The full Governing Management Letter | Subscribe to The Governing Management Letter

Retirees and Realities

As states' employee liabilities countinue to outpace revenue growth, lawmakers find themselves wrestling with benefit issues.

As 2006 drew to a close, New Jersey's governor and legislature, hoping to pay for some property tax relief through pension plan reforms, failed to reach agreement — much to the relief of thousands of state workers who marched on Trenton to make known their concerns about benefit adjustments.

Despite the New Jersey stalemate, benefit issues will be front and center across the country, in both collective bargaining states and those without. With the labor market improving, lower unemployment, and renewed strength at the polls, unions are becoming more aggressive. At the same time, governments are even more aware of their cost problems. Although their revenues have grown with the economy expanding, their costs and liabilities continue to grow faster.

One of the issues that surfaced in New Jersey and will likely be an issue elsewhere is retirement age. The traditional retirement age is 65, and the Baby Boom generation is expected to outlive that age by 21 years. Many states and localities allow their employees to retire at 55 or even earlier, which means those governments face an extended actuarial payout period with too few years to sock away the funding it requires.

Clearly, we need to adjust the normal retirement age for increased life expectancy. Then public employees and employers will both have more years to contribute to their retirement plans, thus increasing the plans' assets and reducing their liabilities.

A second area of intense concern is retiree medical costs, especially in light of the Government Accounting Standards Board pronouncements that require disclosure of this runaway expense in the annual financial report. Public managers everywhere are now scrambling to find solutions to this growing liability estimated by some at $1.4 trillion.

How should public managers approach these beasts, given the high level of political heat they are likely to confront?

Here are some steps to get you started:

1. Start educating everybody immediately. Elected officials and employees by nature would rather ignore the problem. In the public sector especially, the path of least resistance is to procrastinate. Without becoming alarmists, public managers should explain that the most successful long-term solutions will include some combination of higher retirement ages, advance funding for some retiree medical benefits similar to a pension plan, employee cost-sharing, caps on benefits, reductions in the benefit formula, and in some cases, defined-contribution plans as an alternative. Public managers must explain the costs of waiting (i.e., the hole just gets deeper). Hint: Bring your actuary to share the heat.

2. Do your research and homework. Solutions to these problems may require new approaches, sometimes including share-cost or defined-contribution plan options for new employees, or hybrid plan designs. In addition to your actuary, consult with other retirement-plan experts with different approaches. Just remember that some well-intended experts have a bias in their approach (based on their business model) and be sure to obtain balanced information from various sources.

3. Establish an internal working group to identify specific solutions unique to your workforce. Besides the usual suspects like the HR director and the CFO, consider including well-selected labor representatives, elected officials and respected employees who might add credibility later. Test the political winds before deciding whether to make this group high-profile or low-key.

4. Work with professional and public-sector groups. In some states, legislative changes will be required to implement the needed reforms. Acting alone, public managers rarely achieve legislative change, so working with a statewide or national association is more likely to succeed. Networking will also lead you to different approaches to consider.

Index of recent columns

Girard Miller, an analyst of benefits and investments with 30 years of experience in the public, private and nonprofit sectors, can be reached at Girardinmalibu@charter.net.
More biographical information.

© 2007, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc.