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Posted November 9, 2007 The full Governing Management Letter | Subscribe to The Governing Management Letter Bonus columns: GIRARD MILLER’S BENEFITS BEAT Hybrid Vigor Pragmatic blends of DB and DC benefits Questions, success stories or anecdotes about benefit issues in government? The political and ideological skirmishes of the past 15 years have left the governmental pensions and benefits field looking like a medieval religious warfield with armed camps ready to strike back at any attack by adversaries. Those aligned with traditional defined-benefits (DB) pension systems have developed a siege-defensive mentality to ward off the missives of critics and cynics who propound alternative solutions at best and scorched earth at worst. The champions of defined-contribution (DC) plans typically represent an odd alliance of taxpayer advocates, libertarian politicos and financial firms looking for a new market. 
As I've written in my online columns on Governing.com, there are merits to both arguments. There is no question that abuses have occurred in many traditional defined-benefit pension plans, and reforms are needed. But many public employees made a choice to serve the public that included a trade-off between higher private-sector pay and less-risky, higher-benefits public employment. And many public pension plans have done a better job of investing than the employees have or ever will on their own. And there are exceptions to every claim by every side. So, we have a stalemate. In coming years, taxpayers will eventually lose patience with public officials who fail to adapt to the changing world around them. The recent UAW contracts with the auto companies, for example, have ushered in a new world of voluntary employee beneficiary associations (VEBAs) that will likely set the standard for both the public and private sectors to follow in providing for retiree medical benefits. In fact, Orange County, Calif., just settled a controversial labor dispute with deputies that included a similar compromise hybrid plan.
Change is in the air. It seems that both sides are beginning to listen to each other. On the pension side, several advocates of traditional DB plans have begun to discuss the need for reforms to prevent pension "spiking," in which employees collect lifelong pensions based on inflated final-pay arrangements such as accrued sick-leave payoffs. Likewise, many public pension officials are now leery of enhanced benefits based on illusory stock market gains. Notably, some companies in the governmental defined-contribution industry have abandoned their broadside attacks on DB plans and are focused instead on peripheral savings plans such as retirement savings plans, supplemental overtime and sick leave savings accounts, and other irregular benefits streams that are not well suited for defined-benefit systems in the first place. So there is reason to hope that practitioners can find middle ground with hybrid arrangements that resist name-calling and ideological wars. Existing retirees should be left in their current defined-benefit plans and left alone — with cost-of-living benefits offered if and when investment values exceed liabilities. New employees should be offered a choice of defined-contribution plans vs defined benefits, or perhaps a dual system such as the Washington State plan. New hires may face a "slimmer" pension benefit that compares more realistically with the benefits that taxpayers receive in the private sector. For retiree medical plans, new employees will likely appreciate a defined-contribution structure which offers portability. For incumbent employees, a phase-out of the legacy "blank check" retiree medical benefits promise seems inevitable — but earned past service credits should be left in the current system and properly funded with an OPEB trust fund that operates like a closed pension fund. Public managers must become much more adept at mixing-and-matching of DB and DC structures. It's time for the critics to begin offering concrete and practical solutions such as those above. Pension traditionalists should streamline their core benefit plans, eliminate opportunities for abuses like spiking, and recalibrate new employee benefits with private-market standards if their current formulas are now excessive in light of total career compensation. By burying the hatchet and crafting superior blends through hybrid systems, the genetic superiority of "hybrid vigor" is now within reach. 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. |
