January 2015

Fact Check: SEIU Responds to Pew Presentation on Pension & Retiree Medical Benefits

David Draine presents Pews findings to the Study & Formulating Committee in Nashville.

David Draine presents Pew’s findings to the Study & Formulating Committee in Nashville.

On a Friday afternoon, while city employees were still at work and unable to attend, the Study & Formulating Committee met to hear a presentation from Pew Charitable Trusts about the pension and health benefits of Metro employees. And as usual, the committee chair carefully chose questions that fits with the adminstration’s narrative which wrongfully suggests that there is some kind of funding or solvency crisis because of employee benefits that requires “reform”.

Tennessean columnist Frank Daniels, a Dean booster who fretted back in November that the committee might not get to finish its work (even though their work was technically completed back in late summer when they delivered their recommendations on a domestic partner benefit), was contacted by SEIU after the committee met with information that was not brought up or was misrepresented by administration and Pew officials. Here is the statement that SEIU’s Mark Naccarato sent to The Tennessean’s Frank Daniels, which as you can tell by the column Daniels wrote, was largely ignored:

With respect to the $2.4B unfunded liability from medical costs that Pew talked about and which The Tennessean reported on in September, here is some important context missing yesterday:

  • Virtually all cities and states have unfunded liabilities for retiree health care benefits. Unfunded liabilities of this type do not affect a municipality’s credit rating since they ordinarily operate on a “pay as you go” basis. By failing to place these liabilities in context, the committee and Pew are creating  a manufactured crisis over “the Big Scary Number” of unfunded medical liability costs (in this case, it’s $2.4 billion). The truth is that worrying over an unfunded liability for medical costs is no different than panicking because you have a mortgage on your house. If you pay your mortgage every month as you go and don’t miss payments, you are fine. You would only be in a financial crisis if suddenly the bank asked you to pay the entire balance of your mortgage at once with cash. That’s the same thing with unfunded medical liability costs – they are only a concern if for some reason, the entire city workforce retired or got a serious illness at the same time. This is a statistical impossibility, so again, the Big Scary Number is in fact, not so scary.
  • Mr. Riebeling did not address the fact that, in the last two years, Metro employee health insurance premiums have not gone up. This is due to several factors, including the Affordable Care Act, but it is worth asking Mr. Riebeling and Mr. Shmerling: If health care costs are so explosive and are such a large concern, then why have employee premiums decreased over the last two years? The fact that this important positive trend was ignored yesterday reinforces our belief that there is a political agenda, not a policy agenda, at work. Also indicative of a political agenda: this is the third “study” of employee benefits in five years, all during the Dean Administration.
  • It is also worth noting that retiree health care benefits don’t enjoy the same legal protections that say, pension benefits do, so future governments do have the ability to adjust them than they do accrued pension benefits. Having said that, we have to come back to the notion that the Big Scary Number – unfunded medical liability – is not expected to affect the long-term fiscal health or credit rating of the city in and of itself.

With regards to the pension, it seems that there is a concerted effort to try to persuade the public and legislators that any changes to the current Defined Benefit (“DB”) pension plan would only affect new employees. This is not the case and when Mr. Draine from Pew was asked about this yesterday, he dodged the question. If the city creates a separate system and puts its new employees into a Defined Contribution (“DC”) plan or a hybrid plan (similar to the State of Tennessee’s), several things will happen:

  • Paying benefits of current employees in the DB pension plan will become more expensive as a result of what pension actuaries call “transition costs.” Without new young members (and their contributions) coming into the existing pension fund, the pension plan would have only older and retired workers in it. Over time, the investment horizon of the plan managers would shrink and more assets would have to be in liquid form, ready to convert into pension checks. These shifts would lower investment returns and require more taxpayer contributions to meet pension obligations. This raises a serious concern in the future that employees who have retired or close to retirement would have their pension checks cut.
  • The switch to a DC plan would mean higher fees (charged by investment firms who manage DC savings plan options) than with a DB pension pool and lower investment returns. There is a large research literature (e.g., by Towers Watson) on the great cost effectiveness of DB plans. The National Institute on Retirement Security estimated in a  2014 study that DC plans cost nearly twice in contributions to achieve the same retirement benefit.
  • The city is about halfway through a comprehensive pay study and what they already know is that retirement and health benefits – especially the DB pension plan – are the primary attractor for (and retainer of) talent in Metro. If Metro stops offering a DB plan, what is it going to do to keep attracting talent? Especially now that the economy is improving and workers have more job options? Will the city have to increase pay to offset its cut to benefits? How do you explain to someone who’s been working for Metro for 30 years that the new employee who just got hired is making more money than they are? Despite the politically expedient comments offered up yesterday, cutting the DB plan or changing to a hybrid or a DC plan will absolutely affect recruiting and employee morale in a negative way. This has already happened in cities and states where they have closed DB plans for new employees and it will happen here as well.

All of the topics I just mentioned above about the pension plan were discussed at the last meeting of the Study & Formulating Committee in September which you were not at. I can assure you that everyone in the room – including Pew and the city’s actuaries at BPSM – all agreed that putting new hires into a new plan gives the city the same or increased costs and less security. At the last meeting, the tone of the committee and everyone else involved was basically that changing the DB plan (even for future employees) was a non-starter. Which is why all of us were shocked yesterday when Mr. Shmerling brought this up again and seemed to act as if all of that discussion never happened.

I’m not sure if Mr. Riebeling or Mr. Shmerling have made you aware of this, but Nashville’s pension fund is well-funded and in 2013 it had nearly 19% ROI which puts it in the top five pension plans in the U.S. of all cities and states. Some of that has to do with getting out from under the losses that everyone took during the Great Recession, some of it has to do with savvy investment decisions by Metro, and some of it has to do with the minor changes that the unions agreed to that were proposed by the last Study & Formulating Committee. The point is… why would you want to fix something that isn’t broken? Even Mr. Draine agreed (both yesterday and at the last committee meeting in September) that the city’s pension plan was not a major cause for concern from a cost or sustainability perspective. His charts and graphs showed as much yesterday. Again, we see a political motive here, not a case that can be justified from a financial or policy standpoint.

We are very concerned that the state of the city’s benefit system is being portrayed as being in some of kind of crisis situation when it is anything but. There are ideologues – including John Arnold, who is funding Pew’s work – who have an interest in seeing public employee benefits weakened. There are several motives for this, one of which is that it is in the interests of private employers to see benefits diluted so that businesses are not forced to keep up to attract talent. Metro is the county’s second largest employer and if their benefit package is less enticing, then there is no reason for say, HCA or Vanderbilt to keep theirs as competitive – that’s money in the bank for them.  And I think you know by now since SEIU has already talked to Tennessean reporters about this that this “review” by Pew isn’t specific to Nashville. Thanks to funding by Mr. Arnold, Pew has a whole division that is barnstorming the country giving reports to cities and states just like what we heard yesterday.

We believe that this is a campaign to scare taxpayers into thinking that public employee benefits are unsustainable and that there has to be a change. In Nashville, we see little to no justification for “fixing” employee benefits, though we do see a financial motive (access to new capital for risk-prone investors) a business motive (diluting the benefits of a large city workforce benefits private companies’ bottom line), and a political motive (weakening benefits weakens the bargaining position of the labor unions and employee associations who represents the workers) to “reform” the benefit package. Simply put, there is no objective reason to accept these proposals from Pew. Now, there is a whole other discussion to be had about Nashville’s fiscal health over the coming decades as a result of the fiscal policies of the Dean Administration, but we strongly believe – and I think most people would if they had all the facts – that working families should not have to pay for irresponsible spending decisions made by politicians. Especially when those decisions have resulted in nearly $1 billion in tax breaks and subsidies being handed out to corporations that are already located in Nashville and who are making big profits.

Keep in mind too that most of the “reforms” that were suggested yesterday would only affect General Government employees, not public safety employees. You should know if you don’t already that General Government workers don’t make as much money overall as public safety employees and they are made up of more minority workers as well. What kind of message does it send to the community that the city is considering cuts (and yes, we are talking about cuts here – not improvements) to the benefits of a workforce which is lower-paid and has a higher percentage of minorities?

Mr. Daniels, when we read your column about this topic back in November, it seemed as if you were only getting one side of the story on this discussion. I know you are on deadline to try and write a column, but at some point, we really would like to have a conversation to go deeper on these issues as the stakes are high for thousands of hard-working city employees and their families, not to mention the citizens who expect high-quality services.

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