"It’s the year 2043 and Cheryl, a 60-year-old public works employee with 30 years of service, has just reviewed her retirement savings with a financial adviser. She is surprised that she will need to work several more years to reach her retirement income goals. “My father retired from city government after 25 years and had a comfortable retirement,” she said ruefully. 'What happened?'"
That's a great question. Between 2009 and 2012, 45 states have made significant changes to their retirement plans. Elizabeth Kellar the President and CEO, Josh Franzel is the Vice President for Research at the Center for State and Local Government Excellence. The also co-wrote the article, "Why the Next Generation Needs a Plan."
Kellar and Franzel sat down with Chris Dorobek on the DorobekINSIDER program to talk about the vast number of changes that are happening to retirements at the state and local level.
"Ever since the recession the pace of change for state and local government employees has been picking up. Between 2009 and 2012, 45 states have made significant changes to their retirement plans. Certain practices such as using overtime as part of the calculation that goes into your pension, those kinds of practices have really fallen out of favor. By in large you are seeing those disappear," said Kellar.
What is happening out there?
"It is a situation where both at the state and local level, you are seeing human resource executives, finance professionals other elected and appointed officials, looking at their costs going up. We have seen increases in defined benefit costs, healthcare costs in the last 10 years. In reaction to that increase, these retirement plans are making changes to shift more of the cost from the employer to the employee," said Franzel."
Trends to watch:
"One of the trends we have been watching, and with some concern, is that the number of years required to vest in a retirement plan has been going up. In some cases that means going up from five years to ten years. We are concerned about that for a variety of reasons, not the least of which is retaining employees," said Kellar. "We have always had some difficulty attracting people with the right skill sets and experience for certain jobs. We have seen that list grow every year. Our Center does a survey annually of human resource professionals, what we find is the list is growing every year of the types of positions that they are having trouble recruiting."
At the federal level there is a three pronged approach to retirement, is that model working at the state and local level?
"You have a situation where some state and local workers are not covered by social security, so that takes out one of the prongs. But you are also seeing a reductions in the benefits from traditional defined benefit pension plan, so our Center has been looking at the growing importance of the supplemental defined contribution plan. We are certainly seeing and more emphasis being being placed on having the supplemental plans play a larger plan in the overall structure of retirement savings," said Franzel.
Detroit filed for bankruptcy. They didn’t pre-fund their retirement. That means retirements are going to be changing, that is scary for retirees especially.
"That is a big problem. I personally hope a way is found in the case of Detroit, that the retirement income isn’t going to take the big hit. When we looked at the reasons at places that have sought bankruptcy protection, the pensions are a factor, but not a primary factor. The most important factor has been economic conditions and fiscal mismanagement. This was true in Detroit as well as Stockton, if you want to pinch an obligation bond, the idea is it might reduce your cost, but in reality in both cases, it increased their cost. Sometimes desperate local governments get talked into something that turns out to be a bad bet," said Kellar.
Kalamazoo, Michigan faced a similar problem, but they found a solution. What was it?
"Kalamazoo is a good example, if you take the long term view and you have a good plan and you stick to it, even if you are fiscally distressed as they are, you can remain over 100% funded. It can be done, but it requires a level of discipline and sophistication on the investment side to do it right. Kalamazoo is an example of the importance of good management. Whether you have a defined benefit or a defined contribution plan, that discipline of contributing to it consistently over time is what makes it work," said Kellar.
Is variety important for retirement plans?
"In terms of preferences for the type of retirement plan it really does vary greatly. When we have done case studies on various local and state governments around the country a lot of it does depend on the local context about the decisions of what type of plan to offer is being made. One of the things that is important to keep in mind retirement benefits are used as a recruitment tool, but it is also important to keep in mind that the role they play in retaining folks and then ultimately retiring folks. It is important to keep in mind the lifecycle of retirement plans," said Franzel.
Health care costs are also changing, right?
"On the retiree healthcare side we are seeing a lot of change. A lot more cost shifting from the employer to the employee. When you look at the number of state and local governments that actually offer retiree healthcare we are seeing that decrease even over the last five or six years," said Franzel.
What should govies be doing to prepare?