Tuesday, January 30, 2007

Pension Pick-Ups

Anyone who's ever gotten a paycheck from a non-government company has become very familiar with Social Security and Medicare (also known as FICA) taxes. Until you make more than around $97,000, you'll have 6.2% of your earnings taken out and given to the federal government for your Social Security tax. For Medicare, there's no limit and you pay 1.45% of all your earnings. Your employer withholds these amounts and pays them - along with their matching amounts - to the government.

In public employment in Ohio, there is a similar system called PERS (Public Employees Retirement System). Personally, I think PERS is better in that the money is in your own personal account and has better earnings than SS does. But the contributions are done in a similar manner with the employer and employee making contributions. (See ORC Chapter 145 for more information)

Under PERS, the 2007 employer contribution for retirement will be 8.65% for local employers. Employers also pay into the Retiree Medical Acount and a Mitigation Factor bringing their total contribution to 13.85% (see this document for more details). Employees contribute 9.4% under this plan.

EXCEPT...unions have, for years, negotiated a 'PERS pickup' in lieu of wage increases - in addition to wage increases. Under this concept, the employer agrees to pay some of the employee's 9.4% in addition to the 8.65% employer portion that they're required to pay. In Toledo, the amount of the pickup ranges from a portion to all the 9.4%...and such pickups apply to non-bargaining units as well.

(Trying to collect the information about how much of the 9.4% employee contribution is picked up proved to be quite a task, but that's another post soon to come.)

This is a terrific deal for the employees...They're getting that money into their dedicated retirement accounts (pre-tax) but not having to pay it themselves. From an administration standpoint, it sometimes makes political sense to negotiate such a benefit. People often make an issue of the amount of pay increases or vacation amounts, but usually pay little attention to other such negotiated benefits like PERS or uniform allowances, etc.

In Toledo, this PERS pickup costs us significantly each year. An employee making $42,000 would normally pay $3948 into their PERS account. However, if you're in AFSCME Local 7, that $3948 is completely paid by the City of Toledo.

Police and Fire contribute to the Police and Firemen's Disability & Pension Fund instead of PERS. Beginning in 2008, the city will pick up all of their contributions. For 2007, they'll still pay 1.5% of their 9% contribution themselves. So if you're a patrolman with 10 years of seniority, you'll make $53,451.84 in 2007 and the city will pay $4008.89 of your pension contribution and you'll pay $801.78. In 2008, when your salary goes up to $55,055.52, the city will pick up all of your contribution - to the tune of $4955.

(For estimating purposes, I used an average amount of pickup of $4900 and multiplied that by 690, the approximate number of sworn officers, to get a rough cost of this benefit...$3,381,000 for one year just for the police department. When you start adding in all the other unions and employees, you can see the fiscal impact of this benefit.)

I realize that these pick-ups are fairly negotiated...but they're also subject to 'me-too' bargaining...and when one unit manages to get all their contributions "picked up," it's only a matter of time before the rest of the units want the same thing. And once you've said 'yes' to one union, it's really hard to say 'no' to the others.

Now, I know items which are given in negotiations are extremely difficult to recover. But considering the amount of the budget deficit that Toledo is facing, it may be time to re-think this negotiation strategy and begin a return to the mandated amounts. Afterall, the taxpayers who are footing the bill for these pickups rarely have such generous packages themselves..and before the City starts talking about tax hikes, it may be wise to remember this fact.


Unknown said...

Wow, I'm stunned. I had no idea that it could cost over 3 million dollars for this. I understand completely giving an additional payment in lieu of a raise but in addition to raises and with the whole amount picked up? I'm not sure that is something that the City can afford to keep doing let alone be placed in a situation where it is assumed other unions can receive.

Maggie said...

Lisa - I'm still working on gathering the numbers, but I think the totals that the city 'picks up' are higher than anyone realizes...

Rusty said...

Toledo started to die on July 1, 1979 when all of the unions went on strike simultaneously and the city was controlled for three days by criminals and arsonists.

I was doing some consulting work for the Board of Health that year, so I had an opportunity to read the old and parts of the new contracts. Good grief.

The unions bullied the city into a position from which the city will never recover, and the residents of Toledo speeded up the exodus to the 'burbs.

On a broader issue, I'm not certain we (Ohio and local units) can continue to provide 30-and-out to most public employees, especially given that private sector pensions plans are evaporating. Perhaps we can keep them for police and fire, but clerks?

Maggie said...

Rusty - the PERS system is pretty well managed (unlike Social Security) in that the funds are there, have good earnings and returns...

And like 401(k)s in private business, the employee owns the account - not the government.

I understand your point and concerns. There's a lot of validity to your position.

But I don't know if I'd go so far to say that employees are not deserving of a pension program because of the job - rather, I'd like to see it go back to equal contributions, instead of taxpayers paying all of it.

I'm a firm believer that you appreciate something you've paid for more than you do if someone else pays for it.

roman said...

I am at a loss of words right now. I just got done reading your post. I agree with you completely, if you don't contribute to the fund then you can not draw from it. I was talking to Lisa about this and I asked if it would be possible for the unions to corner us (the taxpayers) and threaten a strike if the contracts aren't amended. Unfortunately she answered - probably yes. If it came to a vote I would vote it down or if came to ay or nay I would definitely say NAY.

Maggie said...

Roman, fortunately, many of the city unions have mediation and binding arbitration instead of strikes (they must have learned their lesson in '79 per Rusty's post).

But that's a problem too. If you've already given such a benefit to others, arbitrators are likely to take that into consideration when making their decisions.

It's not a good position to be in...

Hammer said...

I'm always annoyed by how we're told by a members of a certain political party that a personal investment account for Social Security would be "risking the rent" but their public employee labor union supporters have exactly that.

If personal accounts are so "risky" why haven't the public employee unions asked to have their accounts dumped into the Social Security system?

Kurt Burglar said...

As someone who has extensively studied economics, I find your logic flawed. While this "me too" negotiation certainly exists in government and union contracts, the bottom line is that the unions make less as a result. They will take more benefits for less pay. To put a number on it, say over $3 million, is nothing more than political. When in fact the government will not be spending that $3 million on raises and other benefits. While you may be accurately accounting the monetary value of these benefits, you are inaccurately accounting the economic benefit. The fact is that many government workers take the pay cut for the long-term benefits, and this is evidence of that. Indeed, given the rate of inflation, the city is probably saving money by taking these actions. But that's why you studied communication and I studied economics. Spin spin spin.

Maggie said...

Hammer - I hadn't thought of making that comparison, but you're right...

Maggie said...

Kurt - I haven't spun anything. Perhaps in being so busy accusing me of "spin" you failed to notice that many employees are getting raises IN ADDITION to PERS pickups.

If you check the Toledo Municipal Code section 2129, you'll see that police officers are getting raises each year while also getting more of their pension picked up.

Even in my post example of an officer with 10 years of service...that wage goes from $53,451.84 in 2007 UP to $55,055.52 in 2008. Now, I don't have a degree in economics, but I'm pretty sure my mathematical calculations are correct that this is a 3% pay increase. At the same time, the pension payment the employee makes goes from 1.5% DOWN to 0.

It may cost a government less to do a 1.5% pickup instead of a 3% raise...but when you do both?

And I disagree that putting a number on it 'is nothing more than political.' I never thought there was a political component to estimating the cost of benefits provided and letting people know what they are.

As an aside: I'm glad you read and post comments on my blog, but please avoid the personal attacks (like belittling my degree and adopting such a condescending attitude). I'd like to have good conversations about such issues.

with that said....

Regardless of what was negotiated in the past - pension pick-ups, raises, allowances, etc. - there often comes a time when the city just can't afford to do its mandated functions AND pay for everything it's promised. That's when downsizing/cuts have to occur. We see entities downsizing all the time (businesses, organizations) but rarely see government doing it. When we're facing a $17 million deficit, I suggest that we re-consider the strategy of pension pick-ups which are extremely costly. What do you suggest we consider?

Do said...

This practice is insane. Pure and simple.

In a past life it went like this:

Opening salary for new officers = $11,387.00/yr
Pension = employee contribution up to 3%, matching up to 1.5% (this was an extraordinary benefit)
Health care = 50% employer paid, 50% employee
Uniforms and basic equipment supplied by the employer. (Weapons and 'personal' equipment were employee responsibility)

Now I realize that this was 30 years ago, but here is the interesting point - this was in a NON union state, with these benefits being negotiated by taxpayers and the Civil Service Commission.

The term 'legal extortion' comes to mind when reading about union negotiations. Perhaps this whole relationship should be reconsidered. Perhaps we, the taxpayers footing the bill, should make it clear that we understand the need for pension programs but that WE cannot afford to subsidize the entire thing. My gratitude (nor my paycheck) go that far.

The City of Toledo is in financial trouble. No doubt. In the private sector, when someone is in this position they are urged to consult a credit counselor/financial expers in order to get control of their situation and avoid a catastrophic future. I'm thinking that Toledo should do just that - and it should be an OUTSIDE entity that has no ties to Toledo. A totally objective review.

Consider....you are upside down in your budget. Do you scale back on your spending? Do you prioritize your spending? Do you consolidate some expenses? Do you learn to do more with less? For the private sector this is what people do (for the most part) and they make it a goal to pull out of it. In the machinations of government we just see more and more spending - justified by what....?

Rusty said...


I'm not saying we make an radical changes to government employee pensions, but if we drop 30-and-out and go to age 65, the employer contribution could be dropped by a couple of percent, and that would certainly help government budgets.

Police and fire, do to the nature of their jobs, still need an early out, no problem there.

In a state where private are evaporated (with apparent encouragement of the Bush administration) a government clerk does not need an early retirement plan.

Kurt Burglar said...

Maggie, I'm sorry if you took my comment the wrong way. I was being sarcastic. I have a very dry sense of humor. Of course, you wouldn't know that because you've never met me, and I should be more careful in the future. I was in a mood yesterday.

Maggie said...

that's OK Kurt - we all have days like that...and dry wit is often hard to detect in writing...

Hooda Thunkit (Dave Zawodny) said...


"But I don't know if I'd go so far to say that employees are not deserving of a pension program because of the job - rather, I'd like to see it go back to equal contributions, instead of taxpayers paying all of it."

Then, would you also favor restoring that part of the negotiated raises representing the difference?

Seems to me that the PERS pickup is a way for less than conscientious workers to benefit from forced savings.

BTW, how does the total wage/raise package compare with say, private workers?

If the public employees are making out better than the private sector or say, the rate of inflation, then maybe that should be addressed at the next negotiations.

Maggie said...

Hooda - there are instances in the city contracts where this 'pickup' was given instead of wage increases. But the most recent police contract gives a 3% raise and picks up 1.5% in the pension. So you're talking a 4.5% pay increase and I thinks it's been a long time since private sector employers in the Toledo area gave a 4.5% increase.

Additionally, there are some years when public employees have gone without pay increases.

And please remember that this 'pickup' is in addition to the employer portion.

All I'm suggesting is that we begin to rethink the strategy. In facing significant deficits, no area of spending should be off limits for discussion. I'm not so naive to expect that reducing the amount the city picks up will be easy...but that leads to another discussion with union negotiations where some think it's better to maintain benefits than it is to maintain members (being willing to accept layoffs for some rather than cuts for all...) Additionally, any such change in strategy would take a while to implement through negotiations...

Something I think would be interesting would be to compare the wages/benefits/vacation/etc. of public employees to what Toledoans in the private sector get. It used to be that wages were lower, but the benefits made up for it. I'm not sure that's true anymore, especially as private sector employers went through periods of downsizings and governments don't...

Maggie said...

Seems to me that the PERS pickup is a way for less than conscientious workers to benefit from forced savings.

Hooda - the contributions to PERS are not optional. The employer withholds the mandatory amount from the paycheck, matches the required percentage and pays the total to the state. The total is attributed specifically to the employee (dedicated account).

With a 100% pickup, the employer makes the employee contribution portion in addition to their match.

PERS is forced savings - same as social security - the PERS pickup just means that the taxpayer is paying the employee portions...

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