allegheny County. Northgate, like all districts in the state, are facing steep increases to pension costs. How does the District work its way out of this situation?

Which Road Will the County Take?

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Wages and health care: those are the two "biggies" for Allegheny County as it negotiates with collective bargaining units representing more than 5,100 of the County’s more than 7,000 employees. Both the County and at least one union leader are in agreement on the importance of wages and health care, and for good reason: personnel and fringe benefits are typically the largest share of expense for government. Based on the County’s 2013 financial plan and the statement of revenues and expenditures personnel and fringe benefits represent 53% of the general fund, 46% of all funds (general, debt service, liquid fuel, and transit support).

One of the bargaining units with whom the County is negotiating represents personnel who do a lot of the County’s road work (spreading rock salt and asphalt) which is housed in the Public Works Department (a good portion of that Department is being spun off into a new department called Facilities Management). Based on Public Works’ 2013 budget of $19 million, $13.1 million is tied to personnel cost and the remaining $5.9 million is identified by the County as non-personnel (services, supplies, materials, repairs and maintenance, and minor equipment). Note that Public Works has almost 70% of its departmental budget into personnel and fringes, higher than the County as a whole.

One of the "Strategic Goals" for the Department is for "Continuous Improvement" and within that goal is an emphasis for the Department to "practice greater fiscal constraint". It’s not clear exactly how the fiscal constraint is to be practiced, but one way would be to be judicious with labor agreements, including the one that would be executed with the aforementioned union representing the road workers.

Upon seeing the County’s initial offer of annual 2 and 2 ½ % raises over the four year contract the union head said it was "…hard to swallow that the county‘s best offer is less than what the city gave under Act 47 (state supervision)."

Pardon us, but we did not know that a local government had to be under state watch to be restrained with its spending on labor contracts. Perhaps the County has learned something from watching the events at the City-County building and does not want to jump into the same fiscal boat. Overly generous contracts and above the norm legacy costs are what got the City into Act 47 and state oversight-is the County supposed to follow suit? Will they?

Honored Contracts, Abused Taxpayers

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School districts across Pennsylvania are struggling to raise the revenue necessary to cover expenses and it promises to get even worse as the recession lingers. Many are hoping their teacher unions will agree to make contract concessions to cut expenses and stave off tax increases that will be ruinous in the current economic environment.

The response of James Testerman, president of the PSEA? Quoted in a Tribune Review article he said; "We expect contracts that are in place to be honored." How contemptuous of the plight of taxpayers. Testerman knows full well that school districts cannot furlough teachers unless there is a substantial drop in enrollment and even then it is difficult. So, while his union has the luxury of facing no layoffs, he can insist also that the pay or benefits be raised as the current contract provides.

Is there any wonder Pennsylvania is one of the slowest growing states in the nation? The attitude of the teacher unions and other public sector unions is completely out of touch with economic reality. They have the political clout to insulate themselves from market forces private sector employees must take into account.

But beyond the arrogance that comes from their control over the Legislature from whence their power derives, the attitude of the teacher union president is one of breathtaking coldness toward the public and taxpayers. The folks who pay their salaries are apparently viewed as adversaries for whom no respect is allowed.

And students must learn from these union teachers? What messages honor and decency are they receiving?