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Posted December 13, 2007 The full Governing Management Letter | Subscribe to The Governing Management Letter Bonus columns: GIRARD MILLER’S BENEFITS BEAT Public vs. Private Pension Plans Why the big differences between public and private sector benefits? Questions, success stories or anecdotes about benefit issues in government? There is a new player in the state and local pension and benefits space — the Center for State and Local Excellence. Headed by former International City/County Management Association executive Beth Keller and funded by ICMA's defined-contribution affiliate, ICMA-RC, the new center will likely become a valued source of information. Its first report. by Boston College researchers Alicia H. Munnell and Mauricio Soto, should be required reading for those entering the fields of public finance, public administration and benefits administration. 
The report details the many ways in which retirement benefit plans of state and local governments are different from the private sector. Unlike the private sector, which is now dominated by defined-contribution 401(k) plans, the vast majority of public sector employees are covered by defined-benefit plans. In the private sector, most pension plans are non-contributory, whereas public employees pay an average of 5 percent of their salaries into the pension fund. Public sector retirees enjoy much greater protection against inflation, with CPI indexing commonplace. Very few private companies provide inflation protection. Hopefully, future reports will get into why these differences are so pronounced and whether these differences make sense in a national labor market. Some of the why issues include the Employee Retirement Income Security Act. State and local governments are exempt from this federal law which establishes myriad fiduciary requirements that corporate defined-benefit plans must meet. Many companies have decided it's too much hassle dealing with the requirements ERISA lays on a defined-benefit plan when the paperwork and liabilities under a 401(k) plan are far less challenging. Companies that maintain pension plans also must contribute to the Pension Benefits Guarantee Corporation, in which weaker systems are subsidized by stronger systems. There tends to be a race to the bottom in that insurance scheme that strong companies can just skip past.
Further, the Financial Accounting Standards Board requires financial reporting of pension gains and losses, and those can mess up an earnings reports. On the other hand, the Governmental Accounting Standards Board allows for special governmental accounting rules that don't hit the state and municipal operating statements with that kind of expense volatility. So much for the legal and structural reasons why governments have not been nudged into defined-contribution plans the way corporations have. And yet, defined-contribution plans don't come back and bite you if investment income falls short or benefits are later increased retroactively. And as the new center report shows, employers' defined-contribution costs nationwide are far lower. So one must ask why public finance officers don't push harder for DC plans. The final, compelling reasons are simple: unions and tax authority. State and local governments are increasingly represented by labor organizations that strongly favor pension benefits over defined-contribution plans, and as long as the taxpayers are willing to pay for the defined-benefits structure, there is no cut-off valve in government finance. Are these differences legitimate, justified and appropriate? The center's report hints at one possible explanation in noting that the authors do not address whether public employees are paid less in cash compensation for their services, which would perhaps justify a more generous and secure retirement benefit structure. This is one of the traditional justifications for generosity in public sector retirement benefits, and it would be worthwhile to discuss. A teachers' union report recently attempted to make this case, but the scope of the study was quite limited, and it smacked of special interest. In this context, what about retiree medical benefits differentials, the "other post-employment benefits" (OPEB) that are stirring up so much interest and controversy? Anecdotal evidence is that governments provide much more generous retiree medical benefits than private companies do. A new research report by the Pew Center on the States will be forthcoming that will address at least one side of this issue, but we need more research in this area. Let's welcome Beth Keller and her research associates to the community of the public pension and benefits wizards who hang around in these enchanted corners of cyberspace. Their work will be closely followed — and appreciated. Last month: 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. © 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. |
