Category Archives: Public Sector

Retirement: Why the Next Generation Needs a Plan / What’s Happening to the Compensation Package?

Source: Elizabeth Kellar and Joshua Franzel, Public Management, Volume 96 Number 1, January/February 2014

Find out how post-recession benefit changes are affecting local government benefit plans and also the retirement strategies of new hires, who are likely to be young professionals.

The Role of Retiree Health Insurance in the Early Retirement of Public Sector Employees

Source: John B. Shoven, Sita Slavov, National Bureau of Economic Research (NBER), NBER Working Paper No. 19563, October 2013
(subscription required)

From the abstract:
Most private sector workers with employer-provided health insurance have a strong incentive to continue working until Medicare eligibility in order to maintain group health coverage. However, most government employees have access to retiree health coverage, which allows them access to group health coverage even if they retire before Medicare eligibility. We study the impact of retiree health coverage on the probability of stopping work among public sector workers between the ages of 55 and 64. We find that, for state and local government employees, retiree health coverage raises the probability of stopping work by 5.1 percentage points (around 28 percent) between ages 60 and 64. However, we find no evidence that retiree health coverage influences state and local employees’ decisions to stop work at ages 55-59, or that such coverage has an effect on the probability of stopping work for federal and military employees.

The Fiscal Stress Arising from State and Local Retiree Health Obligations

Source: Byron F. Lutz, Louise Sheiner, National Bureau of Economic Research (NBER), NBER Working Paper No. w19779, January 2014
(subscription required)

From the abstract:
A major factor weighing down the long-term finances of state and local governments is the obligation to fund retiree benefits. While state and local government pension obligations have been analyzed in great detail, much less attention has been paid to the costs of the other major retiree benefit provided by these governments: retiree health insurance. The first portion of the paper uses the information contained in the annual actuarial reports for public retiree health plans to reverse engineer the cash flows underlying the liabilities given in the report. Obtaining the cash flows allows us to construct liability estimates which are consistent across governments in terms of the discount rate, actuarial method and assumptions concerning medical cost inflation and mortality. We find that the total unfunded accrued liability of state and local governments for the provision of retiree health care exceeds $1 trillion, or about 1⁄3 of total state and local government revenue. Relative to pension obligations discounted at the same rate, we find that unfunded retiree health care liabilities are 1⁄2 the size of unfunded pension obligations. We also find that using assumptions concerning the growth in health care costs that are arguably more realistic than those employed by most states actually reduces the size of the liability in most cases. Pushing in the opposite direction, we find that using plausibly more realistic mortality assumptions increases the size of liability. The second portion of the paper places retiree health care obligations into context by examining the budget pressures associated with retiree health on a continuing, largely pay-as-you go basis. We find that much of the projected increase in retiree health obligations as a share of revenue is the result of health care cost growth. On average, states could put their retiree health obligations into long-run fiscal balance by contributing an additional 3⁄4 percent of total revenue toward the benefit each year. There is, however, wide variation across the states, with the majority of states requiring little in the way of additional financing, but some states requiring a significantly larger increase.

Improving Government Through Labor-Management Collaboration and Employee Ingenuity

Source: Erin Johansson, Jobs With Justice Education Fund, January 2014

From the summary:
Public employees and their unions are frequent scapegoats when elected officials seek to score political points or contract out government services. But despite what you may have read, there are many examples of productive labor-management relations in the public sector. A new report released by the Jobs With Justice Education Fund, Improving Government Through Labor-Management Collaboration and Employee Ingenuity, profiles how public employees and their unions are working collaboratively with management to improve the way government runs. …

Key findings of this report include:
– The Federal Aviation Administration and National Air Traffic Controllers Association worked together to successfully roll out new technology at 17 of 20 air traffic control centers, saving millions of dollars of software development costs.
– The Naval Sea Command and AFL-CIO Metal Trades Council implemented a system for improving productivity that proved successful enough at reducing inefficiencies that it was expanded to all four shipyards.
– Charlotte County Public Schools partnered with its unions to tackle rising health-care costs by creating a self-funded health plan with a free clinic for employees and their families.
– The U.S. Patent and Trademark Office and the Patent Office Professional Association developed a new system for managing patent examiner time. Despite a steady increase in unexamined applications every year since 2009, examiners reduced the backlog of applications by 20 percent between 2009 and 2013.
– The State of Michigan and the United Auto Workers employed “lean techniques” to reduce lobby wait times for social services clients from three hours to 30 minutes.
– The Cleveland Public Library and Service Employees International Union developed a system for transferring library employees to avoid layoffs and maintain library hours during a recent budget crisis.
– The City of Phoenix worked with a coalition of unions to create an Innovation and Efficiency Task Force, which has saved the city nearly $60 million annually since it began in 2009.
– Ohio State University partnered with the Communications Workers of America to encourage employee participation in a wellness program, which led to a quadrupling of union member participation.
– Colorado Workers for Innovative and New Solutions, a union representing Colorado state mental health employees, is convening state and community representatives to proactively address changes to the provision of mental health care. …

The Affordable Care Act: What Public Sector Employers Need to Do Now …Later This Year… and Beyond

Source: J. Richard Johnson, HR News, Vol. 80 no. 1, January 2014
(subscription required) (scroll down)

This article discusses actions public employers need to take now and over the next year to fulfill ACA requirements, to prepare for mandates and to allow their health plans to continue to be a positive factor in attracting and retaining quality employees. The following sections outline major areas, which public employers should be focusing on going forward.

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. …