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Good as Gold



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

By JAMES NASH

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.

jnash@dispatch.com


Comments

1apollo(1227 comments)posted 4 years, 11 months ago

Yes, the public sector has effectively bankrupted every government entity. Federal, state, and local entities are on an unsustainable path to fiscal failure.

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2northsideperson(365 comments)posted 4 years, 11 months ago

No, the recession did it, and bargaining unit and pension plans have not been adjusted to correspond - and probably won't be in any timely fashion.

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3apollo(1227 comments)posted 4 years, 11 months ago

When the public sector can give 80% of the last 3 years salary and allow the person to retire in their early 50's, is there any surprise that the pension funds are under funded? It's time the public sector face the same thing the private sector faced years ago, the end of pensions and replaced with 401K's.

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4300(562 comments)posted 4 years, 11 months ago

I was in London on business about a year or so ago, and on the flight back I was reading an interesting article in the Financial Times about pension funds. What struck me was that a good 40% of the article was about Ohio's public workers funds and teacher's one (or maybe these are both part of the same larger fund).

Anyway, the gist of the article was about how well Ohio's funds were structured. It said that they had over 13B in assets at the time, and this was during the current recession. The reason they were so healthy, it seemed to me since I had 6 hours to think about it, was because the teacher's pension fund excludes many of the problematic people that suck SS dry; namely, the uneducated and lazy, both of which are disproportionately labeled as disabled and pay little into the system to begin with. The teachers had this right, exclude the others and manage their own pensions that cover like-minded individuals.

It seems to me that the reason that they're even talking about it is to ensure that these funds stay as strong as they've been for the next life-cycle.

Teaching never appealed to me, but I think they deserve whatever they've made for themselves. Not to mention that while salaries might not be that much less in the public sector as compared to the private, we shouldn't neglect the educational discrepancies. Nearly everyone in the public pensions have at least a BA, while in the general population of our area, only 12-15% do; when post-graduate degrees are brought into play, the differences only increase.

Remember, if you're so jealous of high-school teachers, go to college and become one as their pensions aren't going anywhere with the amount of assets they've already got.

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5300(562 comments)posted 4 years, 11 months ago

I forgot to add, that the 13B didn't include the current amounts that are paid in by teachers and employers, it was purely investment drawing interest/dividends. I'd guess that there are maybe 10,000 retirees receiving payments, and if we divide that up, it's well over one million per pensioner that acts as an investment and doesn't include whatever it is that gets paid into the fund monthly.

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6CompMan(125 comments)posted 4 years, 11 months ago

Defined Pension plans in the public sector need to be replaced (systematically to not jeapardized the last 5 -10 years of highest earning calculations of those presently covered and all new hirees on a DC plan) to Defined Contribution plans. There are 2 main problems: 1) Only 8% of private workers are unionized while the the public (service) 40% belong to unions. There is no motive for leaders in goverment or educational institutions at local, state or federal levels to make changes considering the same group of leaders are dependant on union support. 2) These same unionized public workers will attempt to claim they gave up wages for pension / health benefits and are entiltled. This is flawed thinking as a total compensation package (read affordability) is based upon total earned wages and benefits. There needs to be a rebalancing. Here is the pie: How do you wish it to be delivered understanding there is no more available from the taxpayers.

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7apollo(1227 comments)posted 4 years, 11 months ago

Benefits in the form of better pensions was a good idea back when public sector work paid 50% of what private sector work paid. Now, however, public sector work pays on average $38/hour (wages and benefits) compared to less than $30 for private sector work. That must end. Taxpayers simply are not going to provide Cadillac wages and benefits for the public workers with their Yugo jobs. The coming tsunami is beginning. Either face layoffs public workers or take concessions. The taxpayers are tapped out.

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8candystriper(575 comments)posted 4 years, 11 months ago

bond market will likely blow up in 2011 and take out state pensions ... Congress will establish the GRA and move what is left of the funds to a new retirement system that will be fair...

JMHO

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9apollo(1227 comments)posted 4 years, 11 months ago

The next bubble to burst is public sector wages and benefits.

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10300(562 comments)posted 4 years, 11 months ago

If you've got a "yugo" job, then it's because of one of 3 reasons: you're not intelligent enough, you're too lazy, or you acted irresponsibly in your youth and never thought about the future.

I've been reading the vindy's pages for a while, though this is my first day posting. Apollo, I've read your past posts, and for a so-called republican you seem to have a lot of resentment towards other's successes.

I've got no sympathies for elected officials, but teachers/cops/firefighters DO what they do for a career, and if they've stuck together and used their power to enhance their status, then so be it.

The Republican idea is that those who work, and more importantly work smartly, deserve their success. What you're calling for is just as much wealth redistribution as what the Democrats try to do with entitlement programs.

It's not teachers/cops/firefighters' fault that you and many others in this area never put in the hard work necessary to have a comfortable retirement. I wish that more teachers voted Republican, but I'm not about to change my views simply because a group of people with whom I don't usually agree have made good decisions about their futures.

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11xytown(63 comments)posted 4 years, 11 months ago

300:

You are right on the mark! NUFF SAID!

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12apollo(1227 comments)posted 4 years, 11 months ago

300, a so called Republican? I'm hardly a Republican. I have no resentment for others success. As long as that success is real and not simply sucked from the public trough by the uneducated which is by far what most public employees are. I'm also highly successful. But, I'm tired of paying around 50% of my and my wife's incomes so that the public troughers who had connections and a high school education can make more than most of us in the private sector. Public service was never meant to make more than the private sector. That bubble is about to burst. Taxpayers aren't going to fund outrageous wages and benefits for trough feeders who are neither intelligent or hard workers. In fact, most of them would have a hard time in the private sector.

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13Millie(192 comments)posted 4 years, 11 months ago

A recent Forbes article spells it out:

"In public-sector America things just get better and better. The common presumption is that public servants forgo high wages in exchange for safe jobs and benefits. The reality is they get all three. State and local government workers get paid an average of $25.30 an hour, which is 33% higher than the private sector's $19, according to Bureau of Labor Statistics data. Throw in pensions and other benefits and the gap widens to 42%."

Link to the article - http://www.forbes.com/forbes/2009/021...

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14Tigerlily(500 comments)posted 4 years, 11 months ago

Right, we should just do away with our public positions and take care of our own firefighting, policing, and education of our individual children.

I'm putting up an electric fence, hiring a laid off teacher for my kids, security guard for the perimeter of my house, and going halfers with the neighbor for a shared firetruck. Screw the public sector!

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15candystriper(575 comments)posted 4 years, 11 months ago

watch California fold and the municipal bond market with it....this week the New York Governor even admits California can not pay the debts they owe...

California has more homes scheduled for foreclosure than listed for sale in the MLS.

Shelby County (Memphis) leaders have filed a lawsuit against Wells Fargo for fraud....selling homes to people who could not afford them leaving the city with tons of foreclosures.

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16CompMan(125 comments)posted 4 years, 11 months ago

Millie, your comments are appreciated and support my previous post. My data also came from Forbes - Jan 18th edition.

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