|Guest Editorial from Richmond
Chamber of Commerce Newsletter
March 27, 2004
The following is from the Richmond Chamber
of Commerce March 2004 Newsletter, “Richmond Chamber News,” which can be
THE SILENT VICTIM
By Mark Howe, Chair, Richmond Chamber of Commerce
The headlines of this perfect storm are truly awesome: West Contra Costa Unified School District eliminates all high school athletic programs — the first district in the state to do so. In addition, it closes all school libraries and terminates 400 employees — 10% of its workforce.
Long awaited City of Richmond financial statements disclose a $35 M dollar deficit. Their workout team proposes a one-time series of accounting maneuvers to save $28 M. City claims that checks will start bouncing in August unless a $20 M annual structural deficit is closed soon. •
The accounting tricks are the easy part. After a series of “feel good” outreach meetings, the moment of truth came at the March 23 council meeting when they started to tackle the $20 million structural deficit – an apocalyptic task. Let’s put on our accounting detective hats and study the problem. The city’s unrestricted general fund revenue actually increased by $3 Million (3%) to $91 Million for the twelve months ending 6/30/03. Most companies would be very happy with this top line performance in light of the current slowdown many are facing. However, the city’s problem involves the expenditure side of the equation. During the same period that income went up by $3M, expenditures went up by $11.6M. And guess what, a loss of $7M was recorded for the twelve months ending 06/30/03.
So why did this happen and why is it going to get worse — a lot worse? The answer has much to do with the unaffordable retirement packages awarded to city employees, also known as: “3% at 50,” “3% at 55,” and “2.7 % at 55.” The pension plan is managed by PERS (Public Employee Retirement System). Based on the retirement benefit promised to the employee by the employer, the City in this case, the actuaries determine how much money needs to be put away today to meet the future anticipated retirement costs. A schedule of contribution amounts to the pension plan shown as a percentage of gross salary are: FY ’02 - 9%, FY ’03 - 22%, FY ’04 – 30%, FY ’05- 40%, FY ’06- 44%. Yes, in FY ’06 they are expecting a pension plan contribution of 44% of wages!
So we can conclude that the city awarded retirement benefits that they cannot afford and the recent poor stock market performance has led to low expected investment returns which drives pension contribution payments through the roof. To truly understand the problem you need to know that “defined benefit plans” are common in the public sector but are dinosaurs in the private sector. The private sector, to protect itself from the whims of the market returns and profitless years, adopted a type of pension plan called a “defined contribution plan” or “profit sharing plan.” This means simply that they will contribute some percentage of their earnings to the employee pension plan when and only when there are profits. Loss years require no contribution. This protects the company. 401K plans fall in this category and end up placing the risk of investment return on the employee, not the employer.
Naturally, this type of plan does not allow one to retire at 50 with full pay for life like 3% at 50 does, but it does provide a cushion that with Social Security provides an acceptable retirement package. Moreover we are particularly dismayed at how this city’s pension plan effects the young union worker. The City is being forced to lay off the young union employee so they can afford to pay the pension benefit of the older worker. This is of course just another straw in the intergenerational shift of wealth in this country from the young to old. The young pay social security for the old; the old have health insurance, the young have none; the young pay market rate property taxes, the old get to retain their prop 13 rates; the old own homes that are worth much more than the young can afford to pay; the old grew up in an era of one income earner families while the young family today needs two jobs, assuming they can find them.
I cannot tell you how many times union workers have come to my job trailer and told me about the 6-month waiting list at the union hall and that they are desperate for work. Is this the type of organization that helps all its members or just those with seniority? And labor wonders why their movement is in trouble. Labor needs to become more sophisticated. They need to address the needs of all their members including the young ones. Many have said that the incestuous relationship between public employee unions and our elected officials leads to bad public policy. Well I can’t think of a better example of this than 3% at 50.
Moving forward in this case, the unions need to find a way to save jobs. This means mitigating pension contribution costs by adopting cost sharing and rewriting 3% at 50. The public sector needs to emerge from the dark ages and move to make its pension plans consistent with the private sector even if it means declaring bankruptcy to do so.