Tell us how cities can reduce worker retirement costs
So you’ve read Bridge’s fairly terrifying report about how Michigan cities and towns have failed to fund employees’ pension and health-care plans, sometimes ignoring the problem for decades.
The result: billions of dollars in unfunded retirement obligations across the state. Add to that crumbling infrastructure, dwindling property tax revenue, and less money coming from the state, and it’s easy to see why cities are caught between raising taxes and cutting back basic services.
Retired city workers are worried their promised benefits will be taken away. Residents are furious about paying higher taxes. And with much of the budget going to pay for these “legacy” costs, cities are laying off police and closing parks and community centers.
What’s a mayor to do? Seriously, what would you do?
Bridge has listed some ideas, below, mentioned as ways that cities can reduce retirement costs while trying to do right by their workers (We designate below where Bridge readers have also weighed in).
But we’d like to hear your thoughts, too. Well, Mayor McGenius, what’s your plan?
Goodbye pension, hello 401(k) – A popular choice, first adopted by the private sector and now widely copied by government employers. The traditional pension, known as a defined benefit plan, is a good deal for workers because the employer pays a set monthly retirement amount, usually based on a worker’s salary and years of service. Today, more employers are using a defined contribution plan, where much or all of workers’ retirement funds come from workers’ own paycheck. The money is typically diverted to a 401(k) or 403(b) account while the worker is still active and it’s up to the employee to properly invest that money for retirement.
Reduce health care – You’d be hard-pressed to find a private company that doesn’t require its workers to contribute something to their health insurance premiums and/or co-pays. Government employers are increasingly asking their workers to contribute, too. Reader Brad adds: “Governor Snyder made a law last year requiring public employees to pay 20% of their health care premiums or a hard cap. Most contracts are set to expire next year and this will go into effect.”
Reduce health care (Part II) – Instead of covering health insurance when workers retire, more cities are offering health savings accounts, which allow active workers to set aside money tax free to pay for medical expenses. Unlike a flexible spending account, money in a health savings account can be rolled over if not used during the year it is set aside.
Rethinking early retirement – Reader City Commissioner writes: “The other side of legacy costs is permitting government employees to retire in their late 40′s or early 50′s. The legacy costs for some school districts is now approaching the amount paid out for current teaching staff. This is one of the primary drivers for single payer healthcare…moving that liability off the balance sheets of local and state governments.”
Limited pension “extras” – Reader Rich notes approvingly that his private-sector pension was less than 50 percent of his final pay when he retired, and did not kick in until he was 55 even though he worked at the company for 35 years. He said public pensions can save money by limiting other perks as well, such as: computing unused sick/vacation time into final pay, and annual cost-of-living increases.
Yet more pension limits – Reader W. Dave writes: “Anyone who gets over $50,000 pension gets benefit lowered to $50,000.”
A little of this, a little of that – Reader dlb writes: “In towns like Ann Arbor, the solution seems simple. A compromise. Increase the property tax the $40/month it would take to fix the city’s current legacy costs then tackle the issue going forward with taking a new look at pension and health care plans. However, how to tackle this issue in places like Saginaw and Flint where the legacy costs are crushing their budgets and where the citizens don’t have the income to pay the extra tax needed to dig themselves out, seems overwhelming.”
Boost revenue sharing – Reader Jon Blakey writes: “The loss of revenue sharing funds is a huge contributor to these problems. The politicians’ failure to maintain these payments in the name of lower taxes has put many places on a death spiral that that people who hate pensions and retiree healthcare programs, state can only be stopped by taking away earned benefits.”