The politics of pensions and paying staff

Cutting cost, cutting corners and saying we are finding efficiencies is like the Ritz Carlton pureeing stale French fries and calling it vichyssoise

STEVE REID
Editor & Publisher
sreid@lbknews.com

So the Longboat Key Fire Department and its pension board are undertaking a forensic investigation of their pension fund with an eye to determine why the unfunded liability has bloated beyond $10 million and what funding and management decisions led to where we are today. And there is something chilling about this request; the words forensic investigation have a grisly pall. One expects Horatio Cain from CSI Miami to emerge in the finance director’s office, crack open a few actuarial reports and say something like, “There is a lot more than money missing in these reports…”

But the reality will be meaningful in far subtler and far reaching ways, starting with contract negotiations. Currently, the town manager and the Fire Department are at an impasse in contract negotiations. Central to the impasse is whether the Fire Pension Plan will be treated as scripture to never be altered or a grazing ground where the commission can save a few sheckles to try and appear responsible in the short term to taxpayers.

The arguments in favor of keeping the pension in place are numerous. Ultimately, it comes down to the role of a public servant and what is reasonable, fair and realistic in pay, incentives and expectations. Many like to say defined benefit plans are like old steam engines that are no longer viable. They say the private sector abandoned them and that teachers and public servants are the last bastions enjoying what the rest of society must live without.

On its face those arguments make sense—but only superficially. After all, the motivations of a public servant are usually different than the private sector. If you are chasing money, looking for rapid advancement, looking to be rewarded financially for excellent service with a bonus, the public sector is not for you. In fact, if any of Longboat Key’s employees go above and beyond, they will likely receive an e-mail of appreciation, perhaps some hokey recognition at a meeting and absolutely no special envelope that the boss hands them on their way out the door. Also, no product or service can be created and sold and turned into a moneymaker. In other words, there are no such incentives—in a sense, government is a small island of socialist principles surrounded by a Sargasso Sea of capitalism.

Once the town attracts employees who must be trained in all the vicissitudes of their jobs, it is smart to retain such employees. Well-defined benefit plans discourage portability and demand commitment and investment. In the private sector a top employee must be paid more and more to be retained. In the public sector, the employee is invested in the town and the town invested in the employee; it ideally benefits and works both ways.

That is why in the current contract negotiations, it is a mistake to try and leverage the pensions as a method to erode pay and other benefits. It has become a chit: if you agree to no cost of living allowances and no step increases or pay raises, we agree to not touch the pensions. Then the fire department says “no.” If the town comes back and says, “We will give you raises and steps but the pension needs to be addressed,” then the employee’s entire retirement plan, the reason that person came to work for the town in the first place, and the employee’s own economic plan take a fateful turn. It would be hard to start a career at a department that is hiring you under one set of retirement promises and obligations and is holding the specter of gutting the pension plans in the near future.

And why are the pension plans such an issue?

They are quickly turning political on our island. If the forensic investigation shows that the plans function fine but mismanagement and chronic underfunding coupled with the unrealistic ongoing assumption of 8 percent investment returns has made the plans the scapegoat, than the Fire Department can say, “You mismanaged and underfunded our pensions and as a reward now you are going to reduce our benefits or talk defined contributions.”

For the town and its manager, the attitude is likely: “The town does not control the pension, it is the pension boards and firefighters, including Keith Tanner, who voted in all the changes and assumptions, and it is disingenuous to now point the finger at the costly problem and cry foul.”

To be fair, while the pension boards did approve the changes in how unfunded liability is repaid, it was our own town staff and Finance Department that always defaults to this line, “It does not matter how long it takes to pay back—in the end the town will pay, so you might as well go along.”

It is that sentiment that is the town’s method of trumping discussions of paying down the unfunded liability. Another dilemma is the ongoing acceptance of the assumption that the pension plan investments will return 8 percent each year. When we speak of a $10 million unfunded liability in the Fire Pension or $25 million between the town’s three plans, it is again based on an 8 percent assumption. The only entity other than the town forecasting year after year 8 percent returns is the Bank of Antigua. It sure makes budgeting and the bottom line far more palatable when you predicate everything on the improbable.

And the attitude of deferring cost has become endemic to how Longboat Key operates. We were a pay-as-you go community. Now we have employed actuaries and issued bonds in other departments to pay tomorrow what we commit to today.

So what to do? Can a bow be placed on this pension/firefighter’s mess and a rosy solution reached?

Let’s first deal with the philosophical. The town employees and public servants are best approached as individuals who dedicate their lives to our community. That said, a competitive, but generous and stable, employment package must be offered. These employees must be able to forecast their employment and retirement lives with some certainty. Otherwise we might as well hire job drifters who will always gravitate toward the private sector where the rewards are greater. In other words, we are not Detroit where we have to absolve all benefits from employees to make an industry viable. We are competing for highly trained service-minded individuals who should be focused on our community and saving lives. Let’s make sure we do not diminish the quality of service or the wonderful attitude we expect from our employees.

At the end of the day, the end of the forensic investigation will show a town manager and commission in 2004 changing the repayment methodology of unfunded liability. You will see over assumptions on rate of returns. You will see large benefit increases that were the outcome of former Town Clerk Jane O’Connor’s Fire Department salary comparison study. It was her study that initiated the push to dramatically increase benefits.

And the fingers will point to blame depending on which side you sit. But in the end, and for the vast majority of residents, this is insider baseball. Don’t we all want the same thing? Don’t we want motivated firefighters who get the benefits they were told they would when they were hired? Do we really want to be a town that changes pension benefits as often as we change commissions? Do we really want to ever go back to insufficient police coverage just to make arbitrary budget goals? Do we really want the general employees and police to see how hard it is to negotiate with the town and reach an amicable solution?

It really comes down to, do we return to classical Longboat principles? Do we want to hire and retain the best and insist on the greatest level of service? Cutting cost, cutting corners and saying we are finding efficiencies is like the Ritz Carlton pureeing stale French fries and calling it vichyssoise. That’s not the Ritz Carlton, and let’s hope it will not become Longboat Key. Our public servants deserve a defined benefit plan—we just have to start paying the actual cost of that plan, not the manipulated actuarial cost.

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