Why Pension Reform Takes Years

By Center President & CEO Elizabeth K. Kellar

Decisions made by state governments on retirement age, benefit levels, and how pensions are calculated can be difficult to change, even when a local government has an independent pension plan.

Three speakers at the ICMA (International City/County Management Association) Annual Conference last month described a decade of challenges in California, Florida, and Michigan, and how local governments are coping.

“Waking up is hard to do,” said Palo Alto, CA, City Manager James Keene, describing the perfect storm of shrinking revenues, growing service costs, and rising pension and health care costs.

Beginning in 2008, Palo Alto created a new tier of benefits, increasing the retirement age and reducing benefit levels for all employee groups.

Such changes create generational equity issues, Keene said, and with fewer active workers than retirees, the future consequences are significant.

Port Orange, FL, City Manager Kenneth Parker noted that elected officials are facing increased pressure to move from defined benefit to defined contribution plans in order to control employer costs.  He said that some local governments are freezing benefits for current employees with no more accruals and providing different benefits to new employees.  He added that share plans, offering a defined benefit plan with a defined contribution component, are another alternative.

Parker offered recommendations for local governments:

  • Use long-term financial modeling to analyze pension benefits.
  • Inform elected officials on the impact of pensions on the budget.
  • Hire an independent actuary and pension attorney to advise them.
  • Require actuaries and plan administrators to report directly to the city council annually and to provide information on past performance since inception.
  • Provide training opportunities for board members and elected officials.
  • Recognize that pension boards can be reluctant to recommend changes.
  • Keep the public informed and provide actuarial reports and statements online.

He also noted that plan sponsors should question assumptions, rather than relying on the plan actuary and plan investment advisors.

Michigan Municipal League Policy Development Director Colleen Layton said that Michigan is one of nine states that has a constitutional guarantee that a pension benefit that has been promised and accrued cannot be eliminated or diminished.  The state has 138 state and local government pension systems; 15 percent of Michigan workers are public sector (federal, state, or local government) and 84 percent of state and local workers have defined benefit pension plans.

Layton said that the state government has tied its economic vitality incentive program to caps on employer contribution to retirement plans for new hires.  That cap is 10 percent of base salary if the employee is eligible for Social Security.

She noted that Michigan political leaders have shown a growing interest in switching government employees from defined benefit to defined contribution plans.  At the same time, Layton observed that leaders often recognize that one solution will not work for all.  Successful labor relations take years to build trust and good public communication is essential whenever pension reforms are undertaken.