Tag Archives: Benefits

2013-2014 Benefits Task Force: Defined Benefits vs Defined Contribution

The 2013-2014 Task Force on Healthcare, OPEB, and Pension Benefits recommended retaining a defined benefits program for City employees while also adding a defined contribution program. This position was different from what was recommended by the 2009-2010 Budget Task Force.

In support of their recommendations, the 2013-2014 group explained why they felt that retaining the defined benefit plan would be the best approach. The discussion in the report begins at the bottom of page number 29. They highlight three considerations:

Technical Issues: Closing the Defined Benefits plan does not change what the City owes to current and future retirees. However, closing the plan would increase the annual required contributions, prevent contributions and investment gains from future hires from offsetting current expenses, and force the investment strategy to become more conservative as the investment horizon decreased. Closing the plan would actually increase the near-term costs of the existing pension program.

Moral Issues: Defined Benefits plans put most of the investment risks on the City, while Defined Contribution plans put most of the risk on the employee. Moving to only a Defined Contribution plan would expose employees to risks that they are “not prepared to manage.”

Competitive Issues: “The supposed lower costs of DC plans is often just a result of cutting employer contributions to the DC plan, not greater economic efficiency.” This point seems to speak to the Task Force’s concerns about ensuring the City can compete for talented employees and provides viable replacement income.

The Task Force imagined a hybrid retirement benefit structure that could serve as a compromise between the two extremes.

They proposed keeping the existing Defined Benefits plan open to new employees, but thinking of it as providing a baseline of support.

Employees with modest earnings would receive significant protection from the Defined Benefits plan. More highly paid employees would share in the same baseline Defined Benefits plan, but would also have an opportunity to participate in a Defined Contribution plan for their earnings above a predetermined threshold.

In addition to capping the Defined Benefits plan at an earnings threshold, the Task Force also made suggestions about how to reduce the plan’s costs. Their suggestions include increasing the full retirement age to 65, making the adjustment for early retirement actuarially sound, reducing the accrual rate for all employees to no more than 2%, restricting the exchange of accumulated sick days for pension service, calculating the final average earnings using the average of the past five years instead of two or three of the last five, and adopting anti-spiking provisions.

Nearly all of their suggestions would be subject to collective bargaining with the various employee unions, which the Task Force made sure to note.

Following the spring 2014 budget season, the City created a new group called the Hartford Committee on the Restructuring of City Government, which includes representatives of the unions in addition to elected City leaders and experts in government reorganization. The resolution creating the committee specifically referenced the Benefits Task Force and the Tax Task Force as a way to ensure that their recommendations were considered in the restructuring conversation.

2013-2014 Task Force on Healthcare, OPEB, and Pension Benefits

Following the spring 2013 budget season, the Mayor (Pedro Segarra) and the Court of Common Council President (Shawn Wooden) created the City of Hartford Task Force on Healthcare, OPEB, and Pension Benefits to study the City’s employee benefits structure and make recommendations about how to improve it. The final report was issued on May 14, 2014 and can be found here.

The Task Force produced a detailed report that begins with an Executive Summary before elaborating on individual recommendation. In total there are 282 pages of material between the 45 page report and the four additional PDFs containing the appendices (Part I, Part II, Part III, Part IV). There is a significant amount of information, and supporting analysis, in the documents. What follows is a summary of the Executive Summary.

Before getting into recommendations, the Task Force identified causes for recent increases in the cost of the three benefits programs.

  1. The 2008 financial crisis caused a large loss in the pension fund, which had previously been 100% funded. As a result, the Actuarially Required Contribution (ARC) jumped from $9.6 million per year to $47.8 million.
  2. Hartford has funded Other Post Employment Benefits (OPEBs) on a “pay as you go” basis and accumulated an unfunded liability of $273 million.
  3. Healthcare costs are rising nationally. The City “has provided good benefits to employees with comparatively low employee contributions and co-pays.”

In reflecting on their findings about the current state of the benefits programs, the Task Force noted that, “It is not an overstatement to say that the situation has already reached a critical stage, which urgently requires corrective action.”

The Task Force recommended that the City and the Employees work together to accomplish the recommended changes. They felt that the proposed structure of the benefits system must have common interests between the City and the Employees.

Specifically, they felt the benefit system:

  • Must be able to remain in place for the long term yet still be financially sustainable.
  • Must offer benefits that allow total compensation to attract talented employees.
  • Must make employees healthier while also reducing costs.
  • Must maintain a viable replacement income rate after employment with the City ends, and not just shift costs to other government assistance programs.
  • Must not shift all risk to the City, nor to the employees.
  • Must account for the increasing life expectancy of retirees.

The Task Force made detailed recommendations for each of the three benefits programs. Again, these are a summary of the summary, and much more information is available in the full report.

Health Benefits: Open a dialog with the employees about making changes to the plan. Emphasize preventative care. Try to consolidate all employees onto a single plan. Follow up more aggressively on the treatment of chronic conditions.

Other Post Employment Benefits: Create a Trust Fund for these liabilities, transfer existing money into the Trust Fund, and begin paying into the Trust Fund annually. Consider merging the Fire Fighters VEBA into the Trust Fund. Increase the employee contributions to the program and/or delay the age at which the benefits can be claimed.

Pension Benefits: Do not try to replace the defined benefits plan with a defined contribution plan for new employees. Instead, keep the defined benefits plan for the first $XX,000 of income (a negotiated, fixed amount for all employees) and stack a defined contribution plan on top to provide the retirement benefit for income above the threshold. Adjust the existing defined benefits plan to reduce the plan’s overall costs.

Most of the Task Force’s recommendations are subject to collective bargaining with the various employee unions, which they noted in the report.