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Good as Gold

Published: Sun, January 3, 2010 @ 12:00 a.m.


At a time when budget cuts are forcing Ohio schools to lay off teachers and cities to raise taxes, eliminate jobs or both, one expense government leaders have not cut is pensions for their workers.

The pension cost to local governments in Ohio now stands at $4.1 billion a year. If current trends continue, the pension costs will grow by $604 million to $768 million during the next five years, according to a Ohio Newspaper Organization computer analysis.

The costs are directly related to the size of government payrolls.

On top of that, two of the five public- pension systems are asking taxpayers to dig deeper to cover funding shortfalls, potentially adding $400 million more to the tally by 2020. The taxpayer tab easily could top $5 billion a year by the middle of the next decade.

Those tax dollars will help ensure that retired teachers, cops, state workers and other government employees receive retirement benefits that many of their private-sector counterparts can only envy — although direct comparisons are difficult.

Retirement incomes for the most- experienced government employees top out at 88 percent of their active-duty pay. Unlike most private-sector workers, whose retirement is driven by the strength of the stock market and their 401(k) plans, the pensions for government employees are guaranteed.

In addition to higher average retirement incomes, government retirees in Ohio also enjoy government-sponsored health care, can retire as young as 48 for police and firefighters, and have the opportunity to “retire” and collect a full pension while going back to work, often at full pay for doing the same job.

Such “double-dippers” were paid more than $741 million by the State Teachers Retirement System last year and $240 million by the Public Employees Retirement System, records show.

In Toledo, even the mayor is a double-dipper.

Since starting his current term in January 2006, Toledo Mayor Carty Finkbeiner has drawn his annual salary of $136,000 in addition to a state pension for more than two decades in elected and unelected positions. He is leaving office Monday.

And because he already is receiving a Public Employees Retirement System pension, Toledo taxpayers have paid $75,221 into an annuity as an additional retirement fund for Finkbeiner.

Some are questioning whether the budgets of local governments can handle higher premiums given that libraries, school districts and cities are receiving less tax revenue.

Increases in pension costs will mean cuts elsewhere, warned John Mahoney, executive director of the Ohio Municipal League, which represents cities.

“I can’t pay that and still employ 1,700 police officers,” he said. “I can’t do it. The money’s just not there.”

Historic shift

For decades, nearly all government workers have been in traditional pension plans that pay fixed amounts at retirement — usually calculated as a percentage of their highest annual salaries multiplied by years of service.

At the same time, private employers have moved dramatically away from such defined-benefit plans.

In 1974, 71 percent of private retirement-plan assets were in defined-benefit plans. By 2008, that number had decreased to 24 percent, according to the nonpartisan Employee Benefit Research Institute.

Despite that historic shift in the private sector, many government leaders say the public pensions are all but untouchable.

“The goal should be to continue the defined-benefit plan,” said state Rep. Todd Book, a Portsmouth Democrat who is chairman of the Ohio Retirement Study Council. “It’s good for the employees of the state. It’s also good for the economy of the state. You have retirees pouring billions of dollars into the economy.”

But with pension-plan investments faltering in a rough economy and costs increasing because Ohio’s pension funds also pay for retirees’ health care — a benefit not mandated by state law — taxpayers may have to pour millions more into the retirement systems just to keep them afloat.

The State Teachers Retirement System and the Ohio Police & Fire Pension Fund are currently in violation of state law requiring them to have enough money to cover their pension obligations for 30 years.

Thus they are asking school districts, cities, counties and other local units of government to contribute more toward employee retirements.

Under the proposed changes, a full 29 percent of teacher salaries — 16.5 percent from school districts and 12.5 percent from teachers themselves — would go toward pensions. And 37 percent of police and fire employee salaries — 25 percent from municipalities and 12 percent from employees — would be earmarked for retirement income.

The increase doesn’t sit well with some private-sector retirees, who have watched their own plans all but vanish.

“I think it’s ridiculous,” said Larry Rausch, 71, of Lancaster, who retired from a sales job at Sears in 1998, before the owner of Kmart purchased the retailer and slashed retirement benefits.

“I don’t know how they can expect guys like me to pay their retirement.”

Status quo a no-go

The requests for more money from local governments by the State Teachers Retirement System and the Ohio Police & Fire Pension Fund are expected to go before state lawmakers early this year. But there’s already resistance to sacrificing textbooks, police cars and staffing levels today for the long-term security of retirees tomorrow.

For some, it’s politically unpalatable to benefit government pensions by heaping additional taxes onto people who have seen their own private-sector retirement plans slashed.

“Does the public-sector pension plan meet the expectations of the taxpayers who pay the bills?” asked Sen. Keith Faber, R-Celina, also a member of the Ohio Retirement Study Council. “I think it’s very difficult to ask the taxpayers to pay more money to support the systems.”

Rep. Lynn Wachtmann, a Napoleon Republican who also sits on the panel, dismissed as outdated the argument that government employees deserve better retirement packages than their private-sector peers because they earn less pay.

“The taxpayers of Ohio who are footing the bill for all of this in the end need to realize how generous the public-pension systems — all of them — are compared to private-sector retirement plans,” Wachtmann said. “Most of our private-sector employers would go bankrupt if they had to pay the kind of money into employee retirements that our public-sector employers do.”

Wachtmann is one of nine voting members of the retirement council, which is comprised of three state senators, three representatives and three appointees of the governor. It considers changes to the state’s five public pension systems and makes recommendations to the Legislature.

So far, the panel is not discussing the idea of following the private sector into 401(k)-type plans. But Tom Ash, lobbyist for the Buckeye Association of School Administrators, said the idea is being floated informally in some circles.

“Our goal is going to be to preserve the defined-benefit plan because, as a matter of public policy, we think it makes sense,” Ash said. “How do we do that is the question.”

The Municipal League’s Mahoney said his group will fight any proposed increases in pension costs.

“They want to take both police and fire up to 25 percent of payroll,” he said. “In these times, well, good luck with that. There will be a prolonged and interesting discussion … about all the changes everyone is talking about.”

Powerful influences

Indeed, politically powerful labor unions representing government workers figure to be influential players in the debate. They reject the idea of a fundamental crisis in the pension funds, saying the funding shortfalls can be remedied with a few tweaks — raising retirement ages here, boosting contributions from employers and employees there — and by counting on investment markets to rebound.

Ohio pension systems are relying on year-over-year investment growth of 7.5 percent to 8.5 percent.

“All classes of investors suffered during the market decline of 2008 — the largest downturn in 70 years,” five unions representing the majority of government workers in Ohio said in a joint statement. “The long-term strategy and design of our retirement systems smooths gains and losses over a longer period of time, so [defined-benefit] plans are better able to reduce volatility. The same cannot be said of [defined-contribution] plans.”

AFSCME Ohio Council 8, OCSEA AFSCME Local 11, the Ohio Education Association, the Ohio Federation of Teachers and Service Employees International Union District 1199 say it would be folly for government employers to follow the lead of private companies into less-secure 401(k)-type retirement plans.

The unions cited statistics from the National Institute on Retirement Security that 357,234 retired government workers in Ohio received a total of $8.41 billion in pension benefits from state and local pension plans in 2006, with most of that sum going back into the state’s economy via purchases of medications, cars and other products and services.

“These dollars are vital to fuel Ohio’s economic engine,” the unions said.

Private vs. public

That argument is less persuasive among private employers, however.

In 1996, investments in 401(k)-type defined-contribution plans overtook traditional pensions, and the trend has accelerated since then, according to the Employee Benefit Research Institute.

The consulting firm Watson Wyatt reported in October that the value of retirement benefits as a proportion of income had declined from 7.8 percent in 2002 to 6.9 percent in 2008 among the 183 corporations it surveyed. Much of that decline was attributed to companies switching from guaranteed pensions to defined-contribution plans.

In contrast, retirement benefits account for at least 14 percent of payroll for all of Ohio’s locally funded public pensions — topping out at 24 percent for firefighters in the Ohio Police & Fire Pension Fund.

Book and other defenders of public pensions say that government employees trade lower wages for more generous retirement plans.

But that’s not necessarily the case. According to U.S. Department of Labor statistics, there is virtually no difference between private-sector and public-sector pay in Ohio.

But there is a difference in the willingness of private employers to take on the risk of having to bail out pension plans if investments go sour or costs increase sharply, said Alan Glickstein, a senior retirement consultant for Watson Wyatt.

Still, traditional pension plans actually generate more bang per investment buck because of the economies of scale of handling billions of dollars in retirement assets for tens of thousands of retirees, Glickstein said.

Traditional pensions can offer the same level of benefits at 30 percent less cost than 401(k)-type plans, he said.

Maintaining benefits

Leaders of all five state pension systems say they’re committed to maintaining retiree health care and full pension benefits over the long haul, even if some of the terms become less generous.

Michael Nehf, head of the State Teachers Retirement System, said keeping pensions for teachers is “extremely important.” The alternative is welfare for some of his retirees.

The other major school pension system is taking a different approach. The School Employees Retirement System, which represents nonteaching employees such as bus drivers and cooks, is not asking school districts to contribute more toward its employees’ retirements, which average $879 a month — far lower than their counterparts in the other state pension systems and below the federal poverty level. Some of the nonteaching employees are part-time.

Forcing school districts to boost their contributions would invariably mean cutbacks elsewhere, such as eliminating busing, said James Winfree, executive director of the School Employees Retirement System.

“We understand the financial stress that school districts are under,” he added.

XCONTRIBUTORS: Dispatch reporter Doug Caruso, (Cleveland) Plain Dealer reporter Patrick O’Donnell, and others contributed to this story. Dispatch Public Affairs Editor Darrel Rowland performed the data analysis.


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