Category Archives: Public Sector

Strengthening the Security of Public Sector Defined Benefit Plans

Source: Donald J. Boyd and Peter J. Kiernan, Nelson A. Rockefeller Institute of Government, Blinken Report, January 2014

State and local government defined benefit pension systems, which pay benefits to more than eight million people and cover more than fourteen million workers, are deeply troubled. They are underfunded by at least $2 to 3 trillion using standard economic measures, and by $1 trillion using measurement practices virtually unique to the public sector pension industry. In response, governments have been raising contributions, cutting services and investments in other areas, raising taxes, cutting benefits for new workers, and even cutting benefits for current workers and retirees.

This is a national concern, affecting retirement security for one-sixth of the workforce, some of whom receive a government public pension in lieu of Social Security coverage, and affecting the capacity of state and local governments to make investments and deliver needed services. We offer this analysis of the problem, and recommendations for correcting the system that allowed this to happen. Public sector defined benefit plans are an important component of the nation’s retirement security, and can and should be structured to fund benefits securely.

Flaws of adopting cost cutting in switching to DC plans

Source: Diane Oakley, Pensions & Investments, January 20, 2014

Thinking back to 2007 — before the financial crisis — public pension plans in the aggregate had nearly 90% of the assets on hand required to pay retirement benefits due decades in the future. However, like all investors, public pension funds took a deep hit when the financial markets melted down in 2008. With markets in a downward freefall, pension assets plummeted, unfunded liabilities grew and pressure mounted on state policymakers to enact reforms. Even states with well-funded plans were prudent to closely examine their retirement systems, while policymakers in states that had fallen behind on their contributions prior to the Wall Street crisis faced tough decisions.

Since that time, 48 states have enacted reforms to their pension plans. The overwhelming majority of states acted to ensure the sustainability of their traditional pension structures by adjusting benefits and increasing employee and employer contributions. Specifically, the states enacted one or more reforms: 40 states reduced future pension benefits; 30 states required employees to increase their contributions; 21 states reduced cost-of-living adjustments for retirees; and 11 states statutorily increased the employers’ pension contributions. …

…Although the environment back in 2008 appeared fertile for a wholesale switch to individual defined contribution accounts from defined benefit pensions, it never happened. That begs the question — why did policymakers stick with their defined benefit plans in the face of financial pressure and the corporate trend away from them?

One explanation is that the move away from defined benefit plans in the private sector is rooted in federal regulations that aren’t applicable to public systems. These rules create sizable funding volatility and unpredictability for corporate plan sponsors.

Another explanation is that state policymakers heeded the data in actuarial analyses that indicated closing public pensions would not address funding shortfalls. Take for example the experience of West Virginia’s pension reform in the 1990s, which now is a cautionary tale for policymakers. West Virginia learned the hard way that a switch to defined contribution accounts from defined benefit plans does nothing to close unfunded pension liabilities, and can leave employees unable to retire. …

The Social Security Windfall Elimination and Government Pension Offset Provisions for Public Employees in the Health and Retirement Study

Source: Alan L. Gustman, Thomas L. Steinmeier, Nahid Tabatabai, Michigan Retirement Research Center Research Paper No. 2013-288, January 8, 2014

From the abstract:
This paper uses data from the Health and Retirement Study to investigate the effects of Social Security’s Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) provision on Social Security benefits received by individuals and households. WEP reduces the benefits of individuals who worked in jobs covered by Social Security and also worked in uncovered jobs where a pension was earned. WEP also reduces spouse benefits. GPO reduces spouse and survivor benefits for persons who worked in uncovered government employment where they also earned a pension.

Unlike previous studies, we take explicit account of pensions earned on jobs not covered by Social Security, a key determinant of the size of WEP and GPO adjustments. Also unlike previous studies, we focus on the household. This allows us to incorporate the full effects of WEP and GPO on spouse and survivor benefits, and to evaluate the effects of WEP and GPO on the assets accumulated by affected families.

Among our specific findings: About 3.5 percent of households are subject to either WEP or to GPO. The present value of their Social Security benefits is reduced by roughly one fifth. This amounts to five to six percent of the total wealth they accumulate before retirement. Households affected by both WEP and GPO lose about one third of their benefit. Limiting the Social Security benefit to half the size of the pension from uncovered employment reduces the penalty from WEP for members of the original HRS cohort by about 60 percent.

United Benefit Advisor’s 2013 Health Plan Survey

Source: United Benefit Advisors, 2013
(subscription required)

From the press release:
United Benefit Advisor’s 2013 Health Plan Survey, the nation’s largest independent health plan benchmarking survey, reveals that while private sector employees are absorbing more costs for their own health care, facing high ­deductibles and huge out-of-pocket cost increases in recent years, they are also bearing more as taxpayers by assuming a higher percentage of costs for employees who work in the public sector.

The survey finds that public employer cost per employee increased 22 percent from $7,001 in 2012 to $8,551 in 2013, while employer cost in the private sector increased only 15.8 percent from $5,226 in 2012 to $6,040 in 2013. The portion an employee pays decreased for both during that same time period, but by nearly 30 percent (or $1,025) for a public worker and only 15.7 percent for a private worker. Taxpayers, therefore, assumed an additional $1,681 or 24.28 percent of a public employee’s health care cost.

Findings from the comprehensive survey of more than 11,000 employers show that the private sector has controlled costs better than public employers by using plan designs that shift more up-front cost to a strategy proven to decrease total cost. Such plans, known as consumer-driven health plans (CDHPs), grew from 22.5 to 24.1 percent of all plan types offered across all industries and size groups. A majority of public plans, however, are still considered “Cadillac plans,” rich in costly benefits that have been stripped from most private plans — putting the public sector at risk of facing the forthcoming “Cadillac Tax.”…

…Health Plan Design Differences in Public versus Private Sector:
– Private employees with dependents have been hit hardest, where the average annual premium (employee contribution) has increased by 1.5 percent since 2012 and 19.7 percent since 2009. A public worker, however, actually saw their annual contribution for dependents decrease by 3.05 percent from $4,716 in 2012 to $4,572 in 2013.
– Total Cost of Employer-Sponsored Health Plans has increased at a rate of 21 percent, on average, for both public and private industry for the past five years; however, the private sector has better controlled costs in recent years. Annual Total Cost for the public sector increased from $10,356 in 2012 to $10,914 in 2013, a 5.4 percent increase. In the private sector, however, Annual Total Cost increased only 2.8 percent in the same time period, from $9,032 to $9,282 in 2013.
– Out of Pocket Maximums (OOP) are much higher in the private sector, with the average worker facing an in-network OOP maximum of $3,721 for a single adult and $8,258 for a family, versus a public sector worker who faces an in-network OOP maximum of only $2,262 for a single adult and $6,032 for dependents. The differences in out-of-network OOP maximums is even more extreme, with a private worker facing a family maximum nearly $5,000 higher than that of a public worker.
– Deductibles are another area where private employees face higher up front costs. The average in-network deductible for a public employee in 2013 was $1,356 for a single adult and $3,064 for a family; a private employee will pay $1,891 for a single adult and $4,323 for a family, a nearly 40 percent difference for each.
– Average in-network co-insurance dropped from 90 percent to 82.5 percent for private employees (a significant decrease), but remained at 90 percent for the public sector….

States as Model Employers of People with Disabilities: A Comprehensive Review of Policies, Practices, and Strategies

Source: Kathy Krepcio and Savannah Barnet, Rutgers, John J. Heldrich Center for Workforce Development, October 2013

Employment plays an important role in the lives of many Americans. For people with disabilities, employment is also an avenue for engaging in meaningful relationships, for expressing skills, and is a critical component of community integration. As Jack Markell, Governor of the State of Delaware, showed in a 2013 report for the National Governors Association, states can play a leading role in the employment of workers with disabilities. In fact, a growing number of states have begun to review their own human resources practices and strategies to see how they can reduce barriers and accelerate the hiring of qualified job seekers with disabilities into government service.

To assess this trend, Kathy Krepcio and Savannah Barnett reviewed published literature and conducted a state-by-state investigation to identify current programs, practices, and activities used in state government and large municipalities relating to the recruitment, hiring, retention, and advancement of people with disabilities into government jobs.

Interactions between private and public sector wages

Source: António Afonso, Pedro Gomes, Journal of Macroeconomics, In Press, Accepted Manuscript, Available online 10 January 2014
(subscription required)

From the abstract:
We examine the interactions between public and private sector wages per employee in OECD countries. The growth of public sector wages and of public sector employment positively affects the growth of private sector wages. Moreover, total factor productivity, the unemployment rate and the degree of urbanisation are also important determinants of private sector wage growth. With respect to public sector wage growth, we find that it is influenced by fiscal conditions in addition to private sector wages. We then set up a dynamic labour market equilibrium model with two sectors, search and matching frictions and exogenous growth to understand the transmission mechanisms of fiscal policy. The model is quantitative consistent with the main estimation findings.

Highlights:
• We estimate the determinants of public and private wage growth in OECD countries.
• Private wage growth is affected by public wage growth, TFP growth and unemployment.
• Public wage growth depends on fiscal conditions and an error correction mechanism.
• We set up a dynamic labour market equilibrium model to understand the interaction.
• The model is quantitative consistent with the main estimation findings.

How Public-Sector Employment Fared in 2013

Source: Mike Maciag, Governing, January 10, 2014

Most governments didn’t shed large numbers of jobs in 2013, but they didn’t begin to ramp up hiring either. … State and local government employment remained flat last year, still failing to recover jobs lost in the aftermath of the recession. Nationally, the public sector job market of 2013 looked a lot like 2012. Most governments didn’t shed large numbers of jobs, but they didn’t begin to ramp up hiring, either. Job estimates published Friday indicate local governments collectively added 33,000 jobs last year, an increase of only 0.2 percent….

From Coolidge to Christie: Historical Antecedents of Current Government Officials Dealing with Public Sector Labor Unions

Source: Bryan J. Soukup, Labor Law Journal, Vol. 64 no. 4, Winter 2013
(subscription required)

One might ask: what do Calvin Coolidge, Ronald Reagan, Scott Walker and Chris Christie have in common? The most obvious answer is that they all are (or were) Republican Governors, but these four men have something much deeper in common. All four have faced-off against powerful public sector labor unions and won. This paper will address and examine the similarities between the anti-union actions taken by these men- Coolidge and the Boston Police Strike of 1919, Reagan and the Professional Air Traffic Controllers (“PATCO”) Strike of 1981, and Walker and Christie’s recent dealings with public employee unions. In the end, the reader will view the work of these political figures as an inspirational passing of the torch between political eras. …

Austerity Blues: Public Sector Bargaining Rights in the United States and Canada

Source: Joseph B. Rose, Labor Law Journal, Vol. 64 no. 4, Winter 2013
(subscription required)

The 2008 global economic crisis had two discernible effects on government fiscal policy in the United States and Canada. First, and consistent with other industrialized countries, governments introduced major stimulus programs in an attempt to reduce the economic impact of the recession. Second, as increases in government expenditures led to rising budget deficits and public debt, governments recognized the need to develop fiscal plans aimed at restoring balanced budgets. Achieving this objective proved difficult in the absence of a sustained economic recovery and the European sovereign debt and banking crisis.1 As stimulus measures gave way to austerity programs, policy makers increasingly focused on reducing expenditures and restraining public sector compensation. …